Pricing is critical to the growth and profitability of a firm. Pricing corresponds to two important business factors: market and consumer. As a commodity, the price of a product or service should be competitive enough to allow it to compete in the market with other competitors. Also, the pricing should be acceptable and cheap so that it appeals to more consumers' purchasing power. A company's ultimate purpose is to maximize earnings while minimizing or eliminating losses. Businesses are also conducted on a breakeven price, which means that the company does not earn and does not lose money. There are number of price strategies that a business pursues to run the business and each strategy has its own ground realities, circumstances and requirements according to the nature and sector and potential in the section of the business.
This paper will examine and explain the two major price patterns i.e. breakeven price and shut down price.
Breakeven price:
Breakeven is a point or stage where a business does not earn profits and at the same time does not incur losses. It is situation of no profit and no loss. It normally occur when a business runs at its initial stages where it has to offer some extra value to its customers and/or has to some put extra cost to the promotion of its business and products. However, there are some particular circumstances when businesses encounter huge shortfall in the sales and reduction in the revenues which eventually requires be stabling and ticking at the breakeven price so that there should not be a loss that the businessmen bear.
Hence, in the breakeven price businesses develop a strategy to stay in the market with a price in which the business will not have profit but at the same time the businesses will also don’t incur lose.
Shutdown price:
It has been elaborated first that businesses are started to earn profits and to increase the profit. Therefore, all the businesses develop their price strategies according to market competition and adding value for the consumer in the price. Adding value to the price denotes to the notion that offering such a price to the consumer that can cater more consumers and the price could be reachable to more consumers i.e. a price which caters more consumers’ purchase power.
Shutdown price is the price in which the business deems to remain in the market with the minimum price. However, a good business do not prefer to run the business in the circumstance where it is not producing profits as the major goal of a business is to produce profits and increase profits. If there is no progress in short term then the business normally shutdown the production and close the business.
Conclusion:
At the end of paper the understanding about price and its importance in the business has been learnt. Moreover, the role of breakeven price and shut down price is also learnt through this paper. As the businesses are initiated with the single aim of earning profit, so it is not good enough and wise decision to run a business on breakeven price and continue the operations with shut down price. Therefore, a prolonged stay of these two price categories in the business suggests that the business need value addition and improvement or it needs to be shutdown.
References
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics: a
problem solving approach. Boston, MA: Cengage Learning.
