Factors considered in a Pricing Decision

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  1. Factors considered in a Pricing Decision

There are few factors that need to be considered when setting a price for a good or service:

  • The price offered by competition.
  • Pricing to high customers seek elsewhere.
  • Pricing to low costs may not be covered.
  • The price the customer is willing to pay.
  • The elasticity of the product see section (ii).
  • The power, the company has in pricing its good/service see section (v).

  1. The importance of Price Elasticity

This is very important, it measures the sensitivity of the volume of goods /services sold to the price the company charges. A company has to find the elasticity of the good/service sold and set its price accordingly otherwise, charging too high then the number of goods or services sold will drop and vice versa and the costs may not be covered.

  • A good or service is said to be elastic if the change in price has considerable effect on the volume of units sold.
  • A good or service is said to inelastic if the change in price has no or minimal effect on the volume of units sold.

  1. Full-Cost Plus Pricing

Benefits:

  • Simple to calculate, this does not need a full accountant to work out the prices and can be done by a trainee/junior.
  • When costs raise its simple to put up prices, prices can also be justified to show why prices are what they are.
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Limitations

  • Full-cost pricing ignores the notion of price elasticity of demand see section (ii) – There can be potential for a company to maximize its profits by finding out the product elasticity and either by raising or lowering prices
  • The company has less incentive to cut or control costs – if costs increase, then selling prices increase.  However, this may make the company uncompetitive and deferring customers away from the company due to uncompetitive prices.

  1. Marginal Pricing

Benefits

  •  If a company is facing poor sales marginal cost pricing ca be used to generate ...

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