Profit- & Cost-Oriented Pricing Strategies

Profit-oriented pricing strategies are developed with high margin or specific profit objectives in mind. Cost-oriented pricing strategies are developed with a focus on understanding cost basis and setting prices at a certain threshold above that point. Numerous specific pricing approaches fall within these two broad categories and generally align with other marketing goals and strategies.

Short-term or long-term profit maximization is the key objective of profit-oriented pricing. Premium pricing is a technique where you set industry-high price points to coincide with a value proposition that emphasizes superior benefits. Skimming is a short-term profit strategy where you try to milk maximum profits off buyers with high discretionary income at initial product launch. Targeted return pricing is a separate type where you set prices to achieve a targeted profit margin. If your current prices don't achieve desired margins, you work to reduce costs or raise prices.

Profit-oriented pricing helps you establish a brand reputation of high quality, luxury or status. This only works if your products and services go along with the price points. Additionally, you earn optimum profits from your core base of customers. The risks of high prices is that if your products fall short, customers perceive your brand as a rip-off. Additionally, your customer audience is limited because of the inability of many people to pay high price points.

While cost-oriented pricing can still result in high profits, the company's primary concern is establishing price points that allow for stable, consistent profits over time. Cost-plus pricing is the simplest form of cost-oriented pricing. In this case, the company sets prices with certain mark-ups above costs. For instance, if all costs are $20 and the desired mark-up is 40 percent, the price would be $28.

Cost-oriented pricing is a practical model in that it ensures you at least cover your costs of doing business. Cost and profit estimates are also simpler when you base your prices on your costs of doing business. While offering longevity and stability, cost-oriented pricing doesn't emphasize profit maximization. Your prices help attract customers, but competitors with more aggressive pricing and better quality can earn more on each sale.