What is price and why does it matter?
Price is the amount of money a buyer pays for one unit of a product or service. It has other names: fees (a doctor), fare (a bus), rent (a house), interest (a loan).
Price is the only part of the marketing mix that brings in money; product, place and promotion cost money. A price that is too high loses buyers; too low loses profit.
Pricing objectives
- Survival: in hard times, a firm may price just to cover costs and stay in business.
- Profit maximisation: earn the most profit, in the short or long run.
- Market share: keep the price low to win a bigger share of buyers.
- Quality (product) leadership: charge a high price to show top quality and cover research costs.
- Meeting competition: match rivals to avoid a price war.
Factors that affect price
Internal factors (the firm controls them)
- Cost of production: the floor; in the long run price must cover cost.
- Objectives: profit or market share?
- Product features: a unique product can charge more.
- Other marketing-mix choices: heavy ads or wide distribution add cost.
External factors (outside the firm)
- Demand: how many people want it and how much they react to price. Usually, higher price → fewer units sold.
- Competition: rivals' prices set a ceiling.
- Government rules: taxes, and price controls on essential goods such as some medicines.
- Economic conditions: inflation, recession and buyers' incomes.
Pricing methods
1. Cost-plus (mark-up) pricing
Add up the cost per unit, then add a percentage for profit. Price = Cost per unit × (1 + markup %). Simple, but it ignores what buyers will pay.
2. Competition-based pricing
Set the price near rivals' prices: a little below, equal or above. Common for petrol, bread and similar goods.
3. Value-based (perceived value) pricing
Set the price by how much buyers think the product is worth, for example a famous designer bag.
4. Break-even (target return) pricing
Find the price or quantity at which total revenue equals total cost. Break-even units = Fixed cost ÷ (Price − Variable cost per unit).
5. New-product strategies
- Skimming: start with a high price for keen early buyers, then lower it (new games consoles).
- Penetration: start with a low price to win many buyers fast (a new mobile data plan).
Try it
In step 6, set cost 100 and markup 20%. Then raise the markup to 60%. Price goes up, but units sold fall. Does total profit go up or down? Find the markup that gives the most profit.
Key formulas and definitions
- Price = Cost per unit + Profit per unit
- Cost-plus: Price = Cost × (1 + markup/100)
- Markup % = (Price − Cost) ÷ Cost × 100
- Total profit = (Price − Cost per unit) × Units sold
- Break-even units = Fixed cost ÷ (Price − Variable cost per unit)
- Skimming = high then lower; Penetration = low to win share
Worked examples
1. Cost per cake: materials ₹60, labour ₹25, other ₹15. Markup 20%. Find the price.
Cost = 60 + 25 + 15 = ₹100. Profit = 20% of 100 = ₹20. Price = 100 + 20 = ₹120.
2. A pen costs ₹40 to make and sells for ₹50. Find the markup %.
Markup = (50 − 40) ÷ 40 × 100 = 10 ÷ 40 × 100 = 25%.
3. Fixed cost ₹20,000. Each shirt sells for ₹500 and has a variable cost of ₹300. How many shirts to break even?
Contribution per shirt = 500 − 300 = ₹200. Break-even = 20,000 ÷ 200 = 100 shirts.
4. Cost ₹100, price ₹120, 400 units sold. Find total profit.
Profit per unit = 120 − 100 = ₹20. Total = 20 × 400 = ₹8,000.
5. A new gaming console launches at a high price and drops a year later. Which strategy?
Price skimming.
6. A new streaming service charges very little in its first year to win users. Which strategy?
Penetration pricing.
Common mistakes
- Thinking price is set by cost alone. Demand and competition matter just as much.
- Calculating markup on the selling price instead of on cost.
- Thinking a higher price always means more profit. If units sold fall a lot, profit can drop.
- Mixing up skimming (high first) and penetration (low first).