Q:

What is pricing policy in economics?

A:

Pricing policy refers to the way a company sets the prices of its services and products basing on their value, demand, cost of production and the market competition. Pricing policy is essential for all companies as it provides a guideline for creating profits and areas that bring in losses. Pricing policy goes hand in hand with pricing strategy.

Establishing a pricing policy enables business managers to create pricing strategies depending on the pricing goals of the company. Examples of pricing goals set out by companies include fighting competition, increasing profits, increasing the company’s cash flow and stabilizing the product prices. Pricing strategies are necessary when setting pricing policies. Companies consider the prevailing market conditions to determine the right prices of their products as per the state of the market. Other important factors considered when developing pricing policies include competition, costs, different market segments and the customers.

Development of pricing policies begins with considering the pricing based on the production costs. The second consideration is the value of the products followed by pricing according to the current demand of the products and services. Additionally, the pricing factor varies according to the age of the company in the market. New entrants offer lower prices to attract customers whereas the incumbent firms vary. The old firms that fear the influence of the new entrants can lower their prices in a bid to retain a larger share of the market. Other firms resort to improving service and enhancing customer loyalty. These factors determine the strategies and policies taken by managers when determining the prices of their products.

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