For any operating business, the primary goal is not just to earn profit but also to maximize their profit margins. As normal convention dictates profit as the difference between revenue and cost, how much profit an entity makes depends largely on how much revenue it earns. Therefore, price and quantity of goods sold are the two most direct influence on the profit of every entity and this makes a not only accurate but also strategic pricing decision a necessity for any business that wants to thrive.
There are many methods and models available for managers to use in order to fix price for a varying range of products and services, depending on the position of the company in the market and the strategy associated with the product. For a multinational company that produces electronic products, it is most likely to be a large supplier in a diverse market and great or little, its ability to influence market price is, nonetheless, certain. As a result, managers of said company will most likely take full advantage of this active power to further their strategy for the entity.
Usually, the process of arriving at the selling price that is tagged with each product involves coming up with a base price or a marked up price, which are derived from cost information and then, this price will be further adjusted along with other market forces and competition so that a compromise is reached, enabling the company to earn profit and yet, the price is not so high as to drive customers away. Because of its easy-to-apply formulas, cost-plus pricing provides a simple start for managers to set up prices for new products, as Smith, Thorne and Hilton, 2006, p. 972 has suggested that “managers cannot ignore market forces, nor can they ignore costs. In practice, cost-plus pricing is used widely to establish a starting point in the process of determining a price”.
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