Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.Pricing is a fundamental aspect of financial modeling and is one of the four P’s of the marketing mix,Price is the only revenue generating element among the four P’s.
Definition: Pricing is the method of determining the value a producer will get in the exchange of goods and services. Simply, pricing method is used to set the price of producer’s offerings relevant to both the producer and the customer.
- Profit maximization: Maximization of profits is one of the main objectives of a business enterprise. Prices are viewed as active instrument for profit maximization. In general, pricing is a tool of accomplishing marketing objectives. The firm may use price to achieve a specific objective, whether a targeted rate of return on profit, a targeted market share or some other specific goal.
- Prevention of Competition: Pricing can be used as one of the effective means to fight against the competition and business rivalries. Lesser prices are charged by some firms to keep their competitors out of the market. But a firm cannot afford to charge fewer prices over a long period of time.
- Price Stability: This is another important objective of an enterprise. Stability of prices over a period reflects the efficiency of a concern. But in practice, on account of changing costs from time to time, price stability cannot be achieved. In the market where there are few sellers, every seller wants to maintain stability in prices.
Some of the more common pricing objectives are:
- Maximize long-run profit
- Maximize short-run profit
- Increase sales volume
- Increase market share
- Company growth
- Enhance the image of the firm, brand, or product
- Social, ethical, or ideological objectives
- Create interest and excitement about a product
- Effects on competitors prices
- Obtain a target rate of return on sales