Pricing strategies

A business can use a variety of pricing strategies when selling a product or service. The price can be set to maximize profitability for each unit sold or from the market overall. It can be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market.

Pricing is one of the most vital and highly demanded component within the theory of marketing mix. It helps consumers to have an image of the standards the firm has to offer through their products, creating firms to have an exceptional reputation in the market. The firm's decision on the price of the product and the pricing strategy impacts the consumer's decision on whether or not to purchase the product. When firms are deciding to consider applying any type of pricing strategy they must be aware of the following reasons in order to make an appropriate choice which will benefit their business. The competition within the market today is extremely high, for this reason, businesses must be attentive to their opponent's actions in order to have the comparative advantage in the market. The technology of internet usage has increased and developed dramatically therefore, price comparisons can be done by customers through online access. Consumers are very selective regarding the purchases they make due to their knowledge of the monetary value. Firms must be mindful of these factor and price their products accordingly.

Method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs.

Contribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on one's assumptions regarding the relationship between the product's price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e. to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).

In cost-plus pricing, a company first determines its break-even price for the product. This is done by calculating all the costs involved in the production such as raw materials used in its transportation etc., marketing and distribution of the product. Then a markup is set for each unit, based on the profit the company needs to make, its sales objectives and the price it believes customers will pay. For example, if the company needs a 15 percent profit margin and the break-even price is $2.59, the price will be set at $3.04 ($2.59 / (1-15%)).

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