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It is important to have a pricing strategy that is tailored to your target market. There are various ways of setting prices as outlined in the following:

Mark-up pricing:

Mark-up is the difference between the costs of producing and selling a product (fixed costs plus variable costs) and the market selling price of the product. It is the difference between what you spend to produce the product and what the customer spends to purchase it.

It is calculated as follows:

Fixed Cost per unit = Total Fixed Cost / Units Produced

Variable Cost per unit = Total Variable Costs / Units Produced

Selling Price = Fixed Cost per unit Variable Cost per unit Desired Profit Margin

Desired profit margin is the amount of profit you would like your business to make above your production costs. It can be expressed as a percentage of the total costs.

Value-based pricing

Value-based pricing sells the product at the price based on the customer's perceived value of the product. A good example where such a pricing system is used is on luxury items where the actual value is quite different from the perceived value. For example, a luxury item may not actually cost nearly as much to make as what people are prepared to pay for it.

It is important to note that this method of pricing is based on a sound understanding of how customers judge value and may only be possible after a product has a strong reputation.

Target return pricing

Using this strategy, a business first determines what level of demand there is for the product and then identifies the desired profit the business would like to make from the product. The price is calculated by dividing the total desired profit by the expected level of sales. Therefore, by meeting the level of expected sales, a certain amount of profit will be received.

Going-rate pricing

In the situation where the business is in a competitive market, the business charges the average price of what its competitors are charging for a similar or the same product. This may be the case where there is only a small amount of competition and the product is a necessity. It is sometimes in a business's best interest to not compete by undercutting their competition.