Product, place and promotion all cost money. Price is the only one of the four Ps that brings money in. Set it too high and customers walk away; set it too low and every sale loses money, or customers wonder what is wrong with the product. A good price has to do three jobs at once: cover the business's costs, match what the target market is willing to pay, and send the right message about the product's quality compared with competitors. Before choosing a strategy, a business decides what its price should achieve — its pricing objective:
- Profit — earn the highest reasonable profit on each sale or over the year.
- Market share — win a bigger slice of total sales in the market, even if that means a lower price for now.
- Meeting competition — keep prices close to competitors' so customers do not switch over price.
- Prestige or image — keep prices high to signal quality and exclusivity.
- Survival — in a crisis, charge whatever keeps cash coming in and the doors open.
| Strategy | How it works | Hypothetical example |
|---|---|---|
| Cost-plus (markup) | Add a set percentage of the cost to the cost | An item costing $12 with a 50% markup sells for $18 |
| Penetration | Launch at a low price to grab market share quickly, then raise it later | A new streaming app charges $1.99 a month for the first three months |
| Skimming | Launch at a high price for eager early buyers, then lower it as competitors arrive | A new game console launches at $699 and drops to $549 a year later |
| Psychological | Prices that feel lower or signal a deal | $9.99 instead of $10.00 |
| Competitive | Set prices at, just above, or just below competitors' | A gas station matches the price across the street |
| Bundle | Sell several products together for less than their separate prices | Burger, fries and drink for $11 instead of $13.50 separately |
| Discount | Reduce the regular price for a reason or a time period | 25% off end-of-season stock; early-bird event tickets |
Markup vs Margin
Cost-plus pricing starts from what the item costs the business. The markup is the profit added on top, stated as a percentage of the cost. The margin describes the same profit as a percentage of the selling price. Both use the same dollars of profit — they just divide by different numbers — so a business must always say which one it means.
Break-Even Analysis
A business has two kinds of costs. Fixed costs stay the same no matter how many units are sold — rent, equipment, website fees, a booth rental. Variable costs rise with every unit — materials, packaging, shipping. Each sale first pays for its own variable cost; whatever is left over is the contribution margin, which goes toward covering the fixed costs. The break-even point is the number of units at which total revenue exactly covers total costs, so profit is zero. Every unit sold after that point adds its contribution margin to profit.
Discounts and HST on the Shelf Price
A discount rate is taken off the regular price: discounted price , so 25% off means paying 75% of the price. In Ontario, 13% HST (harmonized sales tax) is then added to what the customer pays: price with HST . The HST is collected for the government, so it is never part of the business's revenue, markup or margin.