Author: Jim Riley Last updated: Sunday 23 September, 2012
The factors that businesses must consider in determining
pricing policy can be summarised in four categories:
In order to make a profit, a business should ensure that
its products are priced above their total average cost. In the short-term,
it may be acceptable to price below total cost if this price exceeds the marginal
cost of production – so that the sale still produces a positive contribution
to fixed costs.
If the business is a monopolist, then it can set any price.
At the other extreme, if a firm operates under conditions of perfect competition,
it has no choice and must accept the market price. The reality is usually
somewhere in between. In such cases the chosen price needs to be very carefully
considered relative to those of close competitors.
Consideration of customer expectations about price must be
addressed. Ideally, a business should attempt to quantify its demand curve
to estimate what volume of sales will be achieved at given prices
(4) Business Objectives
Possible pricing objectives include:
• To maximise profits
• To achieve a target return on investment
• To achieve a target sales figure
• To achieve a target market share
• To match the competition, rather than lead the market