Explain how costs affect pricing decisions essay

Factors that Influence Pricing April 10, Pricing is both an art as well as science as we discussed in earlier post on Ten Commandments of pricing. There is no one right way to determine the price of products or services you are selling.

Explain how costs affect pricing decisions essay

Until recently it has been one of the most neglected areas. Even today, pricing in some firms is simply based on the concepts of cost, market position, competition and necessary profits. There may be various objectives of the firm such as getting a reasonable rate of return, to capture the market, maintenance of control over sales and profits etc.

A pricing policy thus, should be established only after proper consideration of the objectives of the firm. Cost of the Product: Cost and price of a product are closely related. Normally, the price cannot or shall not fixed below its cost including the product, administrative and selling costs.

Price also determines the cost. The prices of the products of different producers are different either because of difference in quality because of the goodwill of the firm. A reputed concern may fix may fix higher prices for its products on the other hand, a new producer may fix lower prices for its products.

Competition may also affect the pricing decisions. Competitive conditions affect the pricing decisions. The company considers the prices fixed and quality maintained by the competitors for their products. The nature of distribution channels used, and trade discounts which have to be allowed to distributors and the distribution expenses also affect the pricing decisions.

Price Elasticity and Demand Elasticity: Price elasticity affects the decisions of price fixation.


Price elasticity means the consequential change of demand for the change for the change in the prices of the commodity. If demand is elastic, the firm should not fix high prices rather it should fix lower prices than that of the competitors.

Pricing decision is affected by the stage of product in its life-cycle. In the introductory stage of the product, it the price strategy which determines the price of the product.

The price of the product also depends upon the characteristics of the product.

Explain how costs affect pricing decisions essay

In order to attract the customers different characteristics are added to the product such as quantity, size, color, alternative uses, etc. Buying Patterns of the Consumers: If the purchase frequency of the product is higher, lower prices should be fixed to have a low profit margin.

It will facilitate increasing the sale volume and the total profits of the firm.The purpose of this question is to explain the reason of tendering contractors being invited to a site visit during the tendering period. The tendering period in a construction project is a very important event.

Explain cost-push inflation and give an example of a possible cause. Cost-push inflation is caused by an increase in costs. It could be the result of rising oil prices or higher wage rates or any other factors that affect the cost of doing business throughout the economy.


The contracting officer rejected ISI’s proposal based on the three provisions quoted from the manufacturer’s “terms and warranty” document above. Advantages of full cost-plus pricing.

It is a quick, simple and cheap method of pricing which can be delegated to junior managers. Since the size of the profit margin can be varied, a decision based on a price in excess of full cost should ensure that a company working at normal capacity will cover all of its fixed costs and make a profit.

The 4-C framework in pricing suggest that pricing is determined by (C)ustomers Willingness-to-pay, (C)osts, (Competition), and (C)apacity.

The fourth C, capacity, is especially important in service businesses with high fixed costs and fluctuating demand. Explain the rationale behind choosing the pricing approach. Identify the costs that the group thinks would be considered in setting the product price, and come up with a sample cost structure for the product (make it as realistic as possible).

Cost-Volume-Profit Analysis