The first, cost-plus , builds prices by taking the company's expenses and cost of sales and establishes a price which will cover them and produce an acceptable profit. The second approach, value-added , establishes price based upon the economic benefit the customer receives, regardless of the company's cost and expense structure. Matching customer expectations is the final pricing approach, in which competitive pricing and customer purchasing history specify what appear to be acceptable. The actual price is the culmination of this analysis and, ultimately, management's best judgement.
Most industries have rules of thumb that are often used to set prices.
These rules of thumb are the cumulative results of the performance of many industry participants over time and should not be dismissed lightly. It is the rare entrepreneur who can revolutionize the cost structure of a competitive market. It is imperative to find out what these rules of thumb are for the particular industry. The best source of that information is other participants in the selected industry. Industry-specific magazines, libraries, and Small Business Administration publications are examples of additional sources.