Without proper pricing of a product, there will never be a sale and hence no revenue.

This article discussed the factors which affect pricing and pricing objectives in relation to meeting the overall business strategy.

It is important to understand the factors that can affect pricing. Some of the common factors that affect/determine a firm’s pricing policy include the following:

(1)   Costs

-          In the long term, a business needs to ensure that its products are priced above their total average cost to achieve profitability. However, in the short-term, it is acceptable to price below total cost if this price exceeds the marginal cost of production – so that the sale still produces a positive contribution to fixed costs.

[ refer to the various types of pricing methodologies]

(2) Competitors

-          The pricing of the business will depend whether it is a monopolist or operating  under conditions of perfect competition or in between. The chosen price needs to be very carefully considered relative to those of close competitors.

(3) Customers

-          The pricing depends on the customer expectations. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices

(4) Pricing Objectives In Relation To Business Objectives

-          Possible pricing objectives include the maximization of profits; achieving a target return on investment; achieving a target sales figure or target market share or just to match the competition, rather than lead the market pricing strategies.

If you found this post useful, keep updated with future posts by subscribing to FMAccounting (for free) through RSS or email.

Related Entries

• Variable/Marginal Cost Plus Pricing(Part3)
• Short Term Decision Making: Understand Relevant Costs(Part1)
• Full Cost Plus Pricing Methodology(Part2)
• Rate Of Return Or Rate Of Investment Pricing Methodology(Part4)
• Factors To Consider In Sales Forecast, Production And Cash Forecast (Part 1 of 3)