Price is the amount of money paid by consumers to possess a product or get a service. Therefore, it can be considered as a formal ratio from economic perspective:

Price= Quantity of money or goods and services received by the seller /
Quantity of goods and services received by the buyer

The external factors that a marketing manager needs to take into consideration when making a pricing decision are the market and demand structure of the firm, economic factors such as inflation or stagflation, the costs and prices of both direct and indirect competitors, the desires and requirements of its distribution channel, legal regulations in the country it operates, and the societal concerns.

The internal factors affecting price decisions are;

1. Costs: Cost is the lower limit of price (or price floor). There are different kinds of costs including fixed costs, variable costs, and total costs. Fixed costs refer to costs which are independent from the level of production. For example, rental fee should be paid monthly regardless of production or sales level. Variable costs are the ones that vary based on production level. For instance, inputs of a car such as materials, tires, etc. vary with the level of production. Total costs include both fixed costs and variable costs for a given production level.

2. Pricing aims: Pricing aims include survival, financial, and marketing aims. Survival aims cover the short-term and try to carry on the activities of the company. Financial aims such as profit maximization or cash flow focus on the medium term.

3. Other Marketing Mix Elements: Product, place, and promotion should give messages
to consumers in the same direction with price.

Companies use three major pricing strategies including value-based pricing, costbased pricing, and competition-based pricing.

In value-based pricing, customers’ value is used to charge a price for a product. Because the strategy is customer-driven, starting point is consumer. There are two types of value-based pricing: goodvalue pricing and value-added pricing. Goodvalue pricing combines higher quality with a lower price. Value-added pricing refers to differentiating products by adding valuable features that support higher prices.

Cost-based pricing includes different approaches such as cost-plus pricing or standard mark-up, break-even analysis, and target profit pricing. Cost-plus pricing approach determines the unit cost of the product firstly.

Break-even pricing is a cost-based pricing approach, too. The company determines the price to reach break-even point or target profit.

Target profit pricing offers to sell products more than break-even volume with a price level which will lead to a target profit.

Competitor-based pricing includes customary pricing, above-, at-, or below-market pricing, and lossleader pricing. In customary pricing, price is dictated by the market. In above-, at-, or below-market pricing, competitors’ prices charged for similar products are used to set prices. In loss-leader pricing, many companies intentionally set a price level below customary price.

This process consists of six steps:

• Identify pricing constraints and objectives
• Estimate demand and revenue
• Estimate cost, volume, and prot relationships
• Select an approximate price level
• Set list or quoted price
• Make special adjustments to list or quoted price

Two pricing strategies can be used in the introductory stage: market-skimming and market-penetration. Market-skimming pricing sets high prices to skim higher revenue from the market. Prices are dropped to attract new buyers after a while. In other words, prices are decreased step by step to sell the products to new consumers. In market-penetration pricing, companies set low prices to penetrate the market as much as possible.

There are six different product mix pricing strategies including product line pricing, by-product pricing, optional-product pricing, captive-product pricing, two-part pricing, and product bundle pricing.

In product line pricing, all the products in the line are considered.

By-product pricing involves products produced unintentionally as an output of the manufacturing process of the main product.

Optional-product pricing refers to accessory products sold with the main product.

Captive-product pricing refers to complementary products which are used with the main product such as a printer cartridge.

Two-part pricing includes a fixed fee and a variable usage fee. 

In product bundle pricing, less demanded products are sold together with highly demanded ones at a discounted price.

Dynamic pricing is a practice of adjusting prices continually to maximize revenue.

Psychological pricing adjusts prices based on a psychological viewpoint rather than an economic perspective.

Discount and allowance pricing refers to a reduction in the price of the products for consumers who buy large quantities or pay early.

Segmented pricing is a practice of differentiating prices based on customer, location, or product rather than cost.

Geographical pricing refers to setting different prices for consumers who are in different locations in order to cover high shipping costs.

Promotional pricing is a practice of reducing prices for a limited time period.

International pricing refers to setting different prices for different countries.

Companies cut prices to increase sales and market share in case of excess capacity or insufficient demand.

Buyers react to price changes differently. Price increase can be perceived as high quality or eligibility while price cut can be considered as a low quality, old fashioned, or a less demanded product.

Its advantage is that it is highly accurate. Its disadvantage is that it is expensive or not an option sometimes.

Its advantage is that it provides customer perspective. Its disadvantage is that share of value can be difficult to estimate.

Its advantage is that it is useful for product planning. Its disadvantage is that it is sometimes difficult to construct.

Its advantage is that it is a nice model for demand in established markets. Its disadvantage is that it has a narrow range and limited view of possibilities.