Page Contents
Pricing Factors (Price Factors)
Pricing is a complicated job that needs to look for various factors. A marketer in the course of setting a product or service’s final price is affected by such as internal, and external factors – objectives, cost, supply, demand, government regulation, and so forth.
Usually, marketing executives are affected while pricing by two problems regarding the lower limit and upper limit. The lower limit also called “base price” is the cost of producing, promoting, and distributing the product or service, this is the price before provision is made for discounts, while the upper limit is the value to the product’s buyer.
Within both limits, the actual price of the product or service is carried out which is affected by various economic and non-economic factors. A marketing manager hence should consider the following factors before setting the actual price of the product or service.
The factors to be considered while pricing any products or services are:
- Internal Price (pricing) Factors
- External Price (pricing) Factors
Internal Pricing Factors
Internal price factors are always controllable by the hand of the manager. The primary internal pricing factors include,
Pricing Objectives
The price of the product is affected by the pricing objectives of the business firm. Finalizing the anticipated objectives is the necessary task of the firm before setting an actual price of its offerings.
Since the pricing objectives are mainly of three, a well-defined firm’s pricing objectives depend upon the expectations. It is,
- If the firm adopts a profit-oriented objective, the level of price becomes a little higher.
- If the firm adopts a sales-oriented objective, the price level will be a little lower.
- If it adopts the status-quo objective, the price will be at a competitive level and avoids frequent changes.
Organizational Involvement
The level of organizational involvement in the pricing mechanism is another major factor after the pricing objective to price. This mainly is affected by the firm’s centralized and decentralized pricing policy.
- If the firm has a centralized pricing policy – it may have a high level of involvement in pricing to standardize prices in various firms.
- If it adopts a decentralized pricing policy – it may opt for different prices in different firms even for the same products or services.
In the case of decentralized pricing policy, mainly the pricing process is carried out by lower-level management, overall by all, and such prices are changed frequently depending upon the individuals within the industry.
Marketing Mix
The price of the product or service is also affected by the other elements of the marketing mix i.e. product, promotion, and place (distribution).
Just think, though the price of the product is low while promoting and distributing, its overall costs go on increasing. Some companies distribute their offerings by specialized distributors whereas some by their wings. This leads to cost differences.
Where, while promoting products some companies use expensive channels such as television, cinema, film slides, etc. whereas some use less expensive channels such as radio, newspapers, etc. Hence, different promotional strategies also cause cost differences.
Similarly, the nature of the product also affects the selection of price limits. For example, the luxurious and service-oriented products, the profit margin will be adequately high and for less essential items and less expensive products, the profit margin will be comparatively low.
Product Differentiation
The determination of a product’s price is also affected by the product differentiations. When the market is highly specialized, firms usually deal with differentiated products.
If the firm can offer its products differentially from others, the freedom it will get to set prices. And, for the differentiated products, usually, consumers do not compare prices, because they know the attributes used in such products are unique. For example, consumers have to pay different prices for different brands of soap although they are all used for identical purposes.
Cost of Production
One of the inevitable factors of pricing is product or service cost. While pricing the product or service the price must cover at least the incurred cost in production, promotion, distribution, and other marketing activities.
Although the marketers may sell their products below the cost prices in the short run (to stabilize the market), in the long run, the cost must be recovered. Failing to do so, the firm is in a difficult situation to survive.
External Pricing Factors
It is well known that external factors are not in the hand of the marketing manager they are beyond his control of him. He can not manipulate the external pricing factors. The major external pricing factors are mentioned below:
Demand For the Product or Service
One of the external pricing factors that affect pricing is the demand for a product or service. The demand for products or services is also affected by various factors,
- Income and preferences of customers.
- Buying and consuming habits of the consumers.
- Social and cultural forces.
- Demographic forces.
- Number and size of competitors, etc.
It is a general concept that when the demand is high in the market the price is set to a higher limit and when the demand is low the price is set to a lower limit by an expectation of adequate demand in the future. However, a marketing manager should critically analyze these factors that may impact the product’s demand.
Competitive Situation
The level of competition in the market is another major external factor that affects the company’s price strategy. When there is a large number of competitors and their offerings are strong, the firm has to set the prevailing market price.
And, if the product has no substitute, or if the competitive position in the market is strong, the firm may have the freedom in setting the price.
Supplier’s Characteristics
Suppliers also affect the price of the product since the price charged by suppliers on their raw materials has a direct effect. If the supplier’s raw materials price is high, the price of the product definitely will be high, and if the raw materials price is low, the price of the product may become cheaper.
The price of raw materials mostly depends upon the quality, which has a direct impact on the final output’s quality. The price of raw materials may be high if the number of suppliers is fewer, on the contrary, if there is competition between the suppliers, usually the price of the product becomes stable or cheaper.
Distribution System
The pricing of products is also affected by the distribution channel selected by the marketer. If a firm has no distribution channel itself, it has to invest a lot of money in establishing one and it becomes very expensive.
If the firm has its distributing network, the distribution system may become cheaper and more efficient. However, sometimes firms use expensive distribution networks to build up their image in the market although there are cheaper distribution networks. As such it may increase the cost of the product and thus affect the consumer price.
Economic Condition
Economic conditions may be either favorable or unfavorable for a business depending upon a business cycle. When the business cycle is in the favorable stage, the demand for the product or service may increase.
This may allow a firm greater independence in its pricing strategy. However, if sales are rising, competition may grow which may restrict pricing freedom. New firms may enter the market when they feel that there are substantial profits to be made.
The pricing is also affected by less favorable economic conditions such as inflation, recession, and shortages.
Government Control
Control of government regarding price-related policy and regulations is another important external price factor. The government may enterprises related to telecommunication, electricity, petroleum products, sugar, salt, water supply, postal products, and controls the pricing services.
Similarly, the increase in the rate of electricity, petroleum products, etc. directly affects the price of industrial products. In addition, the government often impacts pricing by regulating new acts and laws related to income tax, sales tax, import duty, excise duty, etc.