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. ...
The price of any product should show a reflection of its value. Every time when a firm is setting a price it should ensure that neither it nor its customers loose from the decision made (Dodd 10).
It is of utmost importance for the management or the pricing team to consider both the customer-value perception and therefore, they are responsible for regular and timely review of a firm's products prices and their quality. Comparing a firm's products to other firms trading in similar products in the market which they operate in terms of quality and price is important for that firm if it will remain relevant in the market. The firm should be in a position to differentiate their products from others so that their customers can be in a position to totally distinguish them. This translates to customer loyalty since they will not be faced with confusion due to the products available thereby increasing sales volume and margins of that product. A firm's product that has many substitutes available is at high risk of loosing its market share that is if the firm product doesn't give the much needed satisfaction by the customer in both aspects of quality and price. Therefore, it is imperative for a firm to regularly review its products quality by redesigning to avoid being faced out of the market. Further, a firm should always offer competitive prices to its customer in order to compete favorably with other firms' products. But in so doing they should not do it while disregarding the costs involved since after all it will determine their profitability (Dodd 14).
Other important internal and external factors affecting a firm's pricing decisions
(a) Experience curve
This is a situation in which the average cost (AC) declines as production of a product