Overview

Price captures value in exchange; it influences demand, profitability, and market position. Effective pricing blends cost, customer perception, and competitive dynamics while aligning with company objectives.

Key Concepts

• Cost-Based Pricing: Cost-plus markup, break-even analysis, target return.
• Value-Based Pricing: Price set on perceived customer value; uses economic value to customer (EVC).
• Competition-Based Pricing: Going-rate, loss leader, price matching.
• New-Product Strategies: Skimming (high initial price) vs. penetration (low to gain share).
• Psychological Pricing: Odd–even ($19.99), reference price framing, decoy effect.
• Dynamic & Yield Management: Real-time adjustment based on demand (airlines, ride-hailing).
• Bundling & Freemium: Package offerings or free basic tier with paid upgrades.
• Legal & Ethical Issues: Price fixing, predatory pricing, deceptive practices, resale price maintenance.

Step-by-Step Example

Scenario: StreamPlay launches a cloud‑gaming subscription.

Step 1 – Costs: Service cost per user = $6/month (servers, royalties).

Step 2 – Value: Survey shows gamers willing to pay up to $15 for unlimited titles.

Step 3 – Competition: Rivals priced at $9.99 and $16.99 tiers.

Step 4 – Price Choice: Use penetration strategy at $7.99 promo for 6 months, then $11.99.

Step 5 – Psychological: Anchor premium bundle at $17.99 to make $11.99 tier appear value.

Final Answer: Combining cost, value, and competitive reference points delivers profit margin and rapid adoption.

Quick Tip