Question

Topic: Student Questions

Demand Based Pricing Method

Posted by Anonymous on 2/7/2009 at 12:38 AM ET 75 Points
Hi. Im a 4 weeks old mktg student trying to understand as much about mktg. Ive got this qn for my next presentation.

Suppose a manufacturer of an equipment sets a suggested price to the customer of $395 for a particular piece of equipment to be competitive with similar equipment. The manufacturer sells it to a wholesaler who receives 25% and a retailer who receives 50% of e selling price. What demand based pricing method is being used and at what price will the manufacturer sell the equipment to the wholesaler?

Firstly, I'd like to know if cost-based pricing is a subset of demand based pricing. There's no mention of demand based pricing in my Kotler Textbook but wikipedia tells me demand based pricing includes premium pricing, cost based pricing, psychological pricing etc.

Here's my train of thoughts.

Based on the question, I assume that am the manufacturer who wants my equipment to be selling at $395, and I know that wholesalers receive 25% of the selling price and that retailers receive 50%. Hence, I will use the cost based pricing ie. I will sell it at $296.25 to wholesalers and $197.50 to retailers. I used the eqn: Cost + Markup = Price

That'll ensure my equipment will sell at $395.

But the ans dun sound logical to me as it seems unfair for wholesalers to pay a higher price as they usually buy in bulks. And my logic of the qn dun make sense either as wholesalers tend to sell their products at a much lower price as compared to retailers.

I'm very confused.
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RESPONSES

  • Posted on 2/9/2009 at 8:45 AM Accepted
    Hello, I would say this is actually Competition-Based Pricing.

    Cost based pricing is when you consider your own costs of manufacturing, marketing, sales, expected mark-up, etc. in order to determine the final list price. Demand-Based pricing considers what the end-user is willing to pay. You are setting the price on par with what the competition is currently asking for a similar product, without without consideration to individual aspects of your product.

    It is difficult to answer the second part of your question without additional information however typically a manufacturer sells to wholesalers and then the wholesalers sell to the retailers. Given that the question only asks what price you would give wholesalers, I wonder if this is the case. If so, you would sell the product to the wholesalers for $148.125. (395 is the list price. Divided by 2 to account for the retailers markup, which gives you 197.50. Multiply this by 75% to deduct the wholesaler's 25% mark-up and you end up with $148.125 for the selling price.) Of course, if you do sell to each individually then your original answer would be correct. I would ask for clarification before submitting your final answer though.

    I hope this helps!
  • Posted on 2/9/2009 at 11:21 PM Author
    Hi Rsloand,

    Thanks for your reply. Ive read up the portion on competition based pricing and it is indeed the setting of the price similar to that of the competitor - as clearly stated in the qn given.

    However, since the question asked about what "demand based pricing method" is used, I began to realise that if I choose to see wholesalers and retailers as my 2 "end users", I will have to use the "demand based pricing method" to set my prices knowing the amounts the "end users" would be willing to pay.

    So both methods seem to be in play here.

    I did read up that the selling process is usually from the Manufacturer -> Wholesalers -> Retailers -> Customers .... So the question given to me isnt really a good one to begin with.

    My follow up question would then be this:

    Is "Demand-based pricing" a pricing strategy by itself or is there sub-strategies under it?

    Thanks. Im beginning to develop a clearer understanding on this aspect.
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