Understanding Pricing

Understanding pricing

Pricing is the process of determining what a company will receive in exchange for its product. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modelling and is one of the four Ps of the marketing mix. (The other three aspects are product, promotion, and place.) Price is the only revenue generating element amongst the four Ps, the rest being cost centres. However, the other Ps of marketing will contribute to decreasing price elasticity and so enable price increases to drive greater revenue and profits.

Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus pricing is very important in marketing.

Price is not just a number on a tag or an item

* Throughout most of history prices were set by negotiation between buyers and sellers.

* Setting one price for all buyers is a relatively modern idea.

* Today the Internet is partially reversing the fixed pricing trend.

* Traditionally, price has operated as the major determinant of buyer choice.

* Price remains one of the most important elements determining market share and profitability.

How Companies Price

* In small companies, prices are often set by the boss.

* In large companies, pricing is handled by division and product-line managers.

* In large companies, top management sets general pricing objectives, policies, and...