An Indian pharmaceutical company invented vaccine for cancer. As the marketing manager of that company, discuss various approaches for pricing this new product. Decide which of them is more appropriate for pricing this vaccine and give reasons in support of your decision.

 As a marketing manager we will decide we will adopt the following approach for pricing our new product

i.e. A New Vaccine for Cancer.

Cost-based Pricing: Cost-based pricing refers to a pricing method in which some percentage ofdesired profit margins is added to the cost of the product to obtain the final price. In other words, cost-based pricing can be defined as a pricing method in which a certain percentage of the total cost of production is added to the cost of the product to determine its selling price. Cost-based pricing can be oftwo types, namely, cost-plus pricing and markup pricing.

These two types of cost-based pricing are as follows:

1. Cost-plus Pricing: Refers to the simplest method of determining the price ofa product. In cost-plus pricing method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total cost to set the price. For example, XYZ organization bears the total cost ofRs. 100 per unit for producing a product. It adds Rs. 50 per unit to the price of product as' profit. In such a case, the final price ofa product of the organization would be Rs. 150.

Cost-plus pricing is also known as average cost pricing. This is the most commonly used method in manufacturing organizations.

In economics, the general formula given for setting price in case of cost-plus pricing is as follows:

P= AVC + AVC (M)

AVC= Average Variable Cost

M = Mark-up percentage

AVC (m) Gross profit margin

Mark-up percentage (M) is fixed in which AFC and net profit margin (NPM) are covered.

AVC (m) = AFC+ NPM

2. For determining average variable cost, the first step is to fix prices. This is done by estimating the volume of the output for a given period of time. The planned output or normal level of production is taken into account to estimate the output.

The second step is to calculate Total Variable Cost (TVC) of the output. TVC includes direct costs, such as cost incurred in labor, electricity, and transportation. Once TVC is calculated, AVC is obtained by dividing TVC by output, Q. [AVC= TVC/Q]. The price is then fixed by adding the mark-up of some percentage of AVC to the profit

[P = AVC + AVC(m)]

3. The advantages of cost-plus pricing method are as follows:

(a) Requires minimum information

(b) Involves simplicity of calculation

(c) Insures sellers against the unexpected changes in costs

Refers to a pricing method in which the fixed amount or the percentage of cost of the product is added to product's price to get the selling price of the product. Markup pricing is more common in retailing in which a retailer sells the product to earn profit. For example, if a retailer has taken a product from the wholesaler for Rs. 100, then he/she might add up a markup ofRs. 20 to gain profit.

It is mostly expressed by the following formulae:

(a) Markup as the percentage of cost= (Markup/Cost) * 100

(b) Markup as the percentage of selling price= (Markup/ Selling Price)* 100

(c) For example, the product is sold for Rs. 500 whose cost was Rs. 400. The mark up as a percentage to cost is equal to ( 100=25. The mark up as a percentage of the selling price equals (10()/500)* 100=20.

Demand-based Pricing: Demand-based pricing refers to a pricing method in which the price of a product is finalized according to its demand. If the demand ofa product is more, an organization prefers to set high prices for products to gain profit; whereas, if the demand ofa product is less, the low prices are charged to attract the customers.

The success of demand-based pricing depends on the ability of marketers to analyze the demand. This type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the period of low demand charge less rates as compared to the period of high demand. Demand-based pricing helps the organization to earn more profit if the customers accept the product at the price more than its cost.

Competition-based Pricing: Competition-based pricing refers to a method in which an organization considers the prices ofcompetitors' products to set the prices of its own products. The organization may charge higher, lower, or equal prices as compared to the prices of its competitors.

The aviation industry is the best example of competition-based pricing where airlines charge the same or fewer prices for same routes as charged by their competitors. In addition, the introductory prices charged by publishing organizations for textbooks are determined according to the competitors' prices. 

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