How are prices for ordinary objects determined by corporations?
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Any large company will have a pricing group (they might not be called that but they’ll exist). Their job is to know what the market price is for widgets, how the company’s widgets might be better or worse than competing widgets (and hence value higher or lower value), the profit margin on widgets, and what the company’s strategy for widgets is.
They’ll use all that to set a price, to periodically tweak it, and to do time-limited things (rebates, sales, etc.). Then they’ll watch sales & revenue to see if it’s working, and adjust if it’s not.
In some industries this can be done by computer algorithms, in some it’s fixed by law, but a surprising number do it by hand or glorified spreadsheet.
Note that, for retail, the company that makes widgets is just selling the wholesale price. They usually don’t know or care how the distributor and/or retailer is marking it up from there.
They start with how much it costs to produce. Then they mark it up to what they think they can get people to pay for it.
Under normal conditions, it’s the price of raw materials plus the cost of processing (labor) to turn them into whatever the final product is, plus all the shipping, some percentage of overhead costs and a reasonable profit margin. The rules are a little trickier if you get into loss leader strategies and luxury goods, but that’s basically it.
The formula for price is simply:
Price = Cost + Profit
Now, this is easier said than done. A corporation will have to adjust the cost and profit inputs based on the current market landscape. If demand is low for their product, they will have to reduce their profit or cut custs or both to get the price to a level that would make the product attractivly priced enough for consumers to buy it.
This is done by conducting market research. A company may analyze what the average price is for the same or similar product on the market and conduct studies and surveys/focus groups to see what consumers think about their product and how much they would be willing to pay for it.
First they need to figure out how much it costs to manufacture (materials, labor, factory, utilities, etc), then figure out how much the market will pay for the item. If the manufacture costs are lower than the income, they will sell. If they lose money on every widget, they will eventually stop selling them.
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