What are the factors affecting determination of the price of a product or service? Explain.
Pricing refers to the process of determining the price of a product. Price of product refers to the amount of money that the customer has to pay to obtain a product from the market. Pricing is considered as a regulator of demand of a product, because, when the price of the product is increased, demand falls, and vice-versa.
Under perfect competition, most firms compete with each other on the basis of this factor. Therefore, firms give great importance to the fixation of price for their goods and services.
Factors Affecting price determination of a product are:
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Product cost: The total cost of product includes production, selling and distribution costs. In the long run the firm strives to cover all their costs. The cost sets the minimum level of floor price for a product. In addition to that firm aims to earn profit margin over and above the cost.
Costs can be broadly divided into three categories:
a. Fixed costs, which do not vary with change in production.
b. Variable costs, which vary at all levels of production.
c. Semi-variable costs, which vary with production, but not in direct proportion with it.
Total cost is the sum total of fixed, variable and semi variable cost, at a specific level of activity. Price is determined by adding a profit to the average cost of a product. -
The utility and demand: It is necessary to anticipate the utility and demand of a product, while fixing the price, as if a product is offering higher utility, one can easily charge high price from the customer.
Whereas, if utility is low, one cannot charge high price for such products. On the other hand, if the demand is elastic, price should be set at a lower level and if the demand is less elastic or inelastic price can be set at a higher level. -
Extent of competition in the market: The price of a product can be set upto the higher limit, if the extent of competitors’ price, their reactions, their product, quality and features must be considered before fixing the price.
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Government and legal regulations: To protect the interest of general public, the government has all the rights to control the price of various products and services by including the products in the category of essential commodities.
The common commodities in essential commodities are drugs, some food items, LPG, etc. With government intervention, there can be a check on the activity of monopolist as they cannot charge unfairly high price for essential commodities. -
Pricing Objectives: If the objective of the firm is to maximize sales, price will be set at a lower level, whereas, if the firm’s objective is profit maximization, price will be set at a higher level. Apart from this, the firm’s other pricing objectives may be:
a. Obtaining market share leadership by setting the price at lower levels.
b. Surviving in a competitive market by setting price at lower levels, in order to face intense competition efficiently.
c. For attaining product quality leadership higher prices are set to cover high quality and cost of research and development. -
Marketing methods used: The price of the product also gets affected by various techniques and methods of marketing used to promote the products. If the company is using intensive advertising to promote the sale of product, them it will change high price.
Other marketing method, which affect price of a product are type of packaging, distribution system, salesmen employed, customer support services, etc.
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