Pricing Process

The Pricing Process

Pricing products and services is not always an easy task for business. Dependent on the level of competition inside industries, companies can choose between a wide variety of pricing strategies. In order to make the process easy some companies just estimate the cost of a product and then add a fixed percentage mark up in order to price the product. When an industry is characterized by a lack of competition, firms may be able to charge a mark-up over their marginal costs and achieve considerable profits. However, in a competitive market it is not a viable pricing strategy. A mark up strategy can keep a company from fully taking advantage of the potential of its industry. A mark up strategy does not allow the company to capture certain marketing aspect that can help the company increase the demand for its products.

In the case of an heterogeneous customer base, a company can make higher profits if it is able to charge higher prices to those customers who are willing to pay more for the product. This is what we call price discrimination in economics. However, in order for this pricing strategy to make sense and be profitable, there must be two conditions. “First, different price elasticity of demand must exist among potential customers for the product. And second, the firm must be able to identify submarkets and restrict transfers among customers across different submarkets”. Price discrimination can be profitable because it gives a company the potential to earn higher profits than normal pricing because it allows firms to capture every last dollar of revenue available from each segment of its market. However, it contains also a downfall. Price discrimination causes a company to lose its customer base and in the process lower its profit margin.

Discount pricing is another method of pricing that a lot of companies use. Discount pricing may help a company in time of low demand; however, the implementation process of this strategy can strain...