Pricing (B)

The pricing function is important because it affects how well a product will sell and how much profit the business will make. To be successful, businesses need to set prices that customers are willing to pay. These prices also need to cover costs and include sufficient profit. However, there is a fine line between the right price and the wrong price. For example, a clothing manufacturer makes T-shirts for $3 and sells them for $15 to make a $12 gross profit. To make a larger profit, the manufacturer might simply increase the price, right? Wrong. As the price of an item increases, the demand for it usually decreases. If the manufacturer increases the price too much, it might lose money because customers no longer want to buy at that price.

The pricing function also helps businesses decide if they need to adjust prices because of changes in the market. Businesses often research prices and analyze the prices of their competitors. This helps them to decide if they should lower prices because of competition, or raise prices because demand is increasing.