The influence of cost

We have said that the manufacturer, in the long run, has to recover his costs or he will lose money. And no business will continue losing money indefinitely. Therefore, a manufacturer, in pricing his merchandise, must consider what it costs him to make it and to sell it. The price which the manufacturer eventually gets for his goods must be high enough to recover his costs.
Stress is laid on the word "eventually," because many new products are sold below cost, mostly in the introductory stages.
In calculating costs, a manufacturer has to examine what his costs have been historically, what he anticipates they will be when in full production, what effect these costs will have on the entire product line (product mix), how big a volume he anticipates, the effect a new product will have in eliminating slack periods (idle machinery doesn't earn dividends), the effect the product will have on stable employment, and what, if any, effect the product will have on increasing the size of orders.
It is clear, then, that proper cost accounting has become an important management tool. Cost includes many direct elements and perhaps as many indirect. What might seem to be a profitable price level may not be one at all. Conversely, pricing realistically may often mean probing into indirect ways of saving.
Another influence on pricing is competition. No manufacturer is free to price his goods without considering competition, unless he has a monopoly. It is not often, however, that a manufacturer has a monopoly, but it is possible. It has happened, for example, with rare drugs, and with unique inventions. But, by their nature, such products are rare.
Even the outstanding leaders in their field seldom command as much as half of the market. Usually, it is much less. The share that any one manufacturer has of the total market naturally influences the manufacturer's pricing policies. The greater the share he commands, the more secure he is as the price leader (the one determining the price level which most competitors try to match).
It is obvious that such price leadership is, as a rule, not whatever the market will bear. Generally speaking, price leadership is lower than it would be without a clearly established leader. It is the smaller competitor who has to meet the leader's price, if he wishes to compete.
The market is not a static thing. Prices change frequently as new developments, new inventions, and changes of all kinds influence both supply and demand. Even after price has been established at a competitive level, a manufacturer must constantly watch competition. The competitor may cut prices, offer better terms or service, or redesign the product to give greater customer satisfaction.