Evaluating pricing decisions

Evaluating a pricing decision means judging its overall effect on total profit, not just asking whether it pulls in more customers. A price change only works if the extra sales, or the higher amount charged per unit, more than cover what the business gives up.

What decides the outcome

• How much demand changes: a small cut may bring only a few extra buyers, so revenue per unit falls and profit drops.
• Competitors' reactions: if rivals match your cut, you keep the lower price but lose the extra customers you hoped for.
• Costs: selling more means buying more materials and paying for more staff hours, which eats into the gain.
• Brand image and loyalty: loyal customers may pay more without leaving, giving a price rise a good chance of raising profit.
• Target market segment: bargain hunters respond strongly to a discount, while customers buying for status may not.

When a lower price backfires

A lower price can damage a premium image. If a scented candle brand normally sells at £20 and suddenly drops to £12, shoppers may assume the ingredients are cheaper or the product is being cleared, and the customers who valued its exclusivity drift away. Rebuilding a luxury reputation is slow and expensive.

Judging it by profit

A candle maker sells 2,000 candles a month at £20, with £8 of costs per candle. Each sale leaves £12, so the business makes £24,000 a month before fixed costs such as rent. Cutting the price to £16 leaves only £8 per candle, so it must sell 3,000 candles just to make the same £24,000. That is 50% more sales simply to stand still, before any extra staff or storage costs.

A pricing strategy works when the gains from extra sales or a higher price outweigh what the business gives up, so these factors have to be weighed against each other rather than judged one at a time.