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15.1: The Pricing Framework and a Firm’s Pricing Objectives

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  • Learning Objectives

    1. Understand the factors in the pricing framework.
    2. Explain the different pricing objectives organizations have to choose from.

    Organizations must remember that the prices they charge should be consistent with their offerings, promotions, and distribution strategies. In other words, it wouldn’t make sense for an organization to promote a high-end, prestige product, make it available in only a limited number of stores, and then sell it for an extremely low price. The price, product, promotion (communication), and placement (distribution) of a good or service should convey a consistent image. If you’ve ever watched the television show The Price Is Right, you may wonder how people guess the exact price of the products. Watch the video clip below to see some of the price guessing on The Price Is Right.

    Video Clip

    Perfect Bid on The Price Is Right

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    Contestant guesses exact price of prizes.

    Video Clip

    Trying to Figure Out When The Price Is Right

    (click to see video)

    How do consumers get so close when guessing the prices of products?

    The Pricing Framework

    Before pricing a product, an organization must determine its pricing objectives. In other words, what does the company want to accomplish with its pricing? Companies must also estimate demand for the product or service, determine the costs, and analyze all factors (e.g., competition, regulations, and economy) affecting price decisions. Then, to convey a consistent image, the organization should choose the most appropriate pricing strategy and determine policies and conditions regarding price adjustments. The basic steps in the pricing framework are shown in Figure 15.2 “The Pricing Framework”.

    Figure 15.2 The Pricing Framework

    The Pricing Framework: Set pricing objectives, estimate demand, determine costs, analyze factors affecting pricing decision, determine pricing strategies and pricing policies for making price adjustments, set initial prices, and offer and make price adjustments as needed.