Everything you need to know about the factors affecting pricing policy. The organizational objectives are attained through pricing policy.
The produced products should reach the customers. The important area that needs a discussion is price policy.
There is not a single price which is universally applicable. The establishment of a ‘standard price’ is the impossible task. Because, price is a relative term that changes according to product, market, customer, economy, life cycle, regulation etc.
The sound price policy therefore would be the outcome of several considerations. The considerations would be both internal and external factors. The internal factors are within the organisation and can be controlled.
The external are environmental factors which cannot be controlled. A sound price policy duly considers both the factors. Pricing decisions are influenced by numerous factors. Pricing policies should be consistent with pricing objectives.
Some of the factors affecting pricing policy are:-
A. Internal Factors – 1. Organisational Nature and Objectives 2. Marketing Mix 3. Product Cost 4. Product Differentials 5. Pricing Objectives 6. Product Life Cycle 7. Interests of Parties B. External Factors – 1. Demand 2. Competition 3. Economic Climate 4. Government Policies 5. Suppliers 6. Buying Behaviour.
Additionally, some of the other factors affecting pricing policy are:-
1. Cost 2. Objectives3. Demand 4. Competition 5. Distribution Channel 6. Government 7. Economic Condition 8. Ethical Consideration 9. Types of Buyers 10. Product Differentiation 11. Geographic Pricing 12. Prestige Pricing 13. Contract Pricing.
Factors Affecting Pricing Policy: Internal Factors and External Factors
Factors Affecting Pricing Policy – Top 13 Factors
Following are the factors affecting pricing policy:
Cost of a product play a vital role in pricing policy of an organization. It is a critical information in profitable pricing decision. By understanding the costs, marketers can judge profitability in advance. They can move resources to the highest profit opportunities and make best use of available scarce resources.
By comparing costs with those of competitors, it is possible to assess production efficiency and estimate the relative profits each competitor can expect at various prices.
Pricing objectives of the company will also play a crucial role in pricing policy. Price is based on the objectives set by the company. Objectives of company can be classified into- (i) Maintaining ROI (Return On Investment) (ii) Stability in prices (iii) Maintaining or increasing market share (iv) Meeting or preventing competition and (v) Maximizing Profits.
One of the most important factors in pricing decision is the total demand for the product. Demand is usually depicted by demand curve. Marketers use the curve to estimate changes in total demand for a product based on differing prices. Elasticity is measured and price is decided based on the type of elasticity. When price has a major effect on demand, the product is price elastic. When price has little effect on demand, the product is price inelastic.
Determination of price is influenced by present and potential competition. A new product remains distinctive only for a short period, until competition arrives. Understanding of competitors’ price is crucial for price fixation. The competitors’ price helps the firm in setting its price.
The company should carefully study the competitors’ prices and the consumers’ reactions towards each competitor’s offer. Therefore, prices should be tailored to meet the various types of competitive postures.
5. Distribution Channel:
Goods are made available to the consumers through middlemen. Each one of them has to be compensated for the services rendered. This compensation should be included in the ultimate price the consumer pays. Longer the distribution channel more will be the price for the product.
Government interference such as control of prices, levying of taxes etc. will also influence pricing policy of an organization. If government increases tax, the ultimate consumer will have to pay more for the product due to the increased tax component added in the price.
7. Economic Conditions:
Economic condition prevailing in the country influences price fixation. Usually prices are raised during inflation because of the increase in costs. During periods of depression, prices are reduced as survival becomes a problem.
8. Ethical Consideration:
While fixing price for a product company may resort to ethical considerations. Company may sell certain products not for making profits but as a public welfare measure. Example- Company may sell certain life-saving drugs or vaccines at a price which covers only the cost of production.
9. Types of Buyers:
Price fixation is largely dependent on the types of consumers. Different buyers may have different motives and values. Quality, safety, status symbol and beauty are the four different considerations a buyer can observe. Thus, pricing decision is based on perceived value of customers.
10. Product Differentiation:
Large coverage is one of the marketing objectives of marketing organization. Different strategies are adapted to reach as many customers as possible. Product differentiation is one of the marketing strategies to reach many customers. Many products can be differentiated in form- the size, shape, colour, coating, and physical structure. Based on these factors price also varies.
11. Geographic Pricing:
Manufactures may have customers though out the county or world. He can adapt different prices in different area. The price quoted by him may be (FOB), zone pricing or uniform pricing. FOB price includes cost of the goods plus expenses incurred only up to loading the cargo on board the ship.
In the case of uniform pricing the manufacturer charges the same price to all customers regardless of their location. This pricing method is used in consumer products. In the case of zone pricing, the manufacturer charges a uniform price in each zone.
12. Prestige Pricing:
In this method, price is based on the perceived value of the product. Many customers judge the quality of a product by its price. Customer may perceive that higher the price better will be the quality. For example, a customer may pay Rs.10 in an air-conditioned hotel, Rs.5 at a good hotel, Rs.20 at star hotel. The most important thing is that the marketer will have to establish the value in the minds of the customers.
13. Contract Pricing:
This is also called ‘sealed-bid’ pricing. This method is followed in the case of specific job works. Government contracts are usually awarded through this method. It is referred to as ‘tender’. The expected cost is worked out in detail and quotation is placed. The minimum price quoted is accepted and the work contract is entered into with the party.
Factors Affecting Pricing Policy – 2 Major Factors: Internal and External Factors
The pricing of a product has two facets, they are polity and setting. First one deals with management area of framing a pricing policy and second one deal with fixation of price.
The organizational objectives are attained through pricing policy. The produced products should reach the customers. The important area that needs a discussion is price policy. There is not a single price which is universally applicable. The establishment of a ‘standard price’ is the impossible task. Because, price is a relative term that changes according to product, market, customer, economy, life cycle, regulation etc.
The sound price policy therefore would be the outcome of several considerations. The considerations would be both internal and external factors. The internal factors are within the organisation and can be controlled. The external are environmental factors which cannot be controlled. A sound price policy duly considers both the factors.
1. Internal Factors:
The factors within the control of management are internal factors. The management can with its power, over exercise control the factors. A change in price can be brought by management.
The factors which are internal include:
The nature and objectives are to be considered while fixing a price. Nature means, the level at which price-decision is finalised. There are two levels i.e., Top and Middle level management. Top level sets overall marketing strategy and actual pricing is considered at middle – executive level.
The objectives of the organisation are welfare of society, customer satisfaction, attaining the market – leader, expansion, etc. If a concern wishes to sales maximisation rather than profit maximisation, its price would be different. If social welfare is the prime object, it is affected by societal needs.
Four P’s form marketing mix of the marketing. Of them, price plays a significant role. Any variation in price factor expects a change in remaining three factors. On the other hand, an increase in price without commensurate addition to product, promotion has no meaning.
The marketing mix together influences the pricing policy.
The cost of production of a product should be considered while fixing a price. Sales price is calculated on the number of channel members. Trice upon the cost to be recovered. Whether total cost, marginal cost, variable cost to be recovered will influence price. The price is different when total cost is recovered, rather than Average Cost. In some cases, firm may go for price which is equal to marginal cost.
A product can be made different by changing colour, design, shape, size, pack, brand etc. Whenever, differentiation is possible, price can be changed accordingly. Firms enjoy freedom to differentiate the price according each character. The sound – pricing policy should give due consideration to these matters.
The objectives of pricing are directly derived from the objectives of a firm. Indirectly, the firm attains its objectives through its pricing policy. Price may aim at cost recovery, profit maximisation, product promotion, market penetration, skimming the market, etc.
The price policy should consider the level at which a product is standing in its life-cycle. Price differs according to the stage. Price charged at introduction stage is different from the price charged at decline stage. The product life cycle stages such as – Introduction, Growth, Maturity, Saturation, Decline are to be considered. The ability of a product to gain from market increases when it is matured. The price policy depends upon the product’s ability to maintain a strong foothold in the business.
Though product is common to the organisation, interested parties in it are different. The parties related are producers, channel, and managers. If company thinks of direct marketing with low rates, the channel members object for this. If the member – number is too large, price is affected. The price charged to customer would include the profit percentages of middlemen. Hence, price policy should integrate these requirements.
2. External Factors:
The external factors are almost environmental and are beyond the management control. The management has to simply modify its price policy according to the influence of factors.
The important external forces are:
Demand is the major factor of market representing the customers group. The aggregate amount of a product purchasing at a point of time is the demand for it. This demand has a sensitive behaviour with price. The demand and price are inversely related. An increase or decrease in the price would bring a decrease or increase in demand. This sensitiveness in economics is called elasticity. Some are very sensitive and some are very less. A change in demand due to change in price represents the price elasticity. The management while framing price – policy should take into account the level of price elasticity.
The prevailing market competition and firm’s position are to be considered. Usually, market competition is divided into perfect, oligopoly, imperfect, monopoly etc. In all these types pricing object and consideration differ. Ex – In perfect competition, the market demand and supply are the forces that fix the price. The producer has no say in price. In case of monopoly it is the producer who enjoys the powers. Hence, price policy is the outcome of competition.
The economic conditions prevailing at a point of time influence the price. India cannot be equated to African country, or American Country. The economic progression, inflation / deflationary etc., have influence on price. The economy differs on trends in National income, per capita Income and, the price factor should also go accordingly.
Government aims at social welfare, protecting customer rights, environmental factors etc., have a direct bearing on price – policy.
The Government influences through its taxation, cost of services, basic infrastructure. For ex, if electricity is not provided to the industries, then they have to go for private electricity suppliers, which affect the price. Its policy on price, welfare, environmental concerns, restrictive trade practices etc., are affecting price – policy.
The company heavily depends on the suppliers of raw-material, labour, men, for its productive purpose. If the suppliers of raw material go on strike, then the company has to bring from other by paying heavy amounts, which in turn increase the price, Price-policy expects a harmonious relationship between suppliers and company.
The ultimate factor that needs serious attention of pricing is buying behaviour. Policy is related to the behaviour of buyers. The attitudes, reactions, taste, fashions preferences, influences (personal & other) etc., are to be considered for price-fixation. If customers are showing negative attitude for hike in price of product, then price should be reduced.
The buying behaviour though psychological in nature, should be understood properly, analysed scientifically and solved appropriately. Every purchase or rejection is backed by advertisement, peer group, friends, kids, information. It is difficult remember while pricing a product.
A sound policy is one which takes into account major factors.
Factors Affecting Pricing Policy – 4 Basic Factors that Businesses Must Consider
The factors that businesses must consider in determining pricing policy can be summarized in four categories:
In order to make a profit, a business should ensure that its products are priced above their total average cost. In the short-term, it may be acceptable to price below total cost if this price exceeds the marginal cost of production – so that the sale still produces a positive contribution to fixed costs.
If the business is a monopolist, then it can set any price. At the other extreme, if a firm operates under conditions of perfect competition, it has no choice and must accept the market price. The reality is usually somewhere in between. In such cases, the chosen price needs to be very carefully considered relative to those of close competitors.
Consideration of customer expectations about price must be addressed. Ideally, a business should attempt to quantify its demand curve to estimate what volume of sales will be achieved at given prices
4. Business Objectives:
Possible pricing objectives include:
i. To maximise profits
ii. To achieve a target return on investment
iii. To achieve a target sales figure
iv. To achieve a target market share
v. To match the competition, rather than lead the market
Factors Affecting Pricing Policy – 2 Important Factors: Internal Factors and External Factors
Pricing decisions are influenced by numerous factors. Pricing policies should be consistent with pricing objectives.
1. Internal Factors:
Internal factors are those, which arise within the organization and are, therefore, controllable.
The important internal factors are described below:
i. Product Cost:
Cost of the product is the basic determinant of its price. Only after ascertaining cost, pricing can be achieved in a financially healthy manner. Resources have to be utilized to their best point in order to achieve cost efficiency and enhance profitability.
Cost will help ascertain the amount of profit to be added in order to arrive at profit and thereby the selling price. When cost is the basic determinant, price can change according to the quantity offered, thereby passing on the benefit of economies of scale to the ultimate consumer.
ii. Pricing Objectives:
Pricing objectives of a company play a crucial role in determining the price. Therefore, price can be based on the objectives alone. A well-established company can afford to offer a very low price for its product, if the objective is to capture market and wipe out competition. Here, in the initial stages, profitability is not given importance. Once the competitors are wiped out, they can raise the price and work on profitability.
However, if a new or an existing company wants to offer a product as a high-end one/ they may adopt premium pricing. It can be justified because of high quality offered, better range of benefits to the consumer and superior ingredients used in the manufacturing process.
iii. Product Differentiation:
The concept of product differentiation aims to distinguish one brand from the other on various dimensions. The manufacturer makes use of aspects like color, size, packaging, name, ingredients, smell, advertising theme, logo etc. to achieve the same. Especially, in consumer goods, this concept is put to practice to the maximum extent.
Whether it is biscuits, soaps, shampoos, detergents or chocolates or even cell phone service providers – all make use of product differentiation. One more such dimension is the price element itself. This strategy was well demonstrated by TATA DOCOMO, which revolutionized its name using price as the distinguishing factor.
iv. Product Life Cycle:
The price of a product is influenced by the stage in its life cycle. In the introduction stage, the price should allow market penetration. Therefore, price is kept low. This helps the product to build goodwill. In the growth stage, prices can be raised depending upon consumer acceptance.
The price rise continues until the product reaches maturity and stabilizes. Once it enters the decline stage, the price is actually cut down to encourage sales. Thus, the stage of the product in its life cycle is a deciding factor for pricing.
v. Marketing Mix:
Price itself is a component of marketing mix for a product. However, it is not an independent factor. Since all the components of the marketing mix are interdependent, a change in one factor will cause changes in others. Therefore, pricing decisions should be conducive to the working of the other elements in the marketing mix. Infact, price is considered to be the greatest weapon in the hand of the marketing manager.
2. External Factors:
The External factors are those which control the firm as they exist in the external, uncontrollable environment. The firm usually does not have any control over them.
The important external factors are described below:
i. Product Demand:
Demand refers to the desire to purchase a product backed by purchasing power. This is an important factor in determining the price of the product. Demand is, in turn, affected by many factors like number of competitors, pricing policy of competitors, buyers’ preference, their capacity and willingness to pay, etc. All these factors should be studied while fixing the price.
Competition refers to other players in the market, within the industry, offering products, which satisfy the same needs of the customers, as offered by the company under consideration. These products exhibit similar features with same benefits and, therefore, the consumer can choose among them.
iii. Economic Conditions:
This refers to the play of business cycles. Accordingly, during good economic conditions, demand is high and therefore, sales are also high. Competition increases during boom to take advantage of the high demand scenario. This leads to higher competition. Even established players reposition their products in a high inflationary period by revising the price to a higher level.
The manufacturer, recovers such cost rise by adding it to the price and the ultimate consumer has to bear it. Similarly, once the boom period phases out and makes way to depression, which is also part of the business cycle, price are considerably affected as it is a period characterized by low income, falling sales and decreasing demand.
Many producers provide price saving offers to survive and also offer value for money to customers who are experiencing lower incomes.
iv. Different Kinds of Buyers:
Buyers can be either business buyers/industrial buyers or individual customers/final users. The composition of these two categories of buyers and their behavior clubbed together impact-pricing decisions. Generally, if the number of buyers are large in number and at the same time small in strength, lesser will be the impact on pricing decisions as they are too small to influence unless well organized.
However, if the number of buyers is small in number but high in strength, they will be an important influencing factor. Apart from this, the firm has to distinguish its pricing policy among the industrial users and final users.
v. Government Regulations:
The laws of the land govern every aspect of business and pricing is also covered among them. Legislations like MRTP [Monopolies and Restrictive Trade Practices Act], Consumer Protection Act, etc., effectively discourage companies from engaging in anti-consumer practices.
vi. Competitive Structure:
Much depends on the number of buyers and sellers operating in a market and the extent of entry and exit barriers. These factors affect a company’s level of flexibility in setting prices.
A non-regulated monopoly can set prices at any level it determines in order to be appropriate. However, in case of regulated monopoly there is less pricing flexibility and the company can set prices that generate a reasonable profit. In case of oligopoly, there are few sellers and market entry barriers are high, such as auto industry, computer processor industry, mainframe-computer, and steel industry etc.
If an industry member company increases the price, it hopes others will do the same. A similar response is likely to result when a company reduces its price in an attempt to increase its market share, other companies to follow suit and the initiator company gains no appreciable advantage.
Monopolistic market structure consists of seller with differentiated offerings in terms of tangible and intangible attributes and brand image. This allows a company to set different price than its competitors. In most successful cases, the nature of competition is likely to be based on non-price factors. Under perfect competition, there are very large number of sellers and buyers perceiving all products in a category as the same.
All sellers set their prices at going market price as buyers are unwilling to pay more than the going market price. Sellers have no flexibility in price setting.