Price is the monetary value of an item or service. When you buy shoes, you give up some money, which is worth the shoes’ price. Price minus cost equals profit generated by the seller.
Price as a market signal to change demand and supply
Prices act as market signals. If the price of an item rises, consumers don’t like it. They will reduce demand.
But, producers see high prices as a signal to increase supply. Higher prices mean more significant profit margins.
Declining demand and increasing supply will ultimately lead to a new equilibrium. That will form an ideal new price for consumers and producers.
The opposite condition applies when prices fall. Demand will increase, and supply will decrease.
Will lowering or increasing selling prices increase income? It depends on the elasticity of demand for the item.
Factors to consider
You need to be careful in setting the price of goods or services. It can have an impact on the success of your product in the market. Prices not only affect profit but also affect the quantity you sell.
Prices affect purchasing decisions. When it’s too high, consumers won’t buy it. But, if it’s too low, fewer benefits.
You need to consider various factors when setting prices, including:
- Demand elasticity
- Level of competition
- Unique selling proposition of your product (for example quality and features)
- Production cost
- Brand image
- Profit margin
- Product life cycle
- Price skimming: starts at a high price and then decreases with time.
- Penetration pricing: setting low prices to attract more customers, especially when entering new markets.
- Competitive pricing: the same price as competitors.
- Cost-plus pricing: the cost per product unit plus the desired profit margin (mark-up).
- Value-based pricing: set prices based on customer perceptions of product value