Some of the factors affecting price determination are: 1. Product Cost 2. The Utility and Demand 3. Extent of Competition in the Market 4. Government and Legal Regulations 5. Pricing Objectives 6. Marketing Methods Used and a Few Others.
Factors Affecting Price Determination
Factors Affecting Price Determination – 6 Factors
Fixation of price is an important exercise for every firm. There are numerous factors which affect fixation of price.
These factors may be stated as follows:
1. Product Cost:
The most important factor which affects pricing is the product cost. The cost sets the minimum price at which the products may be sold. This minimum price is called as ‘floor price’. At times when a firm introduces a new product it may launch the product at a price less than its cost but in the long run every firm aims to earn a certain margin of profit.
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The total product cost consists of fixed cost, variable cost and semi-variable cost.
a. Fixed cost is the cost which does not change with change in production volume. It remains constant whether 1000 units or 10 units or zero units are produced.
Examples of fixed cost are rent, salaries etc.
b. Variable cost is the cost which changes with change in production level. It is directly proportional to the level of production. Therefore, variable cost will be incurred only if there is production. If there is no production there will not be any variable cost.
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Examples of variable cost are raw material, petrol expenses, labour cost etc.
c. Semi-variable cost on the other hand is the cost which varies with the level of production activity but is not directly proportional to the production activity.
Examples of semi-variable cost are telephone expenses, salesmen’s incentives etc.
2. The Utility and Demand:
The maximum price a buyer is willing to pay is the value of the utility of the product and the minimum price a seller is willing to offer is the cost of the product. Therefore, the price must reflect the interest of both buyer and seller and should be fixed on the basis of the utility of the product and the intensity of demand. Further, price of a product is affected by the elasticity of demand of the product. In case of elastic demand a firm cannot fix high prices but in case of inelastic demand it has the option of fixing high prices.
3. Extent of Competition in the Market:
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The product cost determines the minimum price of a product and utility of the product determines the maximum price of the product but it is actually the nature and degree of competition which fixes the price of the product. In case of lesser degree of competition the market price of the product will be closer to the maximum price and in case of free market the market price would be closer to minimum level. Therefore, while fixing price of the product the firm must consider competitor’s prices and their anticipated reactions.
4. Government and Legal Regulations:
Government may intervene or regulate prices by declaring a product as essential product to protect the interest of society at large. Therefore, a firm has to fix price of its product within the rules and regulations stated by the government.
5. Pricing Objectives:
Each firm has its own set of objectives guiding the fixation of prices.
These objectives may be:
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(a) Price Maximisation – A firm with an objective of maximising profits in the short run will fix high prices but if a company has plans to maximise profits in the long run then it will fix low prices and increase sales volume to earn more profits.
(b) Obtaining Market Share Leadership – A firm with an objective of increasing its market share will fix low prices so that it can reach large number of customers.
(c) Surviving in a Competitive Market – If a firm has to meet challenges from its competitors in the form of more efficient products then it may offer lower prices so that it can survive competition.
(d) Attaining Product Quality Leadership – If a firm wishes to produce high quality products and be the leader in the industry it has to incur high cost on research and development. Firm has to fix high price to recover the additional cost incurred.
6. Marketing Methods Used:
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Price fixation also depends on the other marketing elements used. If a firm provides unique services then it has an edge over its competitors’ and thus can fix higher prices.
Factors Affecting Price Determination – Top 10 Factors to be Considered by the Marketer
The marketer while deciding the price of the product must consider different internal and external environmental factors.
These factors that affect pricing decisions are discussed below:
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Pricing strategy depends upon “What the marketer wants” – the objectives of the firm. Market positioning (i.e., the place that a product occupies in the mind of the customer and how it is distinguished from products from competitors) has an impact on pricing decision. The objectives of the firm may be survival, immediate profit maximization, expanding market share, market leadership, product leadership and so on.
Different objectives of the firm calls for different pricing strategies. If survival is the main objective for a firm in highly competitive market then the company has to set a low price with the hope to increase the demand to keep the firm going. If the marketer wants to maximise profit immediately or wants to capture a substantial market share and intends to become market leader has to set prices as low as possible.
The company may also decide to maintain a minimum price to prevent competitors’ entering into market or may set prices at competitor’s level to stabilize the market. The marketer may set high price for a product if it has been successful in convincing consumers that the price is worth giving for a high quality product and the firm has achieved product quality leadership.
2. Other Marketing Mix Elements Strategy:
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Pricing decisions must be coordinated with other marketing mix decisions like product design, branding, product positioning, distribution and promotional mix to develop an effective marketing program. For instance high promotional activities will have an impact on prices, a longer distribution channel involving many resellers will include larger reseller margin into their prices, and product positioned on high performance quality will mean that seller will charge a higher price.
3. Cost of Production and Distribution:
Cost is the basis of price determination. The price is fixed in a manner to cover all its cost of production, distribution, selling and promotion and to deliver a fair return to the producer for all efforts and risk undertaken.
According to economists point of view markets are of four types – perfect competition, monopolistic competition, oligopolistic competition and pure monopoly market. The pricing of products depend upon the market to which it belongs to. In case of perfectly competitive market where there are many buyers and sellers and no single buyer and seller can influence the going market price, the seller hardly spends any time on marketing strategy.
In case of monopolistic market where there are many buyer and many sellers, each of them offering differentiated products can influence the price of the product, as buyers see differences in each seller’s product and are willing to pay different prices. An oligopolistic competitive market consist of few sellers selling uniform (like steel, aluminium) or non-uniform products (like cars, laptops, computers, telecom service provider) and are highly sensitive to each other’s pricing and marketing strategies.
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The pure monopoly market consists of one seller, who may be a Government monopoly (Indian Railways), a private monopoly (power company-CESC). Here pricing is handled differently in each case.
Demand of consumer for the product must be studied carefully to set prices. Demand depends upon price of the product, consumer’s want and preferences, competitor’s price, consumer’s income and purchasing power and so on. If the demand for the product is inelastic, high prices may be fixed. On the other hand if the demand is elastic, the firm cannot fix high prices rather it should maintain the price lower than that of its competitor’s.
6. Competitors Pricing Strategy:
Competitor’s pricing strategy has an important impact on company’s own pricing policy. Consumers always prefer products offered at lower price will easily switch on to products of companies offered at less price. This will adversely affect sales volume and profit.
Economic factors such as – boom or recession, inflation rates, interest rate have an impact on pricing decision because these factors affect cost of production and consumer’s buying decision.
Price of product is influenced by taxation and pricing policies of Government. Changes in duty-import and export duty, tax rate applicable on production and purchase of raw material like GST has an impact on pricing policy of the firm. There are certain goods like essential food items, medicine, price of which is regulated by the Government. So companies producing such items should consider the pricing policies of Government.
Company changes its pricing strategies with the change in the stages of product life cycle. For instance when the product is in the introductory phase the marketer may adopt penetration pricing strategy i.e., keeping the prices of the product lower than the market price in other penetrate into the market, to attract customers and increase sales volume and capture a market share.
In the growth and maturity stage when the marketer has been successful in gathering customer’s loyalty and are not reluctant to pay a high price for a high quality product, may adopt skimming pricing strategy i.e., charging a high price for the product and inflate the profit.
10. Economic Environment:
Economic environment, inflation rate, period of recession has an impact on prices of the product. During period of inflation high prices are charged to cover the increasing cost of production and distribution. During the period of recession, prices are reduced to maintain the turnover level.
Factors Affecting Price Determination – Internal and External Factors
The marketing executive sets the product price between a lower and an upper limit. The upper limit is the highest value that the customer is likely to put on the product or service offered at a particular point in time. While the lower limit is the cost of manufacturing, promoting, distributing the product and also includes reasonable margins for the channel members. The actual price is fixed somewhere between these two extreme points.
While setting the price, the marketing manager is influenced by many internal and external factors. The internal factors are the controllable ones and the external factors are the ones over which the marketing manager has no control.
Let us here see each of these factors and how they influence the pricing of a product:
1. Internal Factors Influencing Pricing:
a. Organisational Factors:
Organisational factors refer to the internal arrangement that a firm has for decision-making and its implementation. Normally in any firm, decision making for pricing occurs at two levels. One is the top-level management, which determines the basic price range for the product range with reference to various market segments.
And the other is the lower level management that deals with the pricing decision. The price mechanism is the outcome of marketing and production specialists. Further they are greatly assisted by computers. Also pricing decisions may be centralised or decentralised. Thus the way in which an organisation is made up and functions, greatly influences the pricing decisions.
b. Marketing Mix:
Price is an important component of the marketing mix. However while taking pricing decisions the other components namely product, promotion and physical distribution cannot be disregarded. Pricing decisions should not be taken in isolation but together with the total marketing strategy and should avoid conflict with the other elements of the marketing mix.
Price changes will bring in the desired results only if they are properly combined with the other components of the marketing mix. Price changes that ignore the other elements of a marketing strategy have brought in disastrous results.
c. Product Differentiation:
Product differentiation is the ability of the marketer to make his product distinct from others in the market. This difference is relevant to the consumers and may be real or imaginary. One product can be differentiated from another by use of package, design, size, colour, shape or an advertising theme.
Thus toilet soap cakes are the same but can be differentiated by colour or smell. Thus a company can have different pricing for differentiated products. The fragrance of soap can be a point for differential pricing. Also the reputation of a firm can be a base for price differentiation.
d. Product Cost:
Many of us think that costs determine the price of a product. That is price is cost plus profit. However production costs merely determine the existence of a business. It is demand and competition that determines the price. Precisely it is the market that determines the price and price that determines costs.
However there is a close relationship between price and cost. It is the effort of every firm to cover all the costs so that the firm has a fair chance of making a profit. Though profit earning and maximisation are the goals of all pricing, it may not always be possible to do so.
e. Product Life Cycle:
The pricing policy to be followed should be in keeping with the age of the product. What stage of the life cycle the product is in will decide the pricing policy to be followed. In the product introduction stage, the pricing policy to be followed is one of market penetration. That is the prices are kept at the lowest possible level. This builds goodwill. In the growth stage prices can be raised to the extent tolerated by the consumers.
However abnormal rise is dangerous. In the product maturity stage, prices can be raised by following the policy of market skimming. (Market skimming means pricing at such a level that only the cream of society can afford to buy). However this should be done with utmost care as the competitors are in action. In the decline stage the prices are to be reduced to maintain the demand. Thus which stage of the life cycle the product is in, determines the pricing policy to be followed.
f. Length of Channel of Distribution:
If the firm has a longer channel of distribution, the price to be paid by the consumer is bound to be higher than if there is a shorter channel. However this does not mean that the channel should be kept at the shortest possible level so as to reduce the price to be paid by the ultimate consumer. But a sound channel management can bring about a reduction in the price of the product.
Shortening the channel should be done by considering the merits of each individual case. Further there is a need for a coordinated functioning of all the channel members so that control over the internal operations, selling, advertising, and administrative costs can be maintained.
2. External Factors Influencing Pricing:
The pricing decisions of a firm are also affected by external uncontrollable factors, which are to be carefully analysed and interpreted.
These factors are:
a. Product Demand:
Demand is the single most important factor having a great impact on price, pricing policy and strategy followed by a firm. It is the nature and magnitude of demand that is most relevant to product pricing. The demand may be elastic, inelastic, perfectly elastic, or perfectly inelastic. The pricing decisions will vary depending upon the exact nature and the extent of elasticity.
A perfect elastic condition brings about more than a proportionate increase in demand with a slight fall in the market price. Thus, a 5% fall in the price brings about say a 30% increase in demand. In case of elastic demand, normally called as unit elasticity, a 10% fall in the price would bring about a 10% increase in demand.
In case the situation is that of perfect inelasticity, even a substantial fall in the price would not pull up the demand. Say a 25% fall in price will bring the demand up by 01%. However in case of inelasticity of demand the severity is reduced. Say 20% fall in price will bring up the demand by 05%. The conditions or magnitudes are not absolute but relative. It is the study of actual demand conditions that paves the way for price decisions and policies.
b. Competition:
Knowing one’s competitor is critical to successful marketing planning. The firm should constantly compare its products, prices, channels and promotion with those of the competitors. The company is supposed to know- who are its competitors, what their objectives are, what are their strengths and weaknesses, and what their reaction pattern is. A company’s competitors include those who are seeking the same customers, or fulfilling same consumer needs, and making similar offers to them.
A competitor’s objectives, strengths and weaknesses go a long way towards making clear the possible moves and reactions of the rival companies to moves of the company like a price hike, or a price cut, or a promotion programme or introduction of a new product or grant of liberal credit facilities. The competitor’s reactions or proactions are related to their philosophy of doing the business, their internal culture and beliefs. A firm’s pricing policy thus depends upon the pricing and substitution policy of its competing firms.
c. Economic Conditions:
The economic conditions prevailing in the country or region do have an impact on the firm’s pricing policy. If the economic condition is good, generally the demand for the product is also high. However boom periods encourage the entrance of competition and this leads to keen competition. During periods of recession, price-cuttings are usually seen. Thus pricing decisions depend upon economic conditions.
d. Government Regulations:
The governments of nations influence the pricing policies in a number of ways. The government happens to be the largest employer and the biggest buyer in the economy. For e.g. – in defense industry, electronics industry, car industry, food grains etc. the government is the single largest buyer and thus influences prices. It also regulates the prices of the products and services that it makes available to the community like electricity, postal services, transport etc.
Further we have various acts and laws in place for protecting the consumer from exploitation through unreasonable price hikes and artificial scarcity conditions by marketers. Thus marketers should consider all government regulations while drafting pricing policies and strategies.
e. Ethical Considerations:
Business principles and ethics hardly go together. However, most business houses make a serious effort to maintain an image of themselves in the back-drop of ethical values. The most common problem faced by managers today is how high they can allow prices to move. The business principle says “Charge what the market can bear”, however this is purely a business consideration.
When seen from the ethical angle this price will be able to be met by only the rich class of consumers. The poor and people badly in need of the product or service will not be able to afford it. Thus ethical norms say that pricing should be such that the firm makes a reasonable profit, it maintains quality standards, time and place dimensions of supply. These conditions are sure to improve the company’s image.
f. Suppliers:
The pricing policy of a firm is also influenced by the price of the inputs to the manufacturing process as well as the pricing policy of the suppliers. Thus the price of a textile manufacturer will be influenced by the price of the cotton, which is a major input.
Similarly the price of an automobile is bound to increase if the price of the parts like batteries, belts, spark plugs, windscreens, mudguards etc., move up. If the suppliers realise that their input is significant and cannot be substituted they may raise their prices to capitalise on this fact. Thus the pricing decisions of a firm are affected by the pricing decisions of the suppliers.
g. The Buyer Behaviour:
Buyers here mean both industrial buyers and final consumers. The composition of these buyers and their behaviour has an impact on the pricing decisions of the firm. Generally, if the buyers are more in number and smaller in strength, less will be the impact on the company’s pricing as they are too small to influence unless they are well organised.
A few but large buyers can greatly influence the pricing decisions. Again the pricing policy to be followed would be different in case of industrial users and final users. The firm cannot have an identical pricing policy for different types of consumers.
Thus the decision makers for pricing decisions have to be aware of both the controllable and uncontrollable factors that have an impact on pricing, while drafting the pricing policies and strategies to be adopted.
Factors Affecting Price Determination – 8 Important Factors to be Kept in Mind by an Entrepreneur
While fixing the price for his product, an entrepreneur should keep in mind the following factors:
(i) Nature of Product – Product characteristics such as its perishability, its life cycle, its substitutability, etc. influence its price. For example, a well- branded product can be priced at a higher level than an unbranded product because the former can be differentiated from the rival products. Pricing of industrial products differs from that of consumer products.
(ii) Product Cost – Cost of production and distribution per unit serves as the minimum level below which a firm cannot afford to price in the long run. However, price in turn influences the sales volume, production volume and cost per unit. Therefore, price should be so fixed as to optimise the cost and profits.
(iii) Pricing Objectives and Policy – The objective and policy of pricing adopted by the firm serve as the broad framework for fixing prices. For instance, price would be high if the firm has adopted skimming price policy.
(iv) Demand – Demand characteristics are an important determinant of price. For example, sales can be increased by reducing prices when the demand is elastic to price change. Seasonal nature of demand may also influence pricing.
(v) Competition – Number, size and attitudes of competitors influence price determination. When the product of an entrepreneur is highly differentiated from the competitive products and entry of new firms is very difficult, prices can be kept high.
(vi) Customers Behaviour – When a product is purchased for status motive, its prices should be fixed at a high level. Similarly, poor customers prefer a low price. Institutional buyers may prefer a different pricing policy as compared to individual buyers.
(vii) Government Control – Wherever Government has laid down certain restrictions on pricing, an entrepreneur has to follow them. To that extent pricing policy depends upon Government regulations.
(viii) Other Considerations – Several other factors may influence pricing. For example, a firm providing home delivery, after-sale service, etc. may charge higher prices. Similarly, the enterprise spending huge amounts on advertising may be able to charge a relatively high price.
Factors Affecting Price Determination – Target Markets, Competition, Company Objectives, The Role of Price and Other Factors
Apart from the costs of goods, there are number of factors affecting the pricing decisions.
These factors are discussed below:
1. Target Markets:
The pricing decision should very closely address the requirements of the target market. If that need is for the best possible price ‘deal’ then low prices would be offered. If exclusivity, service and status were required, higher prices would be in order. For example, some exclusive fashion retailers refuse to mark down slow-moving lines for fear of compromising their exclusive image. Instead they might sell their merchandise on to another retailer.
2. Competition:
Analysis of the competitors’ pricing strategy will determine what pricing strategy a retailer may adopt in order to compete effectively.
3. Company Objectives:
The pricing decision must be consistent with the overall company objectives. For example, if the company wishes to pursue aggressive market share growth then lower prices may be required (penetration pricing); if on the other hand early cash recovery of investment is required this objective may dictate higher pricing (skimming).
4. The Role of Price:
The role of price in the retailing mix should also be determined. If the price is perceived as a key element in the consumer’s purchase decision, then price will be used to establish a differentiating role. If on the other hand price is not seen as so important, other elements of the mix may be emphasized, e.g. specialty stores, where exhaustive is the target and which rule the price where as in a super market low price rules, convenience stores.
Other Factors:
Intermediaries may well influence the pricing decision. Financial institutions may alter rates of interest, suppliers may put up their prices, trade unions may demand higher wages or the government may change the pricing policy or tax structure.
Factors Affecting Price Determination – Top 6 Factors which Affect the Determination of Price of a Product
Price refers to the amount of money which a customer has to pay to buy a product.
The important factors which affect the determination of the price of a product or service are as given below:
1. Product Cost – The cost of a product is one of the very important factors which affects the price determination of the product.
2. Utility and Demand -The utility as well as the demand of a product also affect the price of the product.
3. Extent of Competition in the Market – The level of competition in the market affects the price determination of the product.
4. Government and Legal Regulations – The level of government interference and other restrictions, rules and regulations have great effect on the determination of the price of the product.
5. Pricing Objectives – Pricing objectives are another important factor affecting the fixation of the price of a product or a service.
6. Marketing Methods – The price fixation process is also affected by other elements of marketing such as distribution system, quality of salesmen employed, quality and amount of advertising, sales promotion efforts, type of packaging, etc.