There are many factors that may influenced the price of a product. Business managers need to decide upon the appropriate price being used by the company to successfully market its products.
In general, the firm’s mission statement is likely to be the basis of making initial pricing decisions.
Factors that determine the appropriate price for a product
There are many determinants to consider when making pricing decisions for any product. Here are the found main factors:
1. BUSINESS:
- Marketing objectives. The appropriate price must reflect the other components of the Marketing Mix based upon the marketing objectives of the business. If the business aim is to become market leader through selling standardized products to mass markets, then the price will be different than when the business aim is to establish a premium branded product in the niche market.
- Liquidity position. When the firm has urgent liquidity requirements (needs cash badly to pay for short-term liabilities), it may set prices low to generate higher sales levels. When the firm does not have urgent liquidity requirements, it may set prices higher to maximize profitability levels.
- Branding. The image of the business often underpins the pricing strategy. A firm wanting to be seen as selling premium products will most likely charge a premium price for products with a unique selling point and quality superior to its competitors.
- Attitudes towards risk and reward. This mainly applies to management attitudes to risk and growth. The Board of Directors that is more traditional may be more conservative in pricing decisions. While, more liberal directors and managers may be more aggressive in setting prices.
2. PRODUCT:
- Costs of production. The higher the costs of production, the higher the price tends to be. It is because the price must cover all of the costs of producing the product, so the business can make a profit on the sale of the product in the long-term. The costs include both Variable Costs (VC) and Fixed Costs (FC). The lower the costs of production, the lower the price can be charged to final customers.
- Whether a new or an existing product. Stage in the Product Life Cycle will determine the price. The price will also change as the product moves through its life cycle. In the introduction stage to the market, marketing managers will use price skimming (very high price that will be going down over time) or penetration pricing (very low price that will be going up over time). The pricing strategy to be adopted will mainly depend on the nature of the product.
- Time. The price of some products falls over time as the product becomes older, e.g. consumer electronics, new cards for the middle class citizens, etc. While the price of some other products grows over time, e.g. classic cars, antique furniture, wine, rare books, etc.
- Image. Businesses with a prestigious and exclusive image can charge higher prices for their goods and services while firms which are not perceived as luxurious will not be able to charge very high prices.
3. COMPETITION:
- Level of rivalry. The higher the degree of competition there is on the market, the more price-competitive the firms in that market tend to be. It means that prices will be similar to those set by other rival businesses.
- Competitors’ prices. In highly competitive industries, prices of similar product will not be much different. Smaller firms will have it difficult to set a price very different from the prices set by close rivals. The lower the competitive rivalry, the less price competition there will be, so the largest firms will have more freedom in setting prices.
4. MARKET:
- Economic conditions. Economic conditions in the country will influence what customers are prepared to pay. During the times of economic growth and prosperity, customers will afford to pay higher prices and will be less price sensitive. On another hand, during the times of economic decline and recession, customers will be very price sensitive and may not afford to pay high prices.
- Demand. The greater the ability and willingness of customers to pay, the higher the price. More demand than supply, a higher price. Less demand than supply, a lower price.
- Consumer perceptions of value. When customers expect to get a lot of value for their money, then they are willing to pay higher price. The more the benefits they can receive, the more they are able to accept higher price level.
- Supply. The lower the supply of a certain product, the higher its price tends to be. Less supply than demand, a higher price. More supply than demand, a lower price.
- Scarcity. The more the product becomes scarce, the higher the price is going to be. The more widely available to product is, the more difficult it will be to charge high price for something that is easily accessible.
- Market segment. Companies using differentiated marketing strategy to sell their products will set different prices for different markets segments. While companies using mass marketing strategy and niche marketing strategy will only set one price to market their products to customers.
- Legal constraints. There are many factors that may impact the price when it comes to the legal environment such as formal barriers to entry, laws and regulations regarding price limits, restrictions on price increases, new TAXes increasing the production costs, and so on.
The combined influence of these internal and external factors related to the business, product, competition and market will find its expression in a particular pricing strategy.
Factors that determine the pricing strategy
In addition to the aforementioned factors that impact the price, there are several different pricing strategies that can be used. These can be broadly categorized into: cost-based methods, competition-based methods, market-based methods and perception-based methods.
1. Increase market position. Pricing strategies to increase market share may include:
- Penetration pricing (especially for new products).
- Loss leader (as the whole company).
- Predatory pricing (especially to remove competition).
- Competitive pricing.
2. Increase sales. Pricing strategies to increase sales revenue may include:
- Loss leader (especially in the short-term).
- Psychological pricing.
- Price discrimination (especially during high season).
3. Increase profit. Pricing strategies to increase profitability may include:
- Cost-plus pricing.
- Price skimming.
- Price leadership.
- Loss-leader (for other profitable products bought at the same time).
Different pricing strategies are used depending on the marketing objective(s) that the firm is trying to achieve. Business objectives need to be relate to the mission statement and broad corporate objectives – Does the firm want to seek market share, grow by increasing sales or maximize profit?
Pricing decisions
Companies will also make pricing decisions based on the quality of product which they are selling. This will correspond with the corporate image as firms producing and selling the best product will be charging the highest prices to maintain a prestigious and exclusive image.
If a product is priced towards the top end of the market, the promotion must develop a high quality image. In the same way there will be a close correlation between price and product. A product that is perceived by consumers as high quality may command a premium price, but the reverse is true as well. However, there usually is a trade-off between product quality and price, so price is an important variable in product positioning.
- High Quality & High Price – Premium pricing, e.g. first class air tickets, Ferrari cars
- High Quality & Low Price – Penetration pricing, e.g. Verizon communication network solutions
- Low Quality & High Price – Price skimming, e.g. a new music album
- Low Quality & Low Price – Economy pricing, e.g. Walmart’s spaghetti, Tesco’s coffee beans
The various elements of the marketing mix need to be consistent with each other. It is important, therefore, when choosing a price that it fits with the other elements of the Marketing Mix.
In order to fulfill consumers’ needs and wants profitably marketing managers need to do everything in their power to determine the price appropriately.
In the next article, I will be looking closer at how the price is determined in the free market environment based on supply and demand forces.
