Cost
Costs set the floor for the price that the company can charge for its product. The company wants to charge a price that both covers all its costs for producing, distributing and selling the product, and delivers a fair rate of return for its effort and risk.
Types of cost
fixed cost
Costs that do not vary with production or sales level.
Variable cost
Costs that vary directly with the level of production.
Demand
When a product’s price is low, consumers desire more units, and vice versa. When demand for a product is elastic, however, a small change in price might result in huge changes in the quantity demanded. In the situation of inelastic demand, a change in pricing has little impact on demand. Inelastic demand allows a company to charge higher profits.
Competition
When there is a lot of competition, a product’s pricing is determined by the price of competitors’ items, their features and quality, and so on. MRF Tyre Company, for example, cannot set its tyre prices without taking into account the prices of Bridgestone Tyre Company, Goodyear Tyre Company, and so on.
Government and Legal
Companies that have a monopoly on a market frequently charge a premium price for their goods. To defend the public’s interests, the government intervenes and regulates commodity pricing; for example, it designates some things to be essential. Drugs that can save your life, for example.
Pricing Objectives
target costing
A technique to support the pricing decision which starts with deciding a target cost and then designing a new product.
Profit maximization
Typically, the goal of every firm is to maximize profits. In the short run, a company can make the most money by charging a high price. However, in the long run, a company lowers its price per unit in order to gain a larger market share and, as a result, make more profits through increased sales.
Obtaining marketshare leadership
If the firm’s goal is to gain a large market share, it will maintain the price per unit low in order to increase sales.
surviving in competitive market
If a company is unable to compete and is having difficulty surviving, it may use a free offer, a discount, or even try to liquidate its stock at BOP (Best Obtainable Price).
attaining product quality leadership
Generally, firm charges higher prices to cover high quality and high cost if it’s backed by above objective.