Setting product prices is one of the most important aspects of attracting customers and achieving profitability. Consumers won't buy products that are priced too high, and a business can't make a profit if its prices are too low to cover its expenses. Businesses employ a variety of different pricing strategies to position products in the market and meet sales goals.

Competitive Pricing

Competitive pricing means setting prices relative to competitors. For example, a new neighborhood restaurant might use the prices of entrees at other restaurants in the area to inform pricing decisions. Companies may choose to set prices slightly below those offered by competitors to attract more customers. Competitive pricing can potentially result in a price war, in which competitors repeatedly slash prices in an attempt to undercut one another.

Cost-Based Pricing

Cost-based pricing is a strategy that uses the cost of production as a baseline to inform pricing decisions. For instance, a company that sells office supplies might set prices that are 10 percent higher than production costs to ensure that it covers its expenses. Similarly, a company that sells T-shirts could simply charge a $5 markup over the production costs of all of its products. Cost-based pricing is a relatively straightforward strategy since it doesn't take consumer demand or competition into account.

Value Pricing

Setting prices based on the benefit or value consumers derive from products is called value pricing. In other words, value-based pricing seeks to set prices based on what consumers are willing to pay. A business pursuing value-based pricing might charge prices that are significantly higher than competitors if it believes its products are more valuable to consumers than those offered by competitors or if wishes to establish itself as a luxury brand. Value-based pricing requires managers to have a deep understanding of customer needs and preferences.

Anti-Competitive Pricing Practices

Anti-competitive pricing tends to harm competition, which can force businesses out of the market or result higher prices for consumers. For example, a large company might set its prices artificially low to force smaller competitors out of business, a practice known as "predatory pricing." When companies collude to set high prices across an industry to increase profits it is called price-fixing, another anti-competitive practice. Businesses that engage in anti-competitive pricing can be subject to legal action by the U.S. Federal Trade Commission.

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