FACTORS TO BE CONSIDERED WHEN SETTING PRICE:
The company’s pricing decisions are influenced by a number of internal company factors
and external environmental considerations. The internal factors include:
o The company’s marketing objectives
o Marketing mix strategy
o Costs
o Organization
The external factors include:
o The nature of the market and demand
o Competition
o Other environmental factors
Internal Factors Affecting Pricing Decisions
1. The marketing objectives: the company decides what it wants to accomplish with a certain product. If the company has selected its target market and market positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. The clearer a firm is about its objectives, the easier it is to set price. Examples of common objectives are survival, current profit maximization, market-share maximization, and product-quality leadership.
2. Marketing Mix Strategy: Price is only one of the marketing mix tools that the company uses to achieve its marketing objectives. Price decisions must be coordinated with product design, distribution, and promotional decisions to form a consistent and effective marketing program. Decisions made for other marketing mix variables may affect pricing decisions e.g. producers who use many resellers and expect these resellers to support and promote their products may have to build larger reseller margins into their prices. The decision to develop a high-quality position will mean that the seller must charge a higher price to cover higher costs.
3. Costs: Costs set the floor for the price that the company can set for its product. The company wants to charge a price that covers all its costs for introducing, distributing, and selling the product, including a fair return for its effort and risk. The company must watch its costs carefully. If it costs the company more than competitors to produce and sell a comparable product, the company will have to charge a higher price than competitors or make less profit, putting it at a competitive disadvantage.
4. Organizational Considerations: Management must decide who within the organization is responsible for setting price. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales department. In large companies, pricing is typically handled by divisional or product line managers.
External Factors Affecting Pricing Decisions
1. The nature of the market and the demand:
Cost set the floor for prices, and the market and demand set the ceiling. Both consumer and industrial buyers balance the price of a product or service against the benefits of
owning it. Thus, before setting prices, the marketer must understand the relationship between price and demand for its product.
Considerations here include:
o Pricing in different types of markets
o Consumer perceptions of price and value
o Analyzing the price-demand relationships
o Price elasticity of demand
2. Competitors’ Prices and Offers: Competitors’ prices and their possible reactions to the company’s pricing strategies affect pricing. Consumers evaluate a product’s price and value against the prices and values of comparable products. The company’s pricing strategy may affect the nature of the competition it faces-a high price, high-margin strategy may attract competition, whereas a low-price, low-margin strategy may discourage competitors or drive them out of the market.
3. Other external Factors: When setting prices, the company must also consider other factors in its external environment e.g. economic conditions can have a dramatic impact on the effectiveness of different pricing strategies. Economic factors such as inflation, boom or recession, and interest rates influence pricing decisions because they affect both the costs of producing a product and consumer perceptions of the product’s price and value.
The company must consider what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that allow resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Marketers need to know the laws affecting price and make sure their pricing policies are defensible.