3 Approaches to Pricing

Approaches to pricing can be categorized into three groups that are based on either costs, competition or customer value (Ingenbleek et al. 2003, p. 291).

Cost-plus pricing

Cost-plus pricing implies the determination of prices based on fixed and variable costs. While the implementation of cost-plus pricing is straightforward (Simon & Fassnacht 2009, p. 190) – e.g., by adding a profit margin to average costs (Avlonitis & Indounas 2005, p. 48) – this approach is unlikely to yield optimal prices (Simon & Fassnacht 2009, p. 191), as concentrating on costs offers no insights into whether or not the resulting prices are acceptable for buyers. Moreover, for an online service provider with high fixed costs and close-to-zero marginal costs, the correct determination of price would, to a major extent, hinge upon an accurate estimation of future sales in order to accurately spread fixed costs.

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