It is everywhere. We invented money, credit, and we also invented the price tag. Granted, price is not just that number on a tag, you can specify price in a barter equivalent, but in modern times, it has been reduced to an abstract number.
But, How is it set? Most of the time we just accept it as it is. We walk into a store, and whatever it says on the tag, that’s what we pay.
Another interesting conversation would be to just ask, Why? Why do we just accept it like that? Why don’t we contest it? But that’s for another time. This article is about how prices are set, and they fall into two major categories: cost-plus, and competitive.
Cost plus, is just as it suggests, we determine all the costs incurred into making the widget, and we slap on it whatever margin we expect to make on it. This method sounds like a good idea, by definition it would never result in a price that is not profitable. The only problem, is that some people may not be willing to pay the price we set. Yet another scenario may be that even though we have put a premium on the cost, our costs could be lower than the competition’s but with this approach, doesn’t allow us to benefit from our better cost structure.
A better approach may be to price accordingly to what other competing offerings go for. By pricing products comparably to other offerings, it is more likely that customers would be willing to pay that price for us. This again may create an issue because the market price may not cover our own costs to manufacture the product.
What pricing method does your organization mostly use? Who is responsible for setting the price?