Factors affecting pricing

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Factors affecting pricing - the price of company product or services is influenced by many factors:

Price Stability

Price stability is a goal of fiscal and monetary policy. Policy should keep very low rate of inflation (increase of the general price level in an economy) or deflation (decrease of the general price level in an economy).

An important feature approaches of the rule-based to monetary policy is the increased emphasis given to a particular policy objective: maintaining stable and a low rate of inflation. Keynesian macroeconometric tell that the Variations in the growth rate of prices and wages are found to be associated with substantial variations in economic activity and employment. Existence of such as "Phillips-curve" relations has typically been held to imply that monetary policy should be used to achieve output or employment goals, rather than giving priority to price stability. Instabiliy of the general level of prices causes substantial real distortions leading to inefficient variation both in aggregate employment and in the sectoral composition of economic activity that price stability is important[1].

Price Mechanism

When a company want to sets the sale price of the product produced, it will take into account the price at which it could acquire the goods, the market place, competition, the manufacturing costs, brand and quality. All prices must cover profits and costs.

A price mechanism in economic is the way in which the prices of goods or services affect the supply and demand of goods and services, especially by the price elasticity of demand. A price mechanism applies to both buyers and sellers who negotiate prices, is also a part of a market mechanism which includes various ways to match up buyers and sellers[2].

Pricing Strategy

Six approaches to pricing strategy[3]:

  • Operations-oriented pricing - where the aim is to optimize productive capacity, to gain operational efficiencies or to match supply and demand through different prices.
  • Revenue-oriented pricing - where the marketer seeks to maximize the profits (the surplus income over costs) or to cover costs and break even. For example, dynamic pricing, is a form of revenue oriented pricing.
  • Customer-oriented pricing - where the objective is to maximize the number of customers; can recognize different levels in the customer's ability to pay.
  • Value-based pricing - The aim of value-based pricing is to reinforce the overall positioning strategy. For example: pricing posture to pursue or maintain a luxury image.
  • Relationship-oriented pricing - where the price are set in order to build or maintain relationships with existing or potential customers.
  • Socially-oriented pricing - Where the objective is to encourage or discourage specific social behaviors. For example: high tariffs on tobacco to discourage smoking

Examples of Factors affecting pricing

  • Economic Factors - These include inflation, recession, market conditions, interest rates, currency exchange rates, labor costs, and the cost of raw materials. For example, a company's pricing strategy may be affected by rising raw material prices, which increase the cost of producing a product.
  • Competition - This is a major factor in pricing decisions. Businesses will often adjust their prices to stay competitive with their competitors. Companies need to consider the pricing strategies of their competitors and make sure their prices are in line with the market.
  • Demand - The demand for a product or service also affects pricing. If demand is high, companies can charge higher prices. On the other hand, if demand is low, companies will need to lower prices to attract customers.
  • Brand Image - The brand image of a product or service can also affect pricing decisions. A product with a high-end brand image can command a higher price than a similar product with a lower-end brand image.
  • Costs - Companies must also consider their costs when setting prices. Companies need to cover their costs in order to make a profit. If the costs of producing a product are high, this will need to be factored into the pricing decision.
  • Technology - The use of technology can also affect pricing decisions. For example, if a company uses new technology to reduce production costs, this could allow them to lower their prices and remain competitive.
  • Location - The geographic location of a business can also influence pricing. Companies often charge different prices in different regions due to varying costs or demand in those regions.
  • Customer Buying Habits - Companies need to take into account their customers' buying habits when setting prices. This includes factors such as the time of year, the type of customer, and the payment methods customers prefer.

Advantages of Factors affecting pricing

One of the main advantages of factors affecting pricing is that it allows companies to set prices that reflect the value of their products or services. This makes it easier to attract customers and generate profits. The following are some of the advantages of factors affecting pricing:

  • Competition: By taking into account the prices of similar products or services offered by competitors, companies can ensure that their own prices are competitive and attractive to customers.
  • Cost: Companies can set prices based on the cost of producing and delivering the product or service. This allows them to make a reasonable profit while still offering competitive prices.
  • Market conditions: By taking into account the current economic and market conditions, companies can ensure that their prices are appropriate for the current climate.
  • Demand: Companies can adjust their prices in response to fluctuations in demand for their products or services. This allows them to maximize their profits by taking advantage of high demand periods.
  • Branding: Companies can use pricing to differentiate their products and services from their competitors, helping to build their brand and loyalty among customers.

Limitations of Factors affecting pricing

The pricing of a company's products or services is heavily influenced by numerous factors.

  • Market conditions - The state of the economy, consumer demand, industry competition, and other market factors all influence the pricing of a company’s products and services.
  • Costs - Variable and fixed costs associated with production, as well as labor, materials, and overhead expenses, must all be taken into account when setting prices.
  • Brand image - A company’s brand image can influence how much customers are willing to pay for its goods and services.
  • Location - The geographical location of the company can also be a factor in pricing, as prices may vary by region.
  • Competitors - Companies must consider the prices of their competitors when setting their own prices, as customers may be more inclined to purchase from the company with the lower price.
  • Supply and demand - Prices may need to be adjusted in response to changes in the supply and demand for a product or service.
  • Legal restrictions - Certain governmental regulations may limit the prices that a company can charge for its goods and services.
  • Customer service - The quality of customer service provided may also contribute to the price, as customers may be willing to pay more for better service.
  • Discounts and promotions - Companies may choose to offer discounts or promotions to customers in order to encourage sales, which can also affect pricing.

Other approaches related to Factors affecting pricing

Factors affecting pricing are varied and complex.

  • Cost of Production: The cost of production largely influences the price of a product. Companies must account for the cost of raw materials, labor, and overhead when setting prices.
  • Market Conditions: The market conditions play an important role in pricing. Companies must consider the state of the economy, the level of competition, and customer demand when setting prices.
  • Brand Image: The brand image of a product or service also impacts pricing. Companies that have established a strong brand image may be able to charge a premium for their products or services.
  • Distribution Channels: Companies must consider the cost of distribution when setting prices. Products that are sold through a large retail chain may require a different pricing strategy than those sold through a small online store.
  • Government Regulations: Government regulations can also impact pricing. Companies must comply with laws related to pricing, such as minimum wage laws, as well as taxes and tariffs.

Factors affecting pricing are varied and complex, including the cost of production, market conditions, brand image, distribution channels, and government regulations. Companies must consider all these factors when setting prices in order to remain competitive in the market.


Factors affecting pricing — recommended articles
Price-Taker — Price Maker — Price — Flexible pricing — Price control — Monopoly — Market based price — Administered price — Market structure

References

Footnotes

  1. ↑ M. Woodford (2003)
  2. ↑ W.H. Shaw (2008)
  3. ↑ S. Dibb, L. Simkin, W.C. Pride, O.C. Ferrell, (2013)

Author: Karolina Piotrowska

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