Price is the money or other considerations exchanged for the ownership or use of a product or service. Although price typically involves money, the amount exchanged is often different from the list or quoted price because of allowances and extra fees.
Consumers use price as an indicator of value when it is paired with the perceived benefits of a good or service. Sometimes price influences consumer perceptions of quality itself and at other times consumers make value assessments by comparing the costs and benefits of substitute items.
Four general approaches for finding an approximate price level for a product or service are demand-oriented, cost-oriented, profit-oriented, and competition-oriented pricing.
Demand-oriented pricing approaches stress consumer demand and revenue implications of pricing and include eight types: skimming, penetration, prestige, price lining, odd-even, target, bundle and yield management.
Cost-oriented pricing approaches emphasize the cost aspects of pricing and include two types: standard markup and cost-plus pricing.
Profit-oriented pricing approaches focus on a balance between revenues and costs to set a price and include three types: target profit, target return-on-sales, and target return-on-investment pricing.
Competition-oriented pricing approaches emphasize what competitors or the marketplace are doing and include three types: customary; above-, at-, or below-market; and loss-leader pricing.
A demand curve shows the maximum number of products consumers will buy at a given price and for a given set of (a) consumer tastes, (b) price and availability of other products, and (c) consumer income. When any of these change, there is a shift of the demand curve. An essential revenue concept is total revenue.
It is necessary to consider cost behavior when making pricing decisions. Important cost concepts include total cost, variable cost, and fixed cost.
Break-even analysis shows the relationship between total revenue and total cost at various quantities of output for given conditions of price, fixed cost, and variable cost. The break-even point is where total revenue and total cost are equal.
Pricing objectives, which specify the role of price in a firm's marketing strategy, may include pricing for profit, sales revenue, market share, unit sales, survival, or some socially responsible price level.
Pricing constraints such as demand, product newness, costs, competitors, other products sold by the firm, and the type of competitive market restrict a firm's pricing range.
Given an approximate price level for a product, a manager must set a list or quoted price by considering factors such as one-price versus a flexible-price policy.
List or quoted price is often modified through discounts, allowances, and geographical adjustments.
