The Ideal Price For Any Product Or Service Is One That Is Acceptable To Both Buyer And Seller. From The Buyer’s Standpoint, The Right Price Is A Function Of Product Purchase Value And Other Competitive Choices In The Marketplace. From The Seller’s Viewpoint, There Are Many Potential Pricing Objectives, But The Basic Concern For Almost All Business Is To Price Products To Maximize Both Sales And Profit. (Discuss)Contents
TOC o “1-3” h z u The Ideal Price For Any Product Or Service Is One That Is Acceptable To Both Buyer And Seller. From The Buyer’s Standpoint, The Right Price Is A Function Of Product Purchase Value And Other Competitive Choices In The Marketplace. From The Seller’s Viewpoint, There Are Many Potential Pricing Objectives, But The Basic Concern For Almost All Business Is To Price Products To Maximize Both Sales And Profit. (Discuss) PAGEREF _Toc377805064 h 1Step 1: the market structure determines the price structure PAGEREF _Toc377805065 h 1Step 2 the demand curve. PAGEREF _Toc377805066 h 2Step Three- Competitive Price Range PAGEREF _Toc377805067 h 3
The equilibrium price is the price at which the consumer and the supplier are both willing and able to trade at, and the market clears without excess demand or supply. A consumer is always subjective; this means consumption is based on the level of utility achieved from the consumption of a commodity (Cryns, 2002). The higher the level of utility the more the consumer is willing to purchase the good, the only constrain is the budget: the amount of money available to the consumer for spending. However excess consumption of a commodity leads to diminishing utility which results in a decline in the quantity consumed.
For a producer, his aim is always maximize profits by equating the price to the marginal cost. However this is usually possible when the firm is large and can experience economies of scale, for most small sized firms, economic operation is usually set to be above the shut down price (Smith, 2011). In this case the average variable cost is maintained at a lower point to ensure that the price is higher and there are enough returns to sustain the firm.
Price determination is not an easy task for any firm as the price set has to be acceptable for maximum sales and enough to cater for all the expenses of the company. The following steps are used:
Step 1: the market structure determines the price structure
The structure of the market will determine the price to be set by the firm. This is because in a perfectly competitive market structure the price is determined by the market forces and the firm is a price taker. In this case any changes in the prices can lead to major loses for the firm because there is perfect distribution of information in the market. The price is predetermined for the firm (Schindler, 2011).
In a monopolistic market structure, price competition is a major advantage as goods are close substitutes and are slightly differentiated by package, brand name and prices (Hunt, 2008). However price wars can lead to complete shut-down of small firms that are unable to experience low costs as a result of economies of scale (Smith, 2011). Oligopolistic market structure price is determined by the market forces. Price wars are highly discouraged due to the kinked nature of the demand curve, slight price changes can lead to major financial losses and loss of market share control.
Step 2 the demand curve.It aids in establishing the elasticity of the demand for the product.
Price D2
D*S
D1
P*
Q* Q2 Quantity
D* is the initial demand curve for the product, it slopes from left to right indicating two factors about the product:
It is a normal product whereby increase in the price leads to a decrease in the demanded. P* and Q* are the equilibrium price and quantity respectfully. S is the supply curve.
It is has an elastic demand whereby changes in the price level leads to an inverse change in the quantity demanded.
An increase in the quantity demanded, shift of demand curve from D* to D2, leads to an increase in the price of the commodity. However if the company maintains the same price there will be more sales than before. From Q* to Q2, since most of the companies will increase their prices, the firm will have a higher market share control.
lefttop1= 2012
2= 2011
3= 2010
Series 1 = Nike
Series 2 = Puma
Series 3 = Adidas
Step Three- Competitive Price Range
Competitive price range is based on the analysis of the price ceiling and price floor as well as the equilibrium price. Ceiling price is the maximum price that the consumers are willing to pay for the products while the floor price is the minimum price that the firm is willing to sell the products (Hunt, 2008).
In order to increase the utility obtained by the consumers, the consumer surplus should be less than the producer surplus. Given the fact the equilibrium price is $75, while the ceiling price is $150 and the floor price is $50. Then we can graphically analyze the industry market as follows:
D Sconsumer surplus P* producersurplusQ*
P* is the equilibrium price = $75. This means that since the market clears at P* the company should charge the same price or higher. But in most market structures the firms will charge a price closer to the ceiling price in an effort to increase revenue and profits. The firm should charge a price that is closer to the equilibrium price and increase the quantity sold.
Improvement of the quality of a product also determines the price of the goods. The better the quality the higher the price and the reverse is also true. The pricing strategies should be based on the following:
Cost pricing – the average variable cost curve should always be below the marginal cost curve. Marginal cost should be equated to the price of the commodity (Schindler, 2011).
Penetration price – it should be relatively low in order to attract clients. Once a substantial clientele base has been established then the price can be increased slowly.
Quality pricing – the higher quality products should be placed at a higher price. It’s not only because higher quality goods are more costly to manufacture but because it creates a need to be better and get the better quality for the consumer (Schindler, 2011).
Third degree price discrimination – different people should pay different prices for the commodities. Children clothes should less expensive as compared to adult clothes made by the same company (Smith, 2011).
References
Cryns, S. D. (2002). Internet Pricing Strategies for E. Business, Colombia Publishers
Hunt, E. K. Nesiba, R. F. (2008). Economics: an Introduction to Traditional and Progressive views, Macmillan Publishers
Schindler, R. Schindler, R. M. (2011). Pricing Strategies: A Marketing Approach, Cambridge University Press, London
Smith, J. T. (2011). Pricing Strategies: Setting and Managing Price Levels, Oxford University Press, New York
