Chapter Four

Factors Affecting Pricing Product

The pricing decisions for a product are affected by internal and external factors.

A. Internal Factors:

1. Cost:

While fixing the prices of a product, the firm should consider the cost involved in producing the
product. This cost includes both the variable and fixed costs. Thus, while fixing the prices, the
firm must be able to recover both the variable and fixed costs.

Cost and price of a product are closely related. The most important factor is the cost of
production. In deciding to market a product, a firm may try to decide what prices are realistic,
considering current demand and competition in the market. The product ultimately goes to the
public and their capacity to pay will fix the cost, otherwise product would be flapped in the
market.

2. The predetermined objectives:

While fixing the prices of the product, the marketer should consider the objectives of the firm.
For instance, if the objective of a firm is to increase return on investment, then it may charge a
higher price, and if the objective is to capture a large market share, then it may charge a lower
price.

A firm may have various objectives and pricing contributes its share in achieving such goals.
Firms may pursue a variety of value-oriented objectives, such as maximizing sales revenue,
maximizing market share, maximizing customer volume, minimizing customer volume,
maintaining an image, maintaining stable price etc. Pricing policy should be established only
after proper considerations of the objectives of the firm.

3. Image of the firm:

The price of the product may also be determined on the basis of the image of the firm in the
market. For instance, HUL and Procter & Gamble can demand a higher price for their brands, as
they enjoy goodwill in the market.

4. Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance,
during the introductory stage the firm may charge lower price to attract the customers, and
during the growth stage, a firm may increase the price.

5. Credit period offered:

The pricing of the product is also affected by the credit period offered by the company. Longer
the credit period, higher may be the price, and shorter the credit period, lower may be the price
of the product.

6. Promotional activity:

The promotional activity undertaken by the firm also determines the price. If the firm incurs
heavy advertising and sales promotion costs, then the pricing of the product shall be kept high in
order to recover the cost.

7. 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 quality, size, colour,
attractive package, alternative uses etc. Generally, customers pay more prices for the product
which is of the new style, fashion, better package etc

8. Organisational Factors:

Pricing decisions occur on two levels in the organisation. Over-all price strategy is dealt with by
top executives. They determine the basic ranges that the product falls into in terms of market
segments. The actual mechanics of pricing are dealt with at lower levels in the firm and focus on
individual product strategies. Usually, some combination of production and marketing specialists
are involved in choosing the price.

9. Marketing Mix:

Marketing experts view price as only one of the many important elements of the marketing mix.
A shift in any one of the elements has an immediate effect on the other three—Production,
Promotion and Distribution. In some industries, a firm may use price reduction as a marketing
technique.
Other firms may raise prices as a deliberate strategy to build a high-prestige product line. In
either case, the effort will not succeed unless the price change is combined with a total marketing
strategy that supports it. A firm that raises its prices may add a more impressive looking package
and may begin a new advertising campaign.

B. External Factors:

1. Competition:

While fixing the price of the product, the firm needs to study the degree of competi-tion in the
market. If there is high competition, the prices may be kept low to effectively face the
competition, and if competition is low, the prices may be kept high.

Competitive conditions affect the pricing decisions. Competition is a crucial factor in price
determination. A firm can fix the price equal to or lower than that of the competitors, provided
the quality of product, in no case, be lower than that of the competitors.

2. Consumers

The marketer should consider various consumer factors while fixing the prices. The consumer
factors that must be considered includes the price sensitivity of the buyer, purchasing power, and
so on.

3. Government control:

Government rules and regulation must be considered while fixing the prices. In certain products,
government may announce administered prices, and therefore the mar-keter has to consider such
regulation while fixing the prices.

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 products.
The prices cannot be fixed higher, as government keeps a close watch on pricing in the private
sector. The marketers obviously can exercise substantial control over the internal factors, while
they have little, if any, control over the external ones.
4. Economic conditions:

The marketer may also have to consider the economic condition prevail-ing in the market while
fixing the prices. At the time of recession, the consumer may have less money to spend, so the
marketer may reduce the prices in order to influence the buying decision of the consumers.

The inflationary or deflationary tendency affects pricing. In recession period, the prices are
reduced to a sizeable extent to maintain the level of turnover. On the other hand, the prices are
increased in boom period to cover the increasing cost of production and distribution. To meet the
changes in demand, price etc.

5. Channel intermediaries:

The marketer must consider a number of channel intermediaries and their expectations. The
longer the chain of intermediaries, the higher would be the prices of the goods

6. Demand:

The market demand for a product or service obviously has a big impact on pricing. Since
demand is affected by factors like, number and size of competitors, the prospective buyers, their
capacity and willingness to pay, their preference etc. are taken into account while fixing the
price.

A firm can determine the expected price in a few test-markets by trying different prices in
different markets and comparing the results with a controlled market in which price is not
altered. If the demand of the product is inelastic, high prices may be fixed. On the other hand, if
demand is elastic, the firm should not fix high prices, rather it should fix lower prices than that of
the competitors.

7. Suppliers:

Suppliers of raw materials and other goods can have a significant effect on the price of a product.
If the price of cotton goes up, the increase is passed on by suppliers to manufacturers.
Manufacturers, in turn, pass it on to consumers.

Sometimes, however, when a manufacturer appears to be making large profits on a particular

product, suppliers will attempt to make profits by charging more for their supplies. In other
words,
the price of a finished product is intimately linked up with the price of the raw materials. Scarcity
or abundance of the raw materials also determines pricing.

8. Buyers:

The various consumers and businesses that buy a company’s products or services may have an
influence in the pricing decision. Their nature and behavior for the purchase of a particular
product, brand or service etc. affect pricing when their number is large.