Pricing refers to setting of a price by company for goods or services sold by it to its customers. Pricing can be compared with human brain, just as human brain controls every function of our body in the same way pricing controls every function of the business. In order to understand pricing let’s look at various objectives of pricing –
- Break even – The first and foremost objective of pricing is to break even, that is company should be able to sell its product or service at a price point where it is able to recover the variable cost as well as fixed cost gone into making a product. So for example if company is into manufacturing and its variable cost and fixed in producing a product is $50 per unit then while deciding the price for a product company will keep in mind that under no circumstances pricing of a product should be done below $50 so as to break even or survive.
- Profit – Business is done for profit and for earning profit one has to sell the product or service above its cost price and therefore another objective of pricing is to make sure that company earn decent profit in order to continue doing business in the long run. So for example if cost per unit of a product is $100 and company is looking to make profit of 20 percent than while pricing a product it will have to set its market price at $120 so that it can achieve the objective of 20 percent profit on its products.
- Competition – All markets are competitive and rarely one finds monopoly and that is the reason why company before deciding about pricing will look into pricing of competitor’s selling same product. For example if there are 10 companies selling soaps and if on an average the price of soap sold by all companies is between $5 to $10 and if company sets the price of soap at $20 than naturally it won’t be able to sell its product at that price because of cheap available options and hence looking into competitors price is another important objective of pricing.
- Long term Planning – Business is a perpetual activity and therefore company before deciding about price of its product or service cannot overlook this aspect and hence pricing should be done in such a way that it attracts long term loyal customers towards company and also increases the market share of the company in comparison to its competitors.
- Fair price and Company Image – While deciding about the price of product, company should adopt fair pricing policy implying that price should be set in such a way that company earn decent profit while at the same time customer should not feel that they are being exploited. For example if company produces a product for $100 and it knows that it will price the product at $130 then also customer will purchase it but company set the price of that product at $125 then it will result in fair price which in turn will increase loyal customer base and also increase the overall brand or company image.
As one can see from the above that pricing is very important and just like human brain when brain stops working we go into coma or become dead in the same way if pricing is not done properly company will suffer losses or go bankrupt.