Explain Demand based pricing method

FinanceFinance ManagementBanking & Finance

In a demand based pricing method, the product price is determined by customer demand and product perceived value. In this, customer responses are considered and a suitable price is determined. Factors considered are manufacturing cost, location, market competition, quality etc.

Some of the strategies are as follows

  • Price skimming − High price is set initially, to increase their value and then, the price is gradually decreased to increase their customer base.

  • Price discrimination − Price is determined based on demand in market. Different markets/customers are charged differently for similar products.

  • Value based pricing − Price determination is based on the actual value of the item.

  • Penetration pricing − Price is set low initially to increase their customer base or adding new customers. After gaining a customer base, then the price increases gradually.

  • Bundle pricing − Price is determined by adding multiple products. In other words, a single price is set for multiple or combination of products.

Customers view for the demand based pricing is as follows −

  • Low price.
  • Quality product.
  • The customer gets/pays for what the customer wants.
  • Service is based on the customer's view.

Disadvantages

The disadvantages of the demand based pricing are as follows −

  • Value based on customer demands.
  • Comparatively difficult.
  • Sometimes, the final price is not accurate.

Example

Transportation sector − This sector uses this demand based pricing method more effectively.

  • Airline industry − We can see air fare varies from time to time. If we book a ticket in advance or booked through some bank cards, vouchers etc. we will get some discount. When we book on spot or near to departure time, the price may go up drastically.

  • Railways − We can see train tickets are also varying from season to season. In peak time or seasonal time such as summer, festival or in emergency. Some special trains will run to meet the requirement but the cost of the special train will be double or more.

  • Phones − We can see when a new phone is released the price of the phone will be high and as time passes or a new phone is ready to release the price of phone will decrease gradually.

raja
Published on 17-Jul-2021 16:12:16
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