Finding a good balance between price floor and price ceiling
Pricing is the process whereby a business sets the price at which it will sell its products and services. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the market place, competition, market condition, brand, and quality of product.
From the business’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. A good pricing strategy is one which is a good balance between the price floor (the price below which the business ends up in losses) and the price ceiling (the price at which the business experiences a no-demand situation).
- Line pricing – Line pricing is the use of a limited number of prices for all products offered by a business and has the advantage of ease of administering.
- Loss leader – Is priced below cost to draw customers into the business.
- Price/quality relationship – Most consumers perceive that a relatively high price is a sign of good quality. Especially so for services as the products cannot be tested until used.
- Premium pricing – This involves consistently pricing at the top of the possible price range to help attract status-conscious consumers who believe the high price is an indication of good quality.
- Demand-based pricing – Pricing is based on consumer demand.
Product or service pricing is a business’s most effective profit lever. Product or service cost, market place competition, market condition, and quality of product all need to be considered when a business sets its pricing. The two most common pricing mistakes made by businesses are discounting and cost-plus pricing and both pricing strategies produce lower selling prices and overall profitability.