Price is the amount exchanged in a transaction, reflecting the buyer’s perceived value of a product or service and the seller’s willingness to accept, influenced by various cost factors and the competitive landscape.
Primary Implication
Every business prospers or fails by the difference between the prices they charge for the products and services customers pay for and the costs incurred to deliver the purchased item creates your Gross Profit.
While many factors should influence the prices you charge, none of the factors matter if you don’t generate sufficient Gross Profit to cover your overhead and nonoperating costs at a profit.
Overview
Price is determined by the amount the buyer is willing to pay and the amount the seller is willing to accept. It is the foundation of a commercial transaction and the only element in the marketing mix that brings in money. The other elements of product, place, promotion, packaging, and people are the investments you make to get people to pay your price.
If your product or service is widely available and relatively easy to access, you’re in the most difficult of competitive situations. In this situation, more often than not, it’s either about price or easy access to the product when the place is highly convenient.
The key to profits for every business lies in being able to charge a price for your products and services that is greater than your costs so that each transaction generates a profit.
Your strategy with price is to find creative ways to show the value of buying from your business over your competitors, or you can relentlessly trim your operating costs through efficiency so that you can provide your product at a lower cost.
The value of a product for any buyer centers on their perception of the price they will pay relative to the benefits they expect to receive from their purchase. The price paid in a transaction is not only financial. It may involve other things that a buyer must be willing to give up. For example, a customer may have any combination of the following factors in addition to paying cash for your product or services:
- Spend time learning to use the product,
- Pay to have an old product removed from their home or office, or
- Temporarily close down their current operations while a product is being installed,
- Incur other expenses to install the product or work with the service.
Beyond the actual price a prospect pays for the transfer of ownership, these additional costs can be real or seen as “opportunity costs.” In economic terms, “opportunity cost” is what a person sacrifices in choosing one option over another. The item that you don’t choose is the opportunity cost. It is a measure of the sacrifice we make when we are forced to make choices.
