A commercial exchange is a process which involves two parties; the seller and the buyer. The seller offers a product to the buyer expecting something in return which is usually in form of money. The product may be in form of a tangible good or service offered and the buyer may be a consumer or a business customer (Schindler 1-7).
One fundamental characteristic of a commercial transaction is that it is a voluntary interaction since both the buyer and the seller exchange the goods and services voluntarily and after the transaction both are in a better position than before. The seller becomes richer while the buyer receives the goods or services that he/she needed and this leads to an increase in happiness to both parties thus making the society a better place than before. (Schindler 1-7).
A price is what is offered in return for a product in a commercial exchange but most likely it is associated with exchange for goods. As for the exchange for services, price assumes other names depending on what is to be purchased such as fee, tuition, rent, interest, salary, premium, toll, wages, commission and fare (Schindler 1-7).
The three possible starting points for the process of setting an initial price that are described in this chapter include:
Cost plus is a common type of pricing that is used by firms to estimate the price of goods and services. This form of pricing consists of the variable cost attached to the product in addition to the fixed cost of executing the service. For the case of painting the house, it is a prerequisite to first calculate the average variable costs of panting the house plus the allocated fixed costs then multiply by the total of 1 plus the percentage markup, the results will be the actual price of painting the house (Schindler 17-28).
The formula of calculating price using cost-plus is given by (average variable cost + fixed cost allocation)*(1+ markup %) thus (10 *(1.6)) which gives $16. If we use keystoning then the price will be $20 as this mode of pricing gains 100% profit based on the cost of production of the product.
There are three types of product characteristics which include convenience product which is a relatively cheap product which calls for little or no shopping effort i.e. milk, the other is the shopping product which needs comparison during shopping since it is more expensive and not found in most stores i.e. bracelet and particular products which need to be searched extensively as they are rare and don’t have substitutes, i.e. medicine (Schindler 20-31).
Since human needs are diversified, it is very significant to segment them into smaller categories such that they are easier to allocate prices. Luxury goods are more expensive for human being can as well live without them (Schindler 22-32).
The difference between these two types of product performance lies between facts and opinions. Objective performance is real and true and is distinguished by the ability of the customer to make up his mind on whether it is biased or not, this performance is meant to be persuasive while subjective product performance is unbiased and balanced. The implication of this measure is that is that it is used as a standard reference to determine price (35-41).
Fixed costs are those expenses whose value remains the same regardless of the activities within the business within any specified period of time i.e. rent while variable costs change according to the activities within the business i.e. sales.
It is hard to allocate portions of fixed costs to individual products as the price of the products may fluctuate during the trading period depending on the condition of the market. Variable costs are considered during pricing because they are the fundamental determinants of the price which will in turn be used to settle them. A firm must monitor the value of the variable costs as they are the key concepts behind a favorable break-even point (Schindler 45-53).
Price ceiling is the maximum amount which a seller is allowed to charge for a product and it is usually regulated by the government in an effort to maintain fair and reasonable prices in business. They are designed to protect the low income earners who are incapable of affording relevant resources however many economists remain to question their significance (Schindler 54-65).
Works Cited
Schindler, Robert. Pricing Strategies: A Marketing Approach. Sage Publishers, 2011. Print
