In today's business world it has become crucial for the management to be very keen when pricing of products and services. In pricing a firm should consider the value perception of the customers that is when attaching a price to a product then that price should reflect the value perception of that product. If a firm set a price that is higher than the value of a product; then that means, the demand for that product will go down which consequently will lead to decline in the volume of sales. If this happens then the contribution (sales less variable costs) and the gross margin of that product will decline leaving that firm lesser gross and net profits (Drew 1).
Alternatively, if a firm set a price that is less that its value this will lead to high demand since the customers can derive more satisfaction from the product at a lesser cost. When a customer feels satisfied with a given product this will tend to increase his/her expenditure and volumes in that product. The increase in sales of that product may not necessarily lead to increase in the product's contribution or the firm's overall profit since the value of that product is higher than its price (Drew 1). This may lead to a loss in that product and also contribute a loss to a firm's overall profits. ...Show more