Welcome to the lesson. By the end of this lesson, you should be able to identify the role of pricing within an organization and its implications for profitability. You should be able to identify factors that influence product price and apply a variety of pricing mechanisms. Now first off, let's talk about pricing at a general level. Pricing determines the revenues generated by an organization. Now that's kind of obvious, because when a product is sold, the price is what's collected in exchange for that product, which then gets added up into total revenues for a given accounting period. But pricing also has an indirect affect. Perhaps even more important than that first direct one. If the product is priced inappropriately, a customer may not turn to us to purchase the product. They may go to a competitor. And so in this case, pricing also determines whether our customer purchase a product from us, which has a long-run and a short-run effect on total revenues collected. Now many factors influence how an organization prices it's products. Three main categories are, customers, competitors, and costs. With respect to customers, customers affect the demand for the product. Perhaps this fluctuates over time. Customer might really want the product at some point in time, but then their interest may wane and they may move on to other products in the future. The customers are the ones that access the value. And that influences what they demand the products for. And finally, there are specific drivers that customers are looking for. Including quality, specific features, maybe something about our organization in terms of reputation, the price itself, etcetera. A second category is competitors. Competitors affect the supply of the product. They also effect the quality, features, the reputation, the price of those products that exist in the marketplace. And of course they might have existing relationship with customers. They might have existing market share, or they might be have contracts with certain costumers, which means that those customers are less available to us. And finally, a third factor is costs. Costs affect the ability of our organization to supply the product. Basically costs provide a feasibility check on whether a product is profitable. If our production process is too costly and we can't charge a higher price due to customer's demand or competitors, then perhaps this product is not necessarily the best one for us to sell. Another factor is time horizon. We can distinguish time horizon between the short-term and the long-term, whatever that means for a particular decision or scenario. In the short-term, some costs are irrelevant, mainly because they don't change as a result of our decision. Further, we can price a product to incur some sort of loss, but only in the short term. In the long term, pricing must provide profitability that makes our investment in the capacity used to produce the product worthwhile. There are some other considerations as well. One has to do with alternative approaches to pricing. You might think about how you differentiate your product, which might command a different price than what our competitors are charging. Or you might look at competitor's prices and differentiate based on that dimension. There's also a legal perspective that often times comes to play. In many jurisdictions, there are anti-trusts, or competition-oriented laws and regulations, that have some limitations on what type of pricing approaches we can adopt. Price discrimination, predatory pricing, and collusion are just some of these factors. Details about these factors are beyond the scope of this course. But I've included some readings alongside with these videos that address some of these concepts.