Pricing decisions

Pricing Decisions are decisions faced by top management and marketing managers. How much to charge for a product or service depends on a multitude of factors such as competition, cost, advertising, and sales promotion. Economic theory suggests that the best price for a product or service is the one that maximizes the difference between total revenue and total costs. However, in reality, the price charged is usually some form of cost-plus, which is later adjusted for market conditions and competition.

Concept of Pricing Decision and Objectives of Pricing Policy
Pricing decisions
Organizations producing goods and services need to set the price for their product which is one of the most important decisions a manager faces. It is also one of the most crucial and difficult decisions a firm’s manager has to make. Pricing is a profit planning exercise. Cost is one of the major considerations in price determination of the product. It is one of the three major factors which influence pricing decision. The two other factors are customers and competitors.
Customer
In a situation where the product has many substitutes, customers decide the price. That is the demand of customers is important for setting the price of the product. Hence the firm should try to deliver the value to customers in term of product/ or service so that a reasonable profit can be earned. Similarly, under competitive condition, price is determined by the market forces and an individual firm or an individual customer cannot influence the price.
Competitors
When there are only few players in the market, competitors usually react to price changes and therefore the pricing decisions are influenced by the possible reaction of competitors. As such, management must keep an eye on the firm’s competitors which is the knowledge of competitors’ strategy is essential for pricing decision in an oligopoly situation.
Cost
Cost is the third major factor. Its role in price’s setting varies widely from