What are some methods of making pricing decisions?

The four basic methods of making pricing decisions are cost-plus pricing, demand pricing, markup pricing and competitive pricing. These methods are used to determine the optimal price that a customer is willing to pay for a product or service.

According to McKinsey & Company, increasing the price of a product or service by only 1 percent translates into a profit increase of 8.7 percent, assuming volume remains the same. There are four methods a company can use to calculate the optimal price.

1. Cost-plus pricing
This is one of the most simple methods. First, calculate the actual cost of the product, and then determine how much profit is desired to be made from the item and add that to the cost, which results in the final sale price.
2. Demand pricing
Demand pricing is based on two factors: sales volume, which is what is actually sold, usually measured in dollars or units, and the desired profit. To calculate demand pricing, it is necessary to come up with a price that will give the best profit-to-volume ratio.
3. Markup pricing
A set amount is added to the cost of the item, usually a percentage that is determined ahead of time. This amount is referred to as a markup.
4. Competitive pricing
Sometimes the market has already established an acceptable price for a product or service. This means a business needs to keep its price within that range.