Underpricing
Underpricing a product is tempting when a business owner is anxious to compete; he assumes low prices will increase sales volume. However, cheap goods are perceived by customers to be cheap. Many customers will choose to buy from the more expensive competition, believing the item is of better quality. Underpricing is also a tricky long-term strategy; a business owner has a thin margin with which he can cover costs and bring home a profit. A business dependent on low prices will require a constant, and ongoing, stream of high volume sales to stay in business.
Overpricing
Consumers are price-savvy, and an overpriced product will sit on the shelf if the competition sells it cheaper. As much as customers look for quality, they will also protect their pocketbooks. Overpriced merchandise will lead to a decrease in sales, as it's possible to price products beyond the customer's ability and willingness to pay.
Other Business Priorities
A focus on pricing that produces profit can detract from other business priorities. The company's long-term strategy might include maximizing its market share; to achieve this, it might introduce a price point that garners less profit but increases sales volume. Developing a reputation for high-quality goods might require increased manufacturing costs to produce a luxury item. During a recession, the company might sacrifice its profit goals and reduce prices to maintain a revenue stream that keeps them in business. Going beyond the profit margin to look at the business's other priorities is often strategically necessary.
Outside Factors
Since pricing is so fundamental to the health of a business, external factors can directly influence profitability. A company that sells food will have its costs rise when crops fail or are ruined by natural disasters; prices will have to rise as a result, causing customers to change their buying habits. Even if the company survives the lack of sales, when its costs decrease again it may be forced to lower prices to earn back the customers it lost.
Source:
http://smallbusiness.chron.com/pricing-variables-affect-business-30856.html
