Demand-based pricing financial definition of demand-based pricing
demand-based pricing pricing methods which determine the PRICE of a product primarily on the basis of intensity of demand rather than on costs of production and distribution. There are several facets of demand which are relevant to pricing:
- Firms may vary their prices over time as demand for their products changes as a result of BUSINESS CYCLES, charging higher prices when demand is strong and shading down prices in conditions of weak demand. More specifically, particular products will be subject to variations in demand over their PRODUCT LIFE CYCLE with implications for pricing. High skimming prices may be charged for a novel product in the early launch phase of its life cycle when demand is price-inelastic, with lower prices and larger promotion expenditures in the later, growth phase of its life cycle;
- Firms may also practise price discrimination, varying prices between types of customers, the location of customers, the time of purchase and versions of a product. Customer-based pricing recognizes the different bargaining power of potential buyers and seeks to capitalize on this by charging whatever price particular customers are prepared to pay. For example, in pricing theatre tickets special low prices may be charged to low income, price-sensitive consumers (for example, students and pensioners), and price discounts may be offered on block bookings. In addition, prices may be scaled for theatre seats in different parts of the theatre, with higher prices for the stalls and lower prices for the upper circle. Furthermore, different prices may be charged on different days or at different times of the day, with higher prices for weekend evening performances and lower prices for mid-week afternoon matinée performances. Finally, prices can be varied according to the version of a product, with different prices for a particular model of car, for example, according to whether the customer specifies fabric or leather seats. See ELASTICITY OF DEMAND, COST-BASED PRICING, COMPETITION-BASED PRICING.