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Pricing


The price for a product is one of the more important decisions a company makes. An increase in price may cause total sales to drop, affecting the number of items a company needs to produce. A price decrease may cause total sales to increase. The flexible budgets from the previous lesson showed you how changes in sales price affect the variable costs for a company. This lesson will address how a company approaches setting prices when it is a price-taker or a price-setter.

gas pump
bizzon_n/iStock/Thinkstock

 

A price-taker is a company that cannot affect the market price of its product. Normally, the product is not unique, and there is a lot of competition. A consumer would have many options when looking for such products as copy paper, eggs, or gasoline, so a company that produces these products will use target pricing to determine the market price for its product and then attempt to reduce expenses to reach its target profit.

 

 

gas pump
Creatas/iStock/Thinkstock

 

A price-maker is a company that can set its product price because the product is unique and/or has little competition. A pharmaceutical company that has developed a new drug can set the price that it will charge, sometimes with little or no competition. A company that produces products like this will use cost-plus pricing, in which it calculates the cost of the product and then adds enough of a markup to cover all costs and reach its target profit.  

 

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