Monday, July 22, 2024
Business

The Psychology of Pricing: Pricing for Profitability

In this modern business world, the wave of entrepreneurship is flourishing in every nook of the world. It is very important for rising entrepreneurs to ace the art of pricing to eliminate monopoly. So, the psychology of pricing, as well as learning pricing for profitability, is necessary. The psychology of monopoly pricing is based on understanding the delicate balance between demand and supply and the cost of production. In this type of market structure, monopolies have the ability to determine prices depending on customer demand and production costs, considerably changing market dynamics.

It might interest anyone why some products are priced in an affordable range while others are relatively expensive. So, how does an enterprise determine the price of its goods and services? What is the perfect pricing strategy for generating optimal profit? And as an entrepreneur, what is the psychology of pricing, and how can you maintain profitability in pricing? Let’s find out by learning the psychology of pricing

Cost of Production

In the Nepali market, the average price of every small packet of packaged biscuits is normally about NRS 10. Marie gold, Monaco, top, Good Day, etc. are the popular biscuits available in the market, which cost exactly NRS 10 for a small packet, supposing no inflation. Oreo is a popular biscuit brand that sells its small packet for NRS 25. Its price is relatively higher because of cost of production is also higher in comparison to the other biscuits. So, it is established that the higher the cost of production, the higher the price. But why do these biscuits have a similar range of price? Why doesn’t any of these biscuits increase its price?

markert graph cost of production, psychology behind the pricing

Analyzing Price in the Market

Let’s analyze it thoroughly with the help of an example. What will happen if Good Day Biscuit decides to increase its price? Let’s suppose the price of a small packet of good day biscuits was NRS 30. From a layman’s perspective, this pricing seems profitable since the myth that everyone believes in is that the higher the price, the higher the profit will be. But would you, as a consumer, buy a small packet of a good day by paying NRS 30, or would you buy any other biscuits available in the market whose price is NRS 10?

The answer is evident: any rational consumer would opt for other biscuits. This would result in lower demand for good day biscuits, which will eventually result in a loss despite having a high-profit margin. So the psychology behind the pricing</b>tyle=”font-weight: 400;”> of Good Day biscuits is that it played with the quantity, i.e., it minimized the quantity, keeping the price similar to other biscuits, in order to generate maximum profit.

Demand and supply scale

This is why, in a competitive market where a large number of firms are producing similar products, a business firm cannot determine the price. The producers do not have power over the price of the product. It is solely determined by the demand and supply of the product in the market. So, if you’re entering a competitive market, you need to know that you cannot have total discretion over the price if you want your business to be profitable. You must comply with the price determined by the market in order to generate maximum profit.

Determining Price in Monopoly

In Nepal, Nepal Oil Corporation has an absolute monopoly over the oil market. Nepal Oil Corporation is the sole provider of oil and petroleum products in Nepal. In such a monopoly structure where only one firm is the big player in the market, they have power over the price determination. Currently, petrol prices range from NRS 167 to NRS 171 per liter, according to “Nepal Oil Corporation.” Though having absolute power over the price, the firm in monopoly cannot price the products too high. This can have two reasons. 

monopoly chart

The first reason is that in some products, the government sets a price ceiling, i.e., the maximum price a producer can charge for a product. If the producer charges more than the price ceiling, s/he is going against government policy. This way, firms having absolute power over the price in the market cannot charge too high.

The second reason is to balance the scale of demand and supply. That the demand will decrease if the price is too high. If the petrol price is too high, consumers will consume less. They’ll opt for alternatives like cycles, skateboards, etc. They might choose to travel in public vehicles rather than their private vehicles. This will lead to a decrease in demand. So, the market will try to set the price at which the demand for the product will be high to maximize the profit. This is the psychology of pricing in a monopoly market. Entering a monopoly market isn’t easy, but if you’re considering it, you must analyze the psychology behind pricing in this market structure.

Conclusion

In a nutshell, the psychology of pricing is an important, interesting, and intriguing topic for every entrepreneur and business hustler. We have to unlearn the myth that the higher the price we set, the more profit we’ll get. It is also important to notice the demand and supply ratio in the market. Price determination plays a vital role in maximizing profitability. If you’re thinking about entering the business world, make sure you learn the psychology behind pricing and ace the art of pricing.

Luzon Technologies

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