A pricing method refers to procedure used for deciding a price for specific products. There are four main types:

(1) Cost based pricing
Cost based pricing is based on costs of . Price is set by adding a profit element to costs of product, ignoring demand side factors such as competitors’ pricing, market conditions and customers’ willingness to pay. There are several ways that this can be done. For example:
- pricing: here price is set by adding a mark up to average cost
- Full cost and pricing: here price is set by adding a mark up to average cost having allocated to each product made by the business.
- Contribution, variable or marginal cost pricing: price is set in relation to the variable costs of production
- Target pricing : here the price chosen is one that generates a satisfactory from a given level of sales and costs

(2) Market based pricing

Market based pricing is based on . Price is set by taking into account customers’ responsiveness to different price levels
Common examples of this include:
- Penetration pricing: firms set a low price to gain market share and name/brand recognition
- Price discrimination: where a monopolist charges a different price for the same product to different market segments eg peak and off-peak rail travel and increase revenue.
- Loss leaders: where products sold below cost. The aim is to get customers to buy other profitable products sold by the firm.

(3) Competition based pricing is based on rival’s prices: for example, with pricing the price simply follows price being offered on average in the market

(4) Contribution, variable or marginal cost pricing
Here, the price is set in relation to the of production. Fixed costs and overheads are not allocated to specific products. The business calculates the variable cost of each producing each item and then adds on an extra amount or contribution. Each product partly contributes to overall fixed costs and net profit.