Remember there is a big difference between costs and price. Costs are the expenses of a firm. Price is the amount customers are charged for items.
Firms think very carefully about the price to charge for their products. There are a number of factors to take into account when reaching a pricing decision:
Customers. Price affects sales. Lowering the price of a product increases customer demand. However, too low a price may lead customers to think you are selling a low quality ‘budget product’.
Competitors. A business takes into account the price charged by rival organisations, particularly in competitive markets. Competitive pricing occurs when a firm decides its own price based on that charged by rivals. Setting a price above that charged by the market leader can only work if your product has better features and appearance.
Costs. A business can make a profit only if the price charged eventually covers the costs of making an item. One way to try to ensure a profit is to use cost plus pricing. For example, adding a 50% mark up to a sandwich that costs £2 to make means setting the price at £3. The drawback of cost plus pricing is that it may not be competitive.
There are times when businesses are willing to set price below unit cost. They use this loss leader strategy to gain sales and market share.