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Making pricing decisions

The price of a product is how much a customer is asked to pay for it. When setting a price, a business needs to consider:

• The cost of making the product - price represents the revenue the business receives from selling each unit of its product. If the unit cost of the product is known, setting a price that is greater than the unit cost will ensure that the product is profitable, as long as consumers are willing to pay that price.
• The quality of the product - consumers expect to pay more for a high-quality or premium products, as they understand that high-quality products usually cost more to make. Charging a higher price often gives the impression that a product is of a higher quality, even when it may not be.
• The brand image of the product - maintaining a brand image requires a high level of marketing activity and a consistent level of quality. These cost money, so a branded product often has a higher price than a non-branded product.
• Thedemandfor and supply of a product - if there is high demand for a product, consumers are likely to be willing to pay more for it. Therefore, businesses can charge a higher price for popular products, unless there are other businesses supplying similar products. If this is the case, they will need to consider their competitors’ prices.

Pricing Strategies

When deciding what price to charge, businesses must choose between different methods of pricing, known as pricing strategies. Pricing strategies include:

• cost plus
• competitive
• penetration
• skimming
• psychological
• loss leaders
• price discrimination