Pricing is an extremely important component of marketing, because it helps determine how many consumers buy a product or service and, ultimately, whether a business succeeds or fails. A business owner must employ a number of strategies to determine the right price for various goods and services that yields a profit without discouraging customers from patronizing his business.
Prices must be competitive if a business is to succeed. Charging too much for a product or service discourages customers from even doing business at a particular place. A businessman, however, does not want to cut his profits so severely that his business does not survive. If his prices are too high, too few products sell, and the overhead cost per product rises, costing the owner money. Sometimes a businessman wants to consider selling a particular product at a lower price than his competitors. These items are known as loss leaders. While he makes less money on that one item, his profits often rise for a couple of reasons. With the lower price, he brings in new customers who potentially become permanent patrons, and those who come in to buy the one item often buy other items while they are shopping. On the other hand, a businessman must take care not to price items so low that they are perceived as being of poorer quality. Customers tend to believe overall that they get the quality for which they pay. Pricing is a delicate balance. When done poorly, business owners risk losing customers.