Setting Prices: An Overview

Pricing is at the heart of revenue management. As noted earlier, we have a three-part relationship:

Prices → Revenues → Profits

The linkage between prices and revenues is volume, the quantity that can be sold at given prices. The linkage between revenues and profits (income) is expenses, the costs of generating these revenues. Thus, we have:

(Price × Volume) - (Variable Costs + Fixed Costs) = Profit

If the price is set too high, the contribution margin (price–variable costs) may be good, but will there be enough volume of sales to cover fixed costs and provide a profit? If the price is set too low, volume will increase, but will enough revenue (price × volume) be generated to cover all costs and provide a ...

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