Price

The essentials

Price is the amount of money paid by buyers in exchange for a product or service. It is the only element of the marketing mix that directly brings revenue; the others involve costs. Setting the right price affects sales, profits and the image of the product.

Key points

• Product cost: the price should usually cover the total cost, which includes fixed costs, variable costs and semi-variable costs. In the long run, prices must cover all costs, though in the short run a firm may price below total cost.
• Utility and demand: the upper limit of price is set by the utility of the product and the demand for it. When demand is inelastic, a higher price can be charged.
• Extent of competition: when there is little competition, the firm has more freedom to fix the price; in a highly competitive market, prices must stay close to competitors' prices.
• Government and legal regulations: the government may control the prices of essential goods to protect the public.
• Pricing objectives: maximising profit in the short or long term, obtaining a larger market share, surviving in a competitive market, and attaining product quality leadership.
• Marketing methods used: distribution system, quality of salesmen, quality and amount of advertising, packaging, product differentiation and credit facilities also affect price.

Exam tips

• If a case says the firm wants to capture a large market quickly, it will probably set a low price (market share objective).
• Cost sets the lower limit; utility and demand set the upper limit.

Common mistakes

• Saying price must always cover total cost. In the short run, firms sometimes price below total cost.
• Ignoring government regulation as a factor in pricing essential goods such as medicines.