Demand Analysis

The Demand Curve

A demand curve is a graph showing the relationship between the price of a certain item and what
consumers are willing to buy at the price.

Demand

When clients want a product and are willing to pay for it, we say that there is a demand for the specific
product. There has to be a demand for a product before a manufacturer can sell it. Demand does not
only have to do with the need to have a product or a service, but also with the willingness and ability to
buy it at the price charged for it.

Example of Demand: Andrew’s Grape Jam

Andrew and his mother, Mrs. Jeffries, decided to earn extra money by selling grape jam at the local craft
market. Mrs. Jeffries would buy the ingredients and make the jam. Andrew would help his mother seal it
in jars and they planned to sell it at the market on Saturday mornings.

Before starting to boil the jam, they decided to test the market to see whether people would be
interested in buying their product. Mrs. Jeffries therefore boiled a few jars of jam and asked their friends
and family if they were interested in buying it and how much they would be willing to pay for it.
Everyone was encouraged to taste some of the jam before making a decision.

The results Mrs. Jeffries received is are illustrated in the graph which indicates the demand at different
prices.

Demand Curve: This graph shows the demand curve based on the number of jars and the price.
The line on the graph indicates the way in which the change in price brought about a change in demand.
This is referred to as the demand curve. It specifies the amount of a product according to the demands
for it at a specific price.

Demand Curve

In economics, the demand curve is the graph depicting the relationship between the price of a certain
commodity (in this case Andrew’s jam) and the amount of it that consumers are willing and able to
purchase at that given price. It is a graphic representation of a demand schedule.

The demand curve for all consumers together follows from the demand curve of every individual
consumer: the individual demands at each price are added together.

Demand Curve Characteristics

According to convention, the demand curve is drawn with price on the vertical axis and quantity on the
horizontal axis. The demand curve usually slopes downwards from left to right; that is, it has a negative
association (two theoretical exceptions, Veblen good and Giffen good). The negative slope is often
referred to as the “law of demand”, which means people will buy more of a service, product, or resource
as its price falls.

Linear Demand Curve

The demand curve is often graphed as a straight line in the form Q = a – bP where “a” and “b” are
parameters. The constant “a” “embodies” the effects of all factors, other than price, that affect demand.

If income were to change, for example, the effect of the change would be represented by a change in
the value of “a” and be reflected graphically as a shift on the demand curve. The constant “b” is the
slope of the demand curve and shows how the price of the good affects the quantity demanded.

The graph of the demand curve uses the inverse demand function in which price is expressed as a
function of quantity. The standard form of the demand equation can be converted to the inverse
equation by solving for P or P = a/b – Q/b.

Shift of a Demand Curve

The shift of a demand curve takes place when there is a change in any non-price determinant of
demand, resulting in a new demand curve.

Non-price determinants of demand are those things that cause demand to change even if prices remain
the same—in other words, changes that might cause a consumer to buy more or less of a good even if
the good’s price remained unchanged.
Some of the more important factors are:

 the prices of related goods (both substitutes and complements)

 income

 population

 expectations

However, demand is the willingness and ability of a consumer to purchase a good under the prevailing
circumstances. Thus, any circumstance that affects the consumer’s willingness or ability to buy the good
or service in question can be a non-price determinant of demand. For example, weather could effect the
demand for beer at a baseball game.

The Influence of Supply and Demand on Price

Changes in either supply or demand will move the market clearing point and change the market price
for a good.

Introduction

The amount of a good in the market is the supply and the amount people want to buy is the demand.
Consider a certain commodity, such as gasoline. If there is a strong demand for gas, but there is less
gasoline, then the price goes up. If conditions change and there is a smaller demand for gas, due to the
presence of more electric cars for instance, then the price of the commodity decreases.

The factors influencing supply include:

 Price – As the price of a product rises, its supply rises because producers are more willing to
manufacture the product because it’s more profitable.

 Price of other commodities – There are two types: competitive supply (If a producer switches
from producing A to producing B, the price of A will fall and hence the supply will fall because
it’s less profitable to make A), and joint supply (A rise in one product may cause a rise in
another. For instance, a rise in the price of wooden bedframes may cause a rise in the price of
wooden desks and chairs. This means supply of wooden bedframes, chairs, and desks will rise
because it’s more profitable. )

 Costs of production – If production costs rise, supply will fall because the manufacture of the
product in question will become less profitable.

 Change in availability of resources – If wood becomes scarce, fewer wooden bedframes can be
made, so supply will fall.

Factors influencing demand include:

  Income

 Tastes and preferences

 Prices of related goods and services

 Consumers ‘ expectations about future prices and incomes that can be checked

 Number of potential consumers

Supply and Demand As an Economic Model

Supply and demand is an economic model of price determination in a market. It concludes that in a
competitive market, the unit price for a particular good will vary until it settles at a point where the
quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at
current price). This results in an economic equilibrium of price and quantity.

The four basic laws of supply and demand are:

 If demand increases and supply remains unchanged, then it leads to higher equilibrium price
and higher quantity.

 If demand decreases and supply remains unchanged, then it leads to lower equilibrium price
and lower quantity.

 If demand remains unchanged and supply increases, then it leads to lower equilibrium price and
higher quantity.

 If demand remains unchanged and supply decreases, then it leads to higher equilibrium price
and lower quantity.

Graphical Representation of Supply and Demand

Although it is normal to regard the quantity demanded and the quantity supplied as functions of the
price of the good, the standard graphical representation, usually attributed to Alfred Marshall, has price
on the vertical axis and quantity on the horizontal axis, the opposite of the standard convention for the
representation of a mathematical function.

Since determinants of supply and demand other than the price of the good in question are not explicitly
represented in the supply-demand diagram, changes in the values of these variables are represented by
moving the supply and demand curves (often described as “shifts” in the curves). By contrast, responses
to changes in the price of the good are represented as movements along unchanged supply and demand
curves.
Equilibrium

Since the demand curve slopes down and the supply curve slopes up, when they are put on the same
graph, they eventually cross one another. The point where the supply line and the demand line meet is
called the equilibrium point.

In general, for any good, it is at this point that quantity supplied equals quantity demanded at a set
price. If there are more buyers than there are sellers at a certain price, the price will go up until either
some of the buyers decide they are not interested, or some people who were previously not considering
selling decide that they want to sell their good. This process normally continues until there are
sufficiently few buyers and sufficiently many sellers that the numbers balance out, which should happen
at the equilibrium point.

Elasticity of Demand

Elasticity of demand is a measure used in economics to show the responsiveness of the quantity
demanded of an item to a change in its price.

Elasticity of Demand: an Overview

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or
elasticity, of the quantity demanded of a good or service to a change in its price.
More precisely, it gives the percentage change in quantity demanded in response to a one percent
change in price (holding constant all the other determinants of demand, such as income). It was devised
by Alfred Marshall.

Elasticity of Demand: The price elasticity of demand equation shows how the demand for a good or
service changes based on the price.

Price elasticities are almost always negative, although analysts tend to ignore the sign even though this
can lead to ambiguity. Only goods which do not conform to the law of demand, such as a Veblen good
and a Giffen good, have a positive PED.

In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than
one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good
demanded.

The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in
absolute value): that is, changes in price have a relatively large effect on the quantity of a good
demanded.

Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be
used to predict the incidence (or “burden”) of a tax on that good. Various research methods are used to
determine price elasticity, including test markets, analysis of historical sales data, and conjoint analysis.

Determinants

The overriding factor in determining PED is the willingness and ability of consumers after a price change
to postpone immediate consumption decisions concerning the good and to search for substitutes (“wait
and look”). A number of factors can thus affect the elasticity of demand for a good:

 Availability of substitute goods: The more and closer the substitutes available, the higher the
elasticity is likely to be, as people can easily switch from one good to another if an even minor
price change is made. In other words, there is a strong substitution effect. If no close substitutes
are available, the substitution of effect will be small and the demand inelastic.

 Breadth of definition of a good: The broader the definition of a good (or service), the lower the
elasticity. For example, Company X’s fish and chips would tend to have a relatively high elasticity
of demand if a significant number of substitutes are available, whereas food in general would
have an extremely low elasticity of demand because no substitutes exist.
  Percentage of income: The higher the percentage of the consumer’s income that the product’s
price represents, the higher the elasticity tends to be, as people will pay more attention when
purchasing the good because of its cost. The income effect is thus substantial. When the goods
represent only a negligible portion of the budget, the income effect will be insignificant and
demand inelastic.

 Necessity: The more necessary a good is, the lower the elasticity, as people will attempt to buy it
no matter the price, such as in the case of insulin for those that need it.

 Duration: For most goods, the longer a price change holds, the higher the elasticity is likely to
be, as more and more consumers find they have the time and inclination to search for
substitutes. When fuel prices increase suddenly, for instance, consumers may still fill up their
empty tanks in the short run, but when prices remain high over several years, more consumers
will reduce their demand for fuel by switching to carpooling or public transportation, investing
in vehicles with greater fuel economy, or taking other measures. This does not hold for
consumer durables such as the cars themselves, however; eventually, it may become necessary
for consumers to replace their present cars, so one would expect demand to be less elastic.

 Brand loyalty: An attachment to a certain brand—either out of tradition or because of

proprietary barriers—can override sensitivity to price changes, resulting in more inelastic
demand.

 Who pays: Where the purchaser does not directly pay for the good they consume, such as with
corporate expense accounts, demand is likely to be more inelastic.

Yield Management Systems

Yield management systems enable organizations to adapt pricing in real-time based on various factors
impacting demand.

Estimating Demand

When an organization begins determining the price of a given product or service, the objective is to
optimize profit through maximizing revenues and minimizing cost. To do so, projections of demand and
fulfilling that projected demand with the appropriate supply to maintain the optimal price point is a
central strategic endeavor for a marketer. Forecasting demand and understanding the elasticity of the
demand for various types of goods is greatly empowered by systems built to manage yield.
Demand Shifts: Understanding fluctuations in demand is a critical component of yield management
systems.

Yield Management Systems

A yield management system is based on pricing models which are variable, which is to say that the price
of a given product or service will change consistently over time. A good example of this, just as a frame
of reference, would be a flight ticket. The prices for a flight from city A to city B will be different per day,
per time, per airline and even per website in which you are finding that ticket. This variable pricing
model is designed to maximize revenue through identifying supply, demand and optimal yield.

When To Manage Yield

Yield management is quite a complex endeavor, as it takes into account multidisciplinary considerations
such as marketing, operations, financial management, statistics, and strategy to build an optimized
approach to pricing which iterates and evolves over time. As a result, it is only worth building into
practice when it will generate significant returns.

Yield management functions best when the following conditions are met:

 There are a fixed amount of a given resource available (i.e. scarcity)

 The resources are perishable, or time-sensitive in some way

 There is a relatively high amount of fluctuation in regards to what consumers are willing to pay
Combining these three factors, we have scarce products which will likely expire and which are valued
differently by different consumers. In these situations, managing yield through pricing properly based on
timing and user can optimize profits.

Big Data

Effective yield management, like most intensive research projects, are best left to computers. Machine
learning and the capacity to process large data streams (i.e. big data) can create highly reliable statistical
models and segmentation of markets to enable an organization to target the appropriate consumer
groups with the appropriate price at the appropriate time. This is generally accomplished through
building forecasts utilizing huge data streams of past user behaviors.

For example, the price of a flight on a given day can take into account he day of the week, time of year,
inflation, market conditions, competitive current pricing, and a wide variety of other data points in order
to create a statistical spread of what the price should be set at.

Ethical Concerns

Yield management systems are very useful in specific industries, but are also somewhat controversial.
The criticism of yield management is fairly intuitive. If companies can set prices based upon what type of
consumer you are, and can identify demand with great accuracy, it is fairly easy for organizations to
exploit consumers in specific situations.

For example, say you are stranded in a foreign country after flight cancellations, and need to get home
to your two young children. You are there on business, and have an upper-middle class salary. A
machine with all of that information can accurately predict that you are willing to pay a great deal more
than someone else due to your dire situation. It would not be inaccurate to point out that this is
somewhat predatory, and therefore potentially unethical behavior. You may pay thousands for the seat,
while the person next to you paid less than 10% of what you paid.

Inputs to Pricing Decisions

Marginal Analysis

Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.

Marginal Analysis

Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
Specifically, firms tend to accomplish their objective of profit maximization by increasing their
production until marginal revenue equals marginal cost, and then charging a price which is determined
by the demand curve.

In business, the practice of setting the price of a product to equal the extra cost of producing an extra
unit of output is known as marginal-cost pricing. Businesses often set prices close to marginal cost
during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling
price of $2.00 the firm selling the item might wish to lower the price to $1.10 if demand has waned. The
business would choose this approach because the incremental profit of 10 cents from the transaction is
better than no sale at all.

In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some
level of output, marginal profit is positive and thus a greater quantity should be produced. Alternatively,
if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity
should be produced. At the output level at which marginal revenue equals marginal cost, marginal profit
is zero and this quantity is the one that maximizes profit.

Since total profit increases when marginal profit is positive and total profit decreases when marginal
profit is negative, it must reach a maximum where marginal profit is zero.

The intersection of MR and MC is shown as point A. If the industry is perfectly competitive (as is
assumed in the diagram), the firm faces a demand curve (D) that is identical to its marginal revenue
curve (MR). Thus, this is a horizontal line at a price determined by industry supply and demand. If the
firm is operating in a non-competitive market, changes would have to be made to the diagram.

Marginal Profit Maximization: This series of cost curves shows the implementation of profit
maximization using marginal analysis.

For example, the marginal revenue curve would have a negative gradient, due to the overall market
demand curve. In a non-competitive environment, more complicated profit maximization solutions
involve the use of game theory. In some cases, a firm’s demand and cost conditions are such that
marginal profits are greater than zero for all levels of production up to a certain maximum. In this case,
marginal profit plunges to zero immediately after that maximum is reached. Thus, output should be
produced at the maximum level, which also happens to be the level that maximizes revenue. In other
words, the profit maximizing quantity and price can be determined by setting marginal revenue equal to
zero, which occurs at the maximal level of output.

Fixed Costs

Fixed costs are business expenses that are not dependent on the level of goods or services produced by
the business.

Fixed Costs

Determining the cost of producing a product or service plays a vital role in most pricing decisions. Fixed
costs are business expenses that are not dependent on the level of goods or services produced by the
business. They tend to be time-related, such as salaries or rents being paid per month. They and are
often referred to as overhead costs. This is in contrast to variable costs, which are volume-related and
are paid per quantity produced. In management accounting, fixed costs are defined as expenses that do
not change as a function of the activity of a business, within the relevant period. For example, a retailer
must pay rent and utility bills irrespective of sales. In marketing, it is necessary to know how costs divide
between variable and fixed. This distinction is crucial in forecasting the earnings generated by various
changes in unit sales and thus the financial impact of proposed marketing campaigns. In a survey of
nearly 200 senior marketing managers, 60% responded that they found the “variable and fixed costs”
metric very useful.

Fixed costs are not permanently fixed – they will change

over time – but are fixed in relation to the quantity of
production for the relevant period. For example, a company
may have unexpected and unpredictable expenses
unrelated to production. Warehouse costs and the like are
fixed only over the time period of the lease. By definition,
there are no fixed costs in the long run. Investments in
facilities, equipment, and the basic organization that can’t
be significantly reduced in a short period of time are
referred to as committed fixed costs. Discretionary fixed
costs usually arise from annual decisions by management to
spend on certain fixed cost items. Examples of discretionary
costs are advertising, machine maintenance, and research
and development expenditures.

Average Fixed Costs

For pricing purposes, marketers generally take into account average fixed costs. Average fixed cost (AFC)
is an economics term that refers to fixed costs of production (FC) divided by the quantity (Q) of output
produced. Average fixed cost is a per-unit-of-output measure of fixed costs. As the total number of
goods produced increases, the average fixed cost decreases because the same amount of fixed costs is
being spread over a larger number of units of output.

Break-Even Analysis

The break-even point is the point at which costs and revenues are equal.

Break-Even Analysis

In economics and business, specifically cost accounting, the break-even point is the point at which costs
or expenses and revenue are equal – i.e., there is no net loss or gain, and one has “broken even.”

A profit or a loss has not been made, although opportunity costs have been “paid,” and capital has
received the risk-adjusted, expected return. For example, if a business sells fewer than 200 tables each
month, it will make a loss. If the business sells more, it will make a profit. With this information, the
business managers will then need to see if they expect to be able to make and sell 200 tables per month.
If they think they cannot sell that many, to ensure viability they could:

 Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of
telephone bills or other costs)

 Try to reduce variable costs (the price it pays for the tables by finding a new supplier)

 Increase the selling price of their tables

In the linear Cost-Volume-Profit Analysis model, the break-even point – in terms of Unit Sales (X) – can
be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as: where TFC is Total Fixed
Costs, P is Unit Sale Price, and V is Unit Variable Cost. The quantity (P – V) is of interest in its own right,
and is called the Unit Contribution Margin (C). It is the marginal profit per unit, or alternatively the
portion of each sale that contributes to Fixed Costs. Thus the break-even point can be more simply
computed as the point where Total Contribution = Total Fixed Cost:

Break-Even Analysis: A break-even quantity can also be found using contribution margin.
Break-Even Calculation: We can derive the calculation for the break-even quantity from the relation of
total revenue to total costs.

Break-Even and Pricing Decisions

The break-even point is one of the simplest analytical tools in management. It helps to provide a
dynamic view of the relationships between sales, costs, and profits. A better understanding of break-
even, for example, is expressing break-even sales as a percentage of actual sales. This can give managers
a chance to understand when to expect to break even (by linking the percent to when in the
week/month this percent of sales might occur). In terms of pricing decisions, break-even analysis can
give a company a benchmark quantity of goods to be sold. This quantity can then be used to derive the
average fixed and variable costs, the sum of which can be used as the basis for markup pricing, et cetera.
Some limitations of break-even analysis include:

 It is only a supply side (i.e. costs only) analysis, as it tells you nothing about what sales are
actually likely to be for the product at these various prices.

 It assumes that fixed costs (FC) are constant. Although this is true in the short run, an increase in
the scale of production is likely to cause fixed costs to rise.

 It assumes average variable costs are constant per unit of output, at least in the range of likely
quantities of sales (i.e. linearity).

 It assumes that the quantity of goods produced is equal to the quantity of goods sold.

 In multi-product companies, it assumes that the relative proportions of each product sold and
produced are constant (i.e., the sales mix is constant).

Organizational Objectives

For the vast majority of business entities, the ultimate objective should be to increase profits, often
through a better pricing strategy.

Organizational Objectives

For the vast majority of business entities, the ultimate objective should be to increase profits. Pricing
strategies for products or services encompass three main ways to achieve this. A business can cut its
costs, it can sell more, or it can find more profit with a better pricing strategy.

When costs are already at their lowest and sales are hard to find, adopting a better pricing strategy is a
key option to stay viable. Merely raising prices is not always the answer, especially in a poor economy.
Too many businesses have been lost because they priced themselves out of the marketplace. On the
other hand, too many business and sales staff leave “money on the table. ” The objective is to adopt a
pricing strategy and manage costs such that profit will be maximized.
One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs
and behaviors of customers and clients.

Laws Of Price Sensitivity

A pivotal factor in determining a price is how consumers will perceive it. In their book,The Strategy and
Tactics of Pricing, Thomas Nagle and Reed Holden outline nine “laws” that influence how a consumer
perceives a given price and how price-sensitive they are likely to be with respect to different purchase
decisions. They are:

1. Reference price effect – The buyer’s price sensitivity for a given product increases the higher the
product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer
segment, by occasion, and other factors.

2. Difficult comparison effect – Buyers are less sensitive to the price of a known or more reputable
product when they have difficulty comparing it to potential alternatives.

3. Switching costs effect – The higher the product-specific investment a buyer must make to switch
suppliers, the less price sensitive that buyer is when choosing between alternatives.

4. Price- quality effect – Buyers are less sensitive to price the more that higher prices signal higher
quality. Products for which this effect is particularly relevant include: image products, exclusive
products, and products with minimal cues for quality.

5. Expenditure effect – Buyers are more price sensitive when the expense accounts for a large
percentage of buyers’ available income or budget.

6. End- benefit effect – This effect refers to the relationship a given purchase has to a larger overall
benefit and is divided into two parts. Derived demand: The more sensitive buyers are to the
price of the end benefit, the more sensitive they will be to the prices of those products that
contribute to that benefit. Price proportion cost: The price proportion cost refers to the percent
of the total cost of the end benefit accounted for by a given component that helps to produce
the end benefit, such as with computers. The smaller the given component’s share of the total
cost of the end benefit, the less sensitive buyers will be to the component’s price.

7. Shared-cost effect – The smaller the portion of the purchase price buyers must pay for
themselves, the less price sensitive they will be.

8. Fairness effect – Buyers are more sensitive to the price of a product when the price is outside
the range they perceive as “fair” or “reasonable” given the purchase context.

9. The framing effect – Buyers are more price sensitive when they perceive the price as a loss
rather than a forgone gain, and they have greater price sensitivity when the price is paid
separately rather than as part of a bundle.
Oil Price Sensitivity: The graph shows the price fluctuation of oil after consumers have significant access
to information regarding the commodity.

Other Inputs to Pricing Decisions

Pricing decisions can have a variety of inputs, such as value-added considerations, legal price
requirements, competitive positioning, and discounting.

Pricing Decisions

The pricing decision is an important one, both for profitability and competitive positioning.
Organizations must take into account supply, demand, competition, expenses, profit margins,
differentiation, quality, and legal concerns. The simplest methods of determining price include concepts
such as break-even points, fixed/variable cost analysis, and marginal analysis. However, there are other
concerns that need to be investigated when determining price.

Pricing Inputs

Looking at cost structures and determining break-even points is not always enough when it comes to
effective pricing strategies. As a result, marketers should be familiar with the legalities of pricing (for
certain commodities in particular), the value added to the consumer (willingness to pay), competitive
positioning, and potential discounts.

Legal Concerns

For some products, governments will set firm price controls (i.e. price ceilings or price floors) to ensure
ethical and/or accessible pricing for a given population. Just as the name implies, price floors and price
ceilings will set minimum or maximum prices for some goods. This is particularly applicable to rent, real
estate, banking, food and other core necessities. When operating in an industry with price ceilings or
price floors, firms must adapt their pricing strategy to these legalities and ensure compliance.

Value-Added Pricing

In a perfectly practical and efficient market, the expenses

would almost always lead to the appropriate price through
competitive forces. However, we do not live in a world of perfect
markets. As a result, there are a number of value-adds that
consumers receive that are not easy or intuitive to measure
from a strictly financial perspective. These include:

 Functional Value: This is a typical example of

demand, where the product is valued at how well it
accomplishes a function (i.e. fulfills the need).

 Monetary Value: This is another typical value example,

where the cost of resources and production correlate
cleanly with the price.

 Social Value: The value a consumer receives can

actually be social as well as economic. This is to say
that some products provide intangible value to users. Fashion is a good example here, as some
fashion items return margins that are enormous due to the social perception of a given fashion
item (expensive bags, for example).

 Psychological Value: Some items have value to an individual for personal reasons. A collector,
for example, may pay far more than an item is worth due to a strong love for something. People
who collect video game action figures, or deluxe editions, for example.

Competitive Positioning

Another input to pricing is the basic premise of differentiation to achieve higher value. This is not so
much an exception to the above mentioned value-added pricing, but more of a facet of this. Branded
items, for example, are often quite similar to generic versions of the same item. However, these brands
add intangible value to the product above and beyond the cost of producing it. Buying brand name
goods may be differentiated based upon celebrity sponsors, premium perception, social value or a wide
variety of other differentiated factors. These can enable organizations to differentiate for a price
premium (i.e. they can charge more for having a strong brand/position).

Discounting

There are also a number of reasons why an organization may offer discounts. Discounting is particularly
useful when it comes to B2B transactions, in which a client might buy a few thousand of a given product
and receive a wholesale price that is significantly lower than the price of buying each product
individually. There are also situations in which a product may be sold at a price that is actually less than
the cost of producing it. This is most often done when a perishable item will soon go bad anyway. In
such a situation, selling at a loss is better than getting nothing at all (opportunity cost!).

Conclusion

All and all, pricing is a bit more complicated than simply understanding the expenses involve. Marketers
must understand social value, legal considerations, branding, discounting, and the functional value of
products and services in order to capture the full potential of a given item. Pricing can be a great
opportunity to capture better margins than the competition, or could offer the ability to make a mistake
and lose market share!