When it comes to determining the cost of products, different businesses use various pricing models to meet their strategic goals. This guide provides an overview of the formulae used in four common pricing models: Standard Pricing, Package Pricing, Graduated Pricing, and Volume Pricing.
Standard Pricing
The Standard Pricing model is straightforward. The total price is calculated by multiplying the base price by the quantity of items purchased.
total Price = Base Price * Quantity
Example:
If the base price of a product is $10 and the customer buys 5 units, the total price will be:
total Price = 10 * 5 = 50
Package Pricing
In Package Pricing, items are sold in fixed packages. If a customer orders a quantity that does not perfectly divide into package sizes, it is rounded up to the nearest full package. The total price is calculated by multiplying the base price by the number of full packages required.
Remainder = quantity % package size
Fully utlised quantity = quantity - remainderRounded Quantity = Fully utilised quantity + package sizeTotal Price = Base price * (rounded quantity/package size)Example:
If the base price is $15, the package size is 10, and the customer buys 23 units:
- The remainder is 23 mod 10 = 3
- The fully utilized quantity is 23−3 = 20
- The rounded quantity becomes 20+10 = 30
- The total price is 15×(30/10)=15×3 = 45
Total Price = 15 x (30/10) = 15 x 3 = 45
Graduated Pricing
Graduated Pricing offers different prices for different tiers of quantity. Each tier is calculated separately, and the total cost is the sum of all tiers.
Remainder = quantity % package sizeTotal Price = 0Total Quantity = 20Tier_first_unit = xTier_last_unit = yQuantity Portion = Total Quantity - Tier_last_unitTotal Price = Total Price + ((Tier Price * Quantity Portion) + Tier Flat Fee)Example:
Consider a total quantity of 20, with tier pricing as follows:
Tier 1: 1–10 units at $5 each, flat fee $10.
Tier 2: 11–20 units at $4 each, flat fee $5.
For Tier 1: 10×5+10=60
For Tier 2: 10×4+5=45
The total price is 60+45=105
Total Price = 60 + 45 = 105
Volume Pricing
Volume Pricing applies one price based on the total quantity falling within a specific tier. If the total quantity falls within a range, that tier’s pricing is applied.
Total Price = 0Total Quantity = 20Tier_first_unit = xTier_last_unit = yTotal Price = (Tier Price * Quantity Portion) + Tier Flat FeeExample:
Assume a total quantity of 20 with tier pricing as follows:
Tier 1: 1–10 units at $6 each, flat fee $5.
Tier 2: 11–20 units at $4 each, flat fee $10.
Since the total quantity is 20, it falls within Tier 2:
- The total price is 20×4+10=80+10=90
Total Price = 20 * 4 + 10 = 90
These pricing models offer flexibility to accommodate different business strategies and customer needs. Understanding these formulae can help businesses better communicate pricing structures and assist customers in making informed purchasing decisions.