Pricing Decisions

What is Price?

In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller).  Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction.  In fact, price means different things to different participants in an exchange:

• Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits.  In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service.  But financial consideration is not always what the buyer gives up.  Sometimes in a barter situation a buyer may acquire a product by giving up their own product.  For instance, two farmers may exchange cattle for crops.  Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product).
• Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit.  For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions.  For example, most retailers highlight product pricing in their advertising campaigns.

Price is commonly confused with the notion of cost as in “I paid a high cost for buying my new plasma television”.  Technically, though, these are different concepts.  Price is what a buyer pays to acquire products from a seller.  Cost concerns the seller’s investment (e.g., manufacturing expense) in the product being exchanged with a buyer.  For marketing organizations seeking to make a profit the hope is that price will exceed cost so the organization can see financial gain from the transaction.

Finally, while product pricing is a main topic for discussion when a company is examining its overall profitability, pricing decisions are not limited to for-profit companies.  Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not as apparent .  For instance, charities seeking to raise money may set different “target” levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other benefits.  While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value.