Pricing is the process by which a company chooses the price at which it will sell its products to its clients. Pricing is a component of a company’s marketing strategy. Fair pricing refers to the ability to assess a product’s value and the price that is reasonable considering that evaluation. A business must ascertain the inherent value of its goods and services, as well as a suitable profit margin, to set a fair price. There are two main schools of thought in the theory of fair price. The market theory of value and the cost theory of value are these.
Cost Theories of Value: The proponents of this school believe that the price of products should reflect the costs incurred in getting them to consumers as well as a reasonable profit margin.
Market Theories of Value – According to this school of thought, products’ true value is best established in an open market (not a monopoly, or oligopoly) where there is no collusion, and the law of demand and supply governs pricing.
Despite the arguments for the two theories, fair pricing should consider the costs of the products, operating and marketing costs (which are the costs associated with getting the product to customers), the forces of supply and demand in a free market, as well as a reasonable profit margin.
Extraordinary Profits
There are times when a seller will make tremendous gains at a reasonable market price. Assume that a product’s production costs (raw materials and overhead) are N100 and that the cost of replacing the same product has increased to N150 before the product is released onto the market. The vendor must adopt the cost price of N150 in setting the fair pricing to stay in the market; otherwise, he would not be allowed to replenish. To be able to continue in business, this extraordinary profit is required.
Unfair Prices
Sometimes in the market, unfair pricing happens when sellers raise the price of their items by taking advantage of the current circumstances, and the consumer is compelled to accept that price. When a merchant raises the pricing of goods to a level that is far higher than acceptable or fair, this is known as price gouging. Such situations include:
Emergency and special needs – In economics, the price will increase to match the demand when the demand outweighs the supply. Prices of essential commodities could rise dramatically in an emergency or when there are specific requirements. As an illustration, consider the cost of hand sanitizer and face masks during the Covid-19 outbreak. Additionally, a driver whose car breaks down far from the mechanic workshop may have to pay an excessive towing fee.
Ignorant of a fair price – If the buyer is unaware of the going rate in the market, the seller may charge an unreasonable price.
Monopoly or oligopoly market or where the sellers collude to force prices above market price.
Conclusively, the price of goods and services shouldn’t be simply based on costs, as there are a variety of circumstances that might cause a product’s worth to exceed its costs, such as extraordinary profits and unfair pricing scenarios.
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