Pricing Decision is the choice businesses make when setting prices for their products or services. Organizations producing goods and services need to set the price for their product. Setting the price for an organization’s product is one of the most important decisions a manager faces. Pricing depends on various factors like manufacturing cost, raw material cost, profit margin etc. It is one of the most crucial and difficult decisions a firm’s manager has to make. Pricing is a profit planning exercise. It is the decision that has to make by a company to make sure the price that decided is accurate or not. Cost is one of the major considerations in the 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.
Good pricing usually starts with customers and their perceptions of value. In a situation where the product has many substitutes, customers decide the price. That is, the demand for customers is the paramount importance in setting the price of the product. In such a situation, the firm should try to deliver the value, in the form of product and/or service, at the target cost so that a reasonable profit can be earned. In order to make some profit, a fair rate of return is added to account for efforts and risks.
In highly competitive markets, consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. When there are only a few players in the market, competitors usually, react to the price changes and, therefore, pricing decisions are influenced by the possible reaction of competitors. As such management must keep watchful eye on the firm’s competitors. For instance, in the gasoline industry, competition-based pricing is applied.
Costs set the floor for the price that the company can charge. Cost is the third major factor. Its role in price setting varies widely among industries. In order to make some profit, a fair rate of return is added to account for efforts and risks. Some industries determine price by market forces and in some industries, managers set prices on the basis of production costs. Firms want to charge a price that covers its costs like production costs, distribution costs and costs relate with selling the product and also including a fair return for its effort.