Q&A - How does pricing link to the objectives of a business?

The price a business charges needs to take account of, and be consistent with the strategic objectives of the business.

For example, it may be that the objective is to position the business as the highest quality provider – in this case, a high price would be used to signal high quality to the consumer. Exclusive designer fashion labels and luxury holiday businesses apply this strategy.

At the other end of the pricing scale, a business that positions itself as a low-cost or discount provider will look to set prices that are lower or as low as any rival. The strategy is to gain competitive advantage by offering the lowest prices (not just in the short-term). The battles in the discount supermarket and low-cost airline markets are great examples of this strategy in action.

In general, a business tries to set a price which:

Maximises profits and the return on assets or investment. The selling price achieved for a product directly affects the gross profit margin made on each sale.

Maximises the sales revenue. Sales revenue is the total amount of money made from sales and is the price of the product multiplied by the number of sales.

For a new business with a new product setting a price can be particularly difficult to do because it has no experience of what customers are prepared to pay. Market research can help identify competitor prices, but the ultimate “proof of the pudding” is starting to sell at a particular price to see what happens.

• If the business gets the price too high, sales might be lost
• Set the price too low and customers who are prepared to pay more don’t have to