Factors Affect Price Decision
Pricing is all around us. We pay for house rent, we pay for taxi, if need a laptop we must pay to buy it. Everything has a price. Who determine the price structure of a product, top management, CEO, the entrepreneur, answer is no. Basically two factors, which affect the company price decision and strategy.
1. Internal Factors Affecting Price
- Marketing Objectives
- Marketing Mix Strategy
- Cost
- Organization
2. External Factors Affecting Price
- The Market and Demand
- Competition
- Other External Factors
Also Read: Stages of New Product Development Product Life Cycle Macroeconomics Articles
Internal Factors Affecting Price
Internal factors affecting pricing include:
- Marketing Objectives
- Marketing Mix Strategy
- Cost
- Organization
Marketing Objectives
Before setting prices, the company must decide on its strategy for the product. The company must select its market clearly and then marketing mix strategy. On the other hand the company must be clear about its objectives. If the company objectives are clear, it will be easy to decide the price. Common objectives of the company are survival in the market, profit maximization, market share leadership and product quality leadership.
Survival in the Market
- Over-capacity
- Intense competition
- Changing consumer want
- And set low price
Maximizing Profit Strategy
Some companies believe in maximizing profit. They select the high prices because they want financial results not long run performance.
Market Share Leadership (Market Penetration Prices)
Conditions are
- Highly price sensitive market
- Low price affect potential buyers
- Economics of scale
Product Quality Leadership
The company set high prices and provide high quality products in the market.
Marketing Strategy Mix
A company achieves the objective by price, which is one of the tools of marketing mix. The price, which is selected, must be related with product design, distribution and promotion decision.
Cost
Cost is related closely with price because to select the price it will include cost of distribution, production and all the other costs on product. If the company cost of production is high, it cannot set suitable price. But if the cost of production is not high, can set suitable prices.
Organization
It is the duty of management that who will set the price within the organization. In large organizations price setting authority is given to product line manager. In industrial organizations it is allowed to salespersons to interact with customers to set the price in specific range. In small organization the top management decides the pricing structure.
External Factors Affecting Price
External factors that affect pricing include:
- The Market and Demand
- Competition
- Other External Factors
The Market and Demand
To set the price the marketers should have complete knowledge about the relationship between market and demand.
Types of market
Perfect Competition
Perfect Competitive market is one in which every firm is to small to affect mark price.
Features of perfect competition
- Large no of sellers & buyers number
- Homogeneous products perfectly
- Free entry and exit
- Perfect knowledge of price cost (no control over price)
- Perfectly price elastic demand imperfect competition
Monopolistic Competition
Monopolistic competition is a market situation in which there are relatively large numbers of small firms, which produce or sell similar but not identical commodities.
Features of Perfect Competition
- Large no of sellers and buyers
- Differentiated products which are close substitute
- Free entry but firms can produce only close substitutes
- Some control our price
- Less than perfectly price elastic demand
Monopoly
Where there is a single seller for a product and there is no close substitute of the commodity that it often by the sole supplier to the buyers.
Features of Monopoly
- Single firm
- Perfectly differentiated product without close substitute
- Very strong barriers to entry
- Extreme control over price
- Near to in elastic price elasticity of demand
Competitors’ Cost, Price and Offers
Another factor affecting the company’s pricing structure is competitors’ cost and pricing.
Other External Factors
Some other external factors can affect setting the price such as: Economic factors like Inflation Deflation and interest rate affect selling price because they affect cost of production and consumer perceptions related product price. Government policies can also affect the price taking decision.
