Pricing Methods
The ideal solution to the problem of pricing is selecting a pricing method that suits the goals of the management of a company and its cost structure. Let us assume that the company could estimate the demand schedule and the cost function and also it could acquire competitors' price list for comparison which helps the company establish its prices. Given these three, the company is now ready to select a price. The price will be set in such a way that it is neither too low to produce a profit nor too high to produce any demand. It will be somewhere between these two extremes.
Figure : Major Considerations in Setting a Price
Major Considerations in Setting a Price
The above figure shows the major considerations involved in setting a price. The first consideration - product costs, forms the basis of price. Competitors' prices and the price of substitutes are the middle level considerations that the company has to take into account in setting its price. They help the firm to establish where its prices might be set and the company can use them as an orienting point for its own pricing. The last one, the presence of unique product features in the company's offer establish the ceiling on its price.
Companies solve the problem of pricing by selecting a pricing method that involves one or more of these three considerations. The method will then hopefully lead to a specific price. In this chapter, we shall discuss about several price-setting methods.
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