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Essay example - Product and Pricing

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Pages 2 (502 words)
It is irrefutable that a business organizations' pricing decision is often based on the cost incurred in the production of the commodity. Companies often account all their expenditures and simply put a mark-up as their profits. However, what they fail to recognize in their pricing decisions is the value that customers attribute to their products…

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Consumer surplus is defined as "the amount that customers benefit by being able to purchase a product for a price that they would be willing to pay" (Economic Surplus 2007). When a company prices less than the amount that buyers are willing to pay for the product, customers will enjoy the consumer surplus in purchasing the product. Thus, companies should be adept in their pricing strategy. They should be able to determine individual consumer surplus and fully expropriate it for their advantage.
Identifying the exact value attributed by buyers to a product is a great challenge for a business organization. As individuals are unique, they often have different perceptions of the monetary value of an offering. Some price sensitive customers may find a product too expensive but some may even find it a bargain. One of the things that company can do is to conduct a survey before releasing the product in order to get an average price that the target market is likely willing to pay. The company can also experiment by raising and lowering the price in the market and monitor the customers' response through product sales and demand. However, all these can be very tedious and can erode the identity and image of the product in the market. It can even bring confusion to the customers.
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