Profit Pricing

Posted in Marketing and Strategy Terms, Total Reads: 555

Definition: Profit Pricing

This involves the company fixing the price that will maximize the profits for the product. Costs incurred can be classified into two: fixed and variable.

Fixed costs are the initial investment and are incurred even at zero output. These include plant, property and equipment.

Variable costs vary with the output level, increasing with the increase in product. This includes material costs, labour costs and overhead costs.

Profit equals total revenues minus total costs.

From the graph with the plot of revenues and costs, we can calculate the point of maximum profit. The profit will be at its maximum when the difference between the cost and revenue is the highest. Customers determine the attractiveness of a price based on the anchor prices, bumps or price hikes for extras, charms for a little discount below the anchor price. Competition on similar price lines can harm your profits. Pricing at the high end may lose price-conscious customers willing to compromise on quality. This is an appropriate pricing strategy for companies which are very confident about their product quality and know that customers will be willing to pay extra for guaranteed quality, e.g., Apple.

Every cost incurred on the product, starting from the fixed costs to production costs to advertising, sales and transport, should be considered before setting a profit margin.

Total profit reaches its maximum value when marginal cost equals marginal revenue. At the profit-maximizing output level, the total revenue is the height of point C, point B gives the total cost; the maximal profit is arrived at CB. The profit curve is also at its maximum at this point.

Hence, this concludes the definition of Profit Pricing along with its overview.


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