If a business does not apply the right price to a product or service, the business can adversely affect the demand for the product. An organization should consider many different factors before ultimately pricing an item. No single formula applies for how a business should set prices; however, businesses need to make sure they set prices competitive with similar offerings from similar businesses. Fixed pricing is typically applied by organizations that offer high-volume service. Fixed pricing is also commonly used by businesses to get customers in the door to showcase other products or services.
Pricing requires the development of a marketing strategy that includes marketing analysis, positioning, targeting and segmentation. A business also has to estimate the demand curve to understand how pricing affects quantity and to calculate costs associated with the product, including both variable and fixed costs. The marketing strategy should also define the product, consider the product distribution and create promotional strategies that can introduce the product to the target market.
Cellular phone service and cable television represent two examples of service companies that routinely apply fixed pricing strategies. Companies such as utilities that rely on a large volume of business to achieve profitability commonly use fixed pricing for the most basic services offered. This type of pricing accomplishes two things: It generates revenue for the business and introduces customers to the company and all of the other types of services offered.
Although public transportation generally relies on subsidies, it nonetheless requires revenue to pay for the day-to-day operations of the business. Like most companies that have fixed pricing, public transportation relies on sheer volume to compensate for the low prices charged to customers. The pricing strategy utilized by public transportation companies also has to take into consideration the competition that exists in the marketplace, including car owners. By offering monthly and daily passes at a discount, public transportation companies aim to entice the population to stop driving cars or using alternative forms of transportation.
Fast Food Restaurants
The competition in the fast food business is fierce, and owners of these restaurants typically must cut prices of food items to the bare minimum. Virtually every fast food franchise has a dollar or 99-cent menu. The goal of this pricing strategy is to get you to come into the restaurant. Once you are there, fast food restaurants typically get you to spend more than 99 cents. The restaurant might only break even on the 99-cent menu but will make a profit on other purchases you make.