Pricing Essay

Cheap Custom Writing Service

A company engages in a pricing activity when it attempts  to determine  the best price at which it can sell its product.  This is one of the basic elements  of the marketing mix. Typically, the company will aspire to find the optimal price to maximize revenues. This might  imply having a high price  per  unit  or a low price and selling many units, making profits through volume. Companies choose pricing strategy (such as premium  pricing, skimming, economy, and penetration) they believe will generate  the most profit, and they will choose the final price according  to a price model such as cost-plus pricing, target-return pricing, value-based pricing, and psychological pricing. Some companies employ price cuts to encourage sales or to liquidate stocks.

A company that wants to determine its pricing will need to estimate market demand for the product, current  cost structure  of the product,  and competitor pricing as well as the positioning  of the product. The last item is crucial, because positioning will often determine  if a product will be priced high or low. For example, if a company decides that the product  will be sold as a luxury item, the pricing will be high. But if they decide to make money through volume, the price will be very low. Cost structure  is also very important to ensure the company does not sell its products below production cost. Cost structures  include production,  promotion,  and  distribution.  Once  all the elements  have been  determined,  and  the  company objective has been decided, the company can determine the pricing model.

Other  concerns  that  can  affect product   pricing include  perishability  (perishable  products  have less shelf life, hence  must  be priced  to maximize  sales) and life cycle (new products  can use multiple pricing strategies, whereas older products are usually limited to economy pricing).

Pricing Strategies

When determining pricing, the company must choose whether  the product  will be priced at a cost-plus  or value-based  structure.   As such,  four  main  pricing strategies  exist: premium  pricing,  skimming,  economy, and penetration.

A premium price implies that the product is of high quality and can justify an elevated price. The company will be able to demand a high price (or command premium pricing) because of the perceived uniqueness of the product. For example, companies selling products for which they have market exclusivity (because of a patent  or a trademark)  usually employ premium pricing. A good example is Rolex watches, which are perceived as status  symbols and command  a higher price than products of similar quality.

Skimming  pricing  is used  when  a new  product enters  a market  for which a competitive  advantage exists but for which the advantage is not sustainable. The advantage is not prestige, but rather technological in nature. As such, the company targets early technology adopters. For example, when the iPod was first sold in U.S. markets, Apple was able to sell its product at an elevated price; as technologically equivalent competitors entered the market, Apple was unable to justify the high price and had to drop it to compete with new competitors.

Economy pricing is used to price goods that have low cost and low differentiation.  Basic commodities usually use economy  pricing.  Hence,  the  company tries  to  increase  margins  with  volume  sales rather than  a high  per-unit  profit.  Private  labels that  are developed  by retail  outlets  are an example  of economically priced goods.

Finally, penetration  pricing  is usually  employed by a company that seeks to gain quick market  share to establish a foothold in a market. For example, if a company  wanted  to develop a new geographic  segment,  they might  be willing to sell their  goods at a lower  rate  than  usual  to  gain  market  recognition. Prices would be adjusted in time accordingly.

Complex  Pricing Strategies

Pricing is often much more complex than the simple strategies discussed previously. As such, various complex models are used by companies. For example, some companies use captive pricing, wherein the initial purchase  is low (penetration strategy)  and  subsequent purchases are elevated (premium pricing). Printers are a very good example of this hybrid strategy; whereas the  initial  purchase  will be  quite  inexpensive  (the printer),  the following purchases  (the ink cartridges) will usually be quite expensive. Other hybrid strategies include product  bundling  pricing (selling a premium item with economy items to move slow-moving items) or optional pricing (selling an economy product  with premium  options,  which is often  found  in products such as cars). As such, the pricing strategy is limited only by the company’s creativity.

Pricing Models

Once  a pricing  strategy  is chosen,  a pricing  model must be determined. The four main pricing models are cost-plus  pricing, target-return pricing, value-based pricing, and psychological pricing. Cost-plus pricing occurs when a company decides that the price of the item it wants to sell should be set at a fixed amount higher than  the cost to produce.  So, for example, a company  for which a product  costs $10 to produce could decide to apply a cost-plus pricing of 50 percent; hence it would sell its products for $15. Although cost pricing is simpler to implement, it does not take into account market demands and competition.

A company that chooses target-return pricing determines  the sales objective it wants to reach. For example, a company that wants to achieve $1 million in net sales for its product  may estimate  it can sell 100,000 units this year, and the product  costs $10 to produce. Hence, the final pricing of the product  will be $10 (cost) and $10 (return  per product  unit) for a total cost of $20 per unit. Nonetheless, there is circular reasoning in target pricing; because the number of sales affects pricing, which, in turn, affects the number of sold units, it is mostly used in “stable” competitive environments.

Value-based pricing is commonly  used when the company is in a very competitive market and needs to price its product  relative to competitors.  Hence, the product  is priced according to competing  products. For example, if competitors are selling a similar product  at around  $12, the product  will have to be priced around  the same price range (depending  on market elasticity).

Finally, some companies  use psychological pricing models when selling their  products.  Hence the price of their  product  will be a mix of popularity, perceived quality, and what the customer  is willing to accept. Luxury items  are the  most  often  priced this way. For example, some running shoes are often priced upward  of $150 per pair, even though  costs to manufacture are relatively negligible and competing products  of similar quality can be found much cheaper.  In this  case, customer  willingness to  pay $150 justifies the pricing model. This pricing model requires  the most  market  knowledge, because it is quite easy for a company to overestimate  consumer willingness to pay a premium  and to price itself out of the market.

Although companies usually set a fixed price, there are a number  of situations  where they will engage in pricing discount. These techniques  include quantity discounts (where prices are lowered when items are purchased  in bulk), seasonal  discounts  (where prices are lowered depending  on the season goods are  purchased),  cash  discounts  (where  a rebate  is offered to companies who pay their bills early), and promotional discounts  (short-term discounts  given to stimulate sales, often to clear out inventory or to regain market shares).



  1. Chenghuan Sean Chu, Phillip Leslie, and Alan T. Sorensen, Nearly Optimal  Pricing for Multiproduct Firms (National Bureau of Economic Research, 2008);
  2. Pascal Courty and Mario Pagliero, Price Variation Antagonism and Firm Pricing Policies (Centre for Economic Policy Research, 2008);
  3. Oded Koenigsberg, Eitan Muller, and Naufel J. Vilcassim, “EasyJet Pricing Strategy: Should LowFare Airlines Offer Last-Minute  Deals?” QME-Quantitative Marketing and Economics (v.6/3, 2008);
  4. Paul Peter and James H. Donnelly, Jr., A Preface to Marketing Management (McGraw-Hill Irwin, 2000);
  5. Akshay R. Rao, Mark E. Bergen, and Scott Davis, “How to Fight a Price War,” Harvard Business Review (March 2000);
  6. Oz Shy, How to Price: A Guide to Pricing Techniques and Yield Management (Cambridge University Press, 2008).

This example Pricing Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.

See also:


Always on-time


100% Confidentiality

Special offer!