Three Important Factors of Pricing
1. Price to Value: the value a customer gets by either paying extra money for the upgrade or even pay any money all together
2. Cost: the total money, time, and resources associated with a producing product.
3. Size of Market: the number of buyers and sellers in a particular market.

Price vs Value
For most customers price by itself is not the key factor when a purchase is being considered.
This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price.
In addition, when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.

Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision.
Any easy way to see this is to view value as a calculation:

Value = perceived benefits received / perceived price paid

For the buyer value of a product will change as perceived price paid and/or perceived benefits received change.
But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up

Pricing Floor:
the price falls somewhere the minimum price the firm is able to sell at.

What do you choose your price based on?
The business chooses the price based on costs, competitors' prices and prices of substitutes, and customers' assessment of unique product features or lack of features compared to competition.

How do we determine demand?
Demand = the size of market x the company's market share

Demand refers to the quantities of a product at which a consumer is willing and able to purchase at given price per period of time. By breaking down the definition, factors that determine demand can be define.
Quantities- this refers to how much the consumer really needs. If people want to purchase large quantities of that good then the good is said to be in high demand.
Product- this is the item being traded.

Price Elasticity of Demand Equation (PED) = % change in quantity demanded / % change in price

Price Elasticity of Demand uses: to show the responsiveness of the quantity demanded of a good or service to a change in its price.
PED from 0 to -1 : the demand is inelastic
PED from -1 to -2 : the demand is moderately elastic
PED from -2 to - 10: the demand is very elastic

The price elasticity of demand is useful:
  • When there is little or no competitive response
  • To estimate the effects of changes in markets when substitute products are hard to find
  • To estimate the effect of the short term price promotion
  • The more elastic the demand the more it pays for the seller to lower the price in sales promotions

Another price elasticity of demand usage: Use "absolute" Value of PED to interpret
In the case of price elasticity of demand it is used to see how sensitive the demand for a good is to a price change. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or inelastic between $9 and $10". To answer that question, you use the following rule of thumb:

• If PED > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
• If PED = 1 then Demand is Unit Elastic
• If PED < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)

Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always positive.