| Summary: | Products are priced in order to sell them and make a profit. Every firm, therefore, needs a pricing
strategy. Such a strategy should be simple. It should ensure simplicity in tactics and decisions and
minimize complications.
It is difficult to set a price with the help of only one pricing model. The price of a product may vary
due to factors like geographical area, different clients and time difference. Prices must always be
cost-compatible.
An essential step in deciding on a pricing strategy involves looking at the characteristics of pricing
decisions. The classic economic theory is based upon demand and supply and attempts to balance
these two concepts. In most cases it works on the basis of cost plus profit. This way of thinking
about prices does not guarantee a profit, because costs and profit depend upon volume and
volume is dependent on the correct price. Prices can be cut at first. In this way only a small profit
will be ensured. If the price is too low it will not automatically ensure a profit.
Usually little attention is paid to the market itself in deciding on a price. It is not an easy task to
arrive at the 'envelope of acceptable prices". Not to fall into the standard trap of adding profit to
cost, one has to have a broad overview of pricing strategies.
Multiple approaches are followed in determining prices. Firstly, one can look at cost and its
characteristics. By adding a profit margin to cost, one can determine a new price. It may be too low
or it may be too high, resulting in the risk that customers will buy the competition's product.
It is there for essential to look at strategic concepts like the competition's price as well. The way a
buyer looks at certain prices and then decides whether to buy or not, also plays a very important
role.
All of these factors have to be taken into consideration and all aspects have to be balanced to
arrive at a price.
A framework for pricing decisions includes the recognition of the need for a pricing decision,
determining a price, developing a model, identifying and anticipating pricing problems, developing
feasible courses of action, forecasting the outcomes of each alternative and monitoring and
reviewing the outcome of each action.
Management's pricing decision is taken after studying all this information. Information can be
given as a single answer or in detail. Costs can be divided into direct costs and absorption costs.
Although prices can be determined in more ways than one, the ideal is to take more than one
factor into consideration. Every aspect must carry a weight and these weights can be changed.
That is why the multiple criteria decision method is so effective. With this method a few factors are
taken into account. Each of these factors adds to the price definition in a certain manner with
regard to each product. By changing the profit margin, the price can be adjusted until one is
satisfied with the new price.
A company's structure, location and nature will play a role in determining which technique is used
to determine a price. The best technique is one that can be adjusted and where multiple criteria
can be set. The choice of a technique is a personal choice. The multi-criteria method is flexible and
prices can be determined uniformly for all products or for a single product. === Thesis (M.Sc. (Computer Science))--North-West University, Potchefstroom Campus, 2004.
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