Price is one of the most important business decisions because it directly affects sales volume, revenue, profit and market share. A wrong price can destroy demand or reduce profit even if the product is good. Therefore, managers use different pricing methods (how price is calculated) and pricing strategies (how price is set to achieve objectives).
This topic is frequently asked:
Pricing means deciding the monetary value charged for a product/service.
Common pricing objectives:
In exams, write any 4–6 objectives with short explanation.
Key factors:
Cost-plus pricing sets price by adding a markup to cost.
Basic idea:
Steps (simple):
Advantages:
Limitations:
Value-based pricing sets price based on customer perceived value rather than just cost.
Examples:
Advantages:
Limitations:
Price is set considering competitors’ prices:
Useful in highly competitive markets.
Price skimming means setting a high initial price and then reducing it gradually.
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Pricing objectives (any four):
Thus, objectives guide whether the firm chooses premium pricing, competitive pricing, or penetration pricing.
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Price is one of the most important business decisions because it directly affects sales volume, revenue, profit and market share. A wrong price can destroy demand or reduce profit even if the product is good. Therefore, managers use different pricing methods (how price is calculated) and pricing strategies (how price is set to achieve objectives).
This topic is frequently asked:
Pricing means deciding the monetary value charged for a product/service.
Common pricing objectives:
In exams, write any 4–6 objectives with short explanation.
Key factors:
Cost-plus pricing sets price by adding a markup to cost.
Basic idea:
Steps (simple):
Advantages:
Limitations:
Value-based pricing sets price based on customer perceived value rather than just cost.
Examples:
Advantages:
Limitations:
Price is set considering competitors’ prices:
Useful in highly competitive markets.
Price skimming means setting a high initial price and then reducing it gradually.
When used:
Example: new smartphone model launched at high price, later discounted.
Pros:
Cons:
Penetration pricing means setting a low initial price to gain market share quickly.
When used:
Pros:
Cons:
Price discrimination is charging different prices for the same product/service to different customers/markets, not due to cost differences but due to differences in willingness to pay.
Conditions for price discrimination:
Examples:
Managers typically check:
Know objective → Study demand/elasticity → Study cost → Study competition → Select method (cost/value/competition) → Implement → Review
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Meaning: Price is decided as Unit Cost + Markup.
Steps:
Limitations (any two):
Hence, cost-plus is simple but should be supported by demand and competitor analysis.
Pricing is not a single-step decision. Firms choose a method (how to compute price) and a strategy (how to set price to meet objectives).
Flowchart:
Set pricing objective
↓
Study cost + demand (elasticity) + competition + legal factors
↓
Choose method: Cost-based / Value-based / Competition-based
↓
Select strategy: Skimming / Penetration / Discrimination / Going-rate
↓
Fix price + implement
↓
Monitor sales & profit → revise price if needed
Conclusion: A good pricing decision balances cost recovery, customer value, and competitive position to achieve the chosen objective.