4 Factors that businesses must consider in determining pricing policy

The factors that businesses must consider in determining pricing policy can be summarised in four categories:

(1) Costs: In order to make a profit, a business should ensure that its products are priced above their total average cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal cost of production – so that the sale still produces a positive contribution to fixed costs.

(2) Competitors: If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under conditions of perfect competition, it has no choice and must accept the market price. The reality is usually somewhere in between. In such cases the chosen price needs to be very carefully considered relative to those of close competitors.

(3) Customers: Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices.

(4) Business Objectives: Possible pricing objectives include:

  • To maximise profits
  • To achieve a target return on investment
  • To achieve a target sales figure
  • To achieve a target market share
  • To match the competition, rather than lead the market