Setting a price for a product is an important aspect that contributes to the success of a business. If the business prices its products too low, it may be leaving some revenue on the table. On the other hand, pricing a product too high will likely reduce demand. The factors to take into account in setting product price are the costs of producing it, the demand for the product, the profit the business wishes to make, and the market competition.
Costs of Production
The costs of producing a good include variable costs of production and fixed costs of production. The variable costs include costs, such as labor. These costs go up when the business produces more units. The fixed costs are costs that the business incurs whether it produces anything or not. These are costs such as utilities. The product price should at least cover the firm’s costs.
In addition to covering the costs of production, the price should also include a profit element. This means that the business is getting a return for its service of manufacturing and selling the good. Businesses that are for-profit aim to make a profit and this is an important aspect of setting a product price. Each business determines how much of a profit it desires and this goes into determining the product price.
Market demand is an indication of how much consumers are willing to pay for a product. If there is high demand for a product, consumers will be willing to pay more for it. If the demand is low, they will not be willing to pay as much for it. Thus, in setting the price of a product, the business takes into account demand for the product so that it can charge a price at which the product will sell.
In a market, there are a number of producers of a good. A business has to take into account this competition in setting a product price. In a market in which there is a lower level of competition, a business could set a higher price. On the other hand, when there is a lot of competition, a business that sets a higher price may find that consumers prefer its competitors’ products that are lower priced.