Pricing Policy

Pricing Policy, an approach taken by a company with regard to setting prices for its products.

There are two basic methods for pricing goods. One is to make the product, calculate the cost of making it, and add a percentage markup (the profit) to arrive at the price. The other is to make a judgement as to the price a product can be sold for in a market, and then to develop and make the product according to specifications the costs of which will give an acceptable profit when the product is sold in the market. When formulating its policy, a company takes a view on how the prices of its products should compare with those of its competitors. It may pursue a low-pricing policy in order to gain market share. It may opt for a high pricing policy in order to reinforce the sought-after perception that its product is of better quality or is more prestigious than competing products. Or it may simply follow what its competitors do, cutting prices for its products when they do.

For each product, there are other considerations. A new product may be introduced at a special low price. Similarly, the price of an old product that is facing increased competition from new and better products may be cut (or the product improved) in order to maintain the level of contribution it makes to profits. Companies will also look at a product’s price sensitivity or price elasticity of demand (how much demand may be reduced by increases in price). They may decide to be flexible rather than rigid by, for example, giving their representatives discretion to vary the price for different customers.

For each market it may be necessary to adopt a different pricing policy, perhaps to follow a low- or middle-price course in the home market but a high-priced policy in certain foreign markets where the brand is perceived as being more prestigious or because the market will bear it. One of the reasons why prices of new cars in the United Kingdom and the Republic of Ireland are higher than in continental Europe is because people drive on the left side of the road in the British Isles and on the right side in the rest of Europe; so British residents can take advantage of lower car prices in Europe only if they do not mind buying left-hand-drive versions. The existence of price discrimination between markets can provide opportunities for distributors to buy a product in one country, ship it to another where the price is higher, and sell it at a profit.

On occasions, companies sell a product at below its cost in a foreign market in order to offload stocks or gain market share. This is known as dumping and, under a variety of national laws and international agreements such as those administered by the World Trade Organization, a number of sanctions such as the imposition of special import tariffs may be employed to discourage it.

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