Pricing: Introduction

Price is a given value that will purchase a finite amount of a product or right to use that product
It is usually the amount of money expected, required, or given in payment for something although it can be in another form other than money
The price of a product is usually determined by:
1. The cost of production as in the long run the business has to cover the expenses incurred in making the product and/or bringing it into a salable condition
2. Demand form customers i.e. the price that customers are willing to pay
3. The behavior or prices of that competitors are charging on similar goods
4. Other elements of the marketing mix
5. The business’s own policy and objectives
When setting up the price of a product a business typically has the following objectives:
To maximize its profit
To achieve a set target of profit
To increase its market share
To maximize sales revenue which may mean charging a lower price to achieve more sales revenue
To have an acceptable profit margin
To reduce the level of risk that the business faces as it operates

Quality is defined as fitness for a particular purpose
While in normal cases price varies inversely with demand i.e. increasing the price of a product reduces demand
For some goods the opposite is true
These are known as vebben goods or goods of snob-appeal
Vebben goods are goods whose demand increases when their price increases examples include flashy products like Rolls Royce, Art and Jewelry
In reality there is only a tenuous relationship between quality and price
While a certain level of costs have to be covered to ensure quality the two are not the same
For example the cost of making an iPhone is $225 yet the device often retails for a minimum of $669 and often more to appeal to the high end market
The cost of making Beats By Dre headphone pair is $10 yet they retail at over $200
Giffen goods are also goods that behave in a similar way to goods of snob appeal but in a more complex fashion that is beyond the scope of Ordinary Level

Each stage of the product life cycle presents an opportunity for the business to adjust its pricing policies to match its needs
For example during the Launch phase penetration pricing can be used to gain market share or price skimming can be used to skim the market
Cost plus pricing can be used to make sure that costs are being covered
At the growth, maturity and saturation phase competitor based pricing can be used to fight off the competition

To access more topics go to the O Level Business Notes

Pricing: Introduction- Updated 2024