Business is all about making profits and competitive pricing is the key to profitability. Three things impact profit these being:
1) the type of market the business exists in
2) Fixed costs
3) Variable costs
With a business that is in an industry that has little competition, businesses can play around with volume to try and achieve economies of scale which will drive down their fixed costs which will help them make a higher profit whilst being competitively priced.
If the business is in a highly profitable market this attracts many competitors which means under the laws of demand and supply in perfect competition oversupply of the goods will drive the price down as supply will be more than demand. In this type of market, it is the businesses that lose out in their price war as they try to get a piece of the action. Competition is for losers.
The ideal market that a business wants to be in is a monopoly market in which it is the sole supplier of goods or services. Their monopoly position could be bought about by an exclusive technology to which the company has patents or economies of scale which enable the business to have its products so competitively priced that new entrants into the market cannot compete with them. These economies of scale raise massive barriers to entry and enable businesses to price at a premium and enjoy massive profits. Google and Apple worth billions of dollars are examples of such companies. Apple can price its products at a premium and people line up for days before the product release because no other company has the patent to produce as good a product as Apple. The same would be true of Google which has a far superior search engine algorithm than any other search engine company. It would take decades just to try and replicate what Google is doing with search.
Determining the prices for product is no easy task. Some business analysts state that it is the toughest thing to do. For a business to be successful, they have to set their price correctly, which proves to be challenging for most businesses.. If products are priced correctly there’s a chance of pushing up your volumes by achieving more sales , and on the other hand when the products are priced wrongly it may result in selling less products being sold and losing your market share to competitors.
Businesses must find the best way to market these products and price them at a point where consumers perceive these products to be giving them more value in return.
What are the strategies for setting prices correctly?
There are mainly two ways that businesses tend to set their pricing:
- The cost of goods
- What the customer is prepared to pay
The difference between these two represents a company’s profit. Business should try and decrease the cost of goods /production and increase what the customer is prepared to pay. Decreasing the cost of goods sold can be done through achieving economies of scale. The price a customer is prepared to pay can be increased by better marketing and getting great brand ambassadors who will raise the customers perception of the value of these goods. Businesses tend to choose one method over the other but to be effective price setting needs to be a good mix of the two approaches and . These two are ever changing as customers tastes and market conditions are ever-changing so they need to be monitored and adjusted regularly.
Iacobucci, D, 2013, MM4, South-Western Cengage Learning, Mason, OH.