Cost Versus Market Pricing
A price level should be established on what the market will bear. Typically entrepreneurs will be persuaded to use a cost plus approach, perhaps associated with break-even analysis, to set prices. This is not usually an appropriate place to start. A low price selected by this process will likely have an effect on perception and decrease the value of the product, thus inhibit¬ing sales. Then, too, the price might be set too low and the product becomes popular at the diminished price thus losing the entrepreneur much profit. A final point is that it is more dif¬ficult to increase a price than it is to reduce it. In the latter case the buyer perceives a deal, in the former a certain dissatisfaction.
These observations lead to five elemental truths about pricing.22