Pricing the product is one of the important element in marketing mix. Until recently it has been one of the most neglected areas. Even today, pricing in some firms is simply based on the concepts of cost, market position, competition and necessary profits.
Factors Affecting Pricing Decisions
- Objectives of the Business : There may be various objectives of the firm such as getting a reasonable rate of return, to capture the market, maintenance of control over sales and profits etc. A pricing policy thus, should be established only after proper consideration of the objectives of the firm.
- Cost of the Product: Cost and price of a product are closely related. Normally, the price cannot or shall not fixed below its cost (including the product, administrative and selling costs). Price also determines the cost.
- Market Position. The prices of the products of different producers are different either because of difference in quality because of the goodwill of the firm. A reputed concern may fix may fix higher prices for its products on the other hand, a new producer may fix lower prices for its products. Competition may also affect the pricing decisions.
- Competitors Prices: Competitive conditions affect the pricing decisions. The company considers the prices fixed and quality maintained by the competitors for their products.
- Distribution Channels Policy : The nature of distribution channels used, and trade discounts which have to be allowed to distributors and the distribution expenses also affect the pricing decisions.
- Price Elasticity and Demand Elasticity : Price elasticity affects the decisions of price fixation. Price elasticity means the consequential change of demand for the change for the change in the prices of the commodity. If demand is elastic, the firm should not fix high prices rather it should fix lower prices than that of the competitors.
- Product’s Stage in the Life Cycle of the Product : Pricing decision is affected by the stage of product in its life-cycle. In the introductory stage of the product, it the price strategy which determines the price of the product.
- Product Differentiation : The price of the product also depends upon the characteristics of the product. In order to attract the customers different characteristics are added to the product such as quantity, size, color, alternative uses, etc.
- Buying Patterns of the Consumers : If the purchase frequency of the product is higher, lower prices should be fixed to have a low profit margin. It will facilitate increasing the sale volume and the total profits of the firm.
- Economic Environment : In recession period, the prices are reduced to a sizable extent to maintain the level of turnover. On the other hand, the price and increased in boom period to cover the increasing cost of production and distribution.
- Government Policy : Price discretion is also affected by the price control by the government through enactment of legislation when it is thought proper to arrest the inflationary trend in prices of certain commodities.