What are the factors affecting determination of the price of a product or service. Explain.
What are the factors affecting determination of the price of a product or service. Explain.
Factors affecting price determination: The important factors that affect the price of a product are:
(i) 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 or floor price for a product. In addition to that firm aims to earn profit margin over and above the costs.
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.
(ii) 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 the utility is low, one cannot charge a high price for such products. On the other hand, if the demand is elastic, a price should be set at a lower level and if the demand is less elastic or inelastic, a price can be set at a higher level.
(iii) The extent of competition in the market: The price of a product can be set up to the higher limit, if the extent of competition is low in the market, and vice-versa. Competitors' price, their reactions, their product, quality and features must be considered before fixing the price.
(iv) Government and legal regulations: To protect the interest of general public, the government has all the rights to control the prices of various products and services by including the products in the category of essential commodities such as drugs, some food items, LPG, etc. With government intervention, there can be a check on the activity of monopolist as they cannot charge an unfairly high price for essential commodities.
(v) Pricing Objectives: If the objective of the firm is to maximise sales, the price will be set at a lower level, whereas, if the firm's objective is profit maximisation, the 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 a 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.
(vi) 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 a product, then it will charge a high price.
Other marketing methods, which affect the price of a product are a type of packaging, distribution system, salesmen employed, customer support services, etc.
Factors affecting price determination: The important factors that affect the price of a product are:
(i) 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 or floor price for a product. In addition to that firm aims to earn profit margin over and above the costs.
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.
(ii) 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 the utility is low, one cannot charge a high price for such products. On the other hand, if the demand is elastic, a price should be set at a lower level and if the demand is less elastic or inelastic, a price can be set at a higher level.
(iii) The extent of competition in the market: The price of a product can be set up to the higher limit, if the extent of competition is low in the market, and vice-versa. Competitors' price, their reactions, their product, quality and features must be considered before fixing the price.
(iv) Government and legal regulations: To protect the interest of general public, the government has all the rights to control the prices of various products and services by including the products in the category of essential commodities such as drugs, some food items, LPG, etc. With government intervention, there can be a check on the activity of monopolist as they cannot charge an unfairly high price for essential commodities.
(v) Pricing Objectives: If the objective of the firm is to maximise sales, the price will be set at a lower level, whereas, if the firm's objective is profit maximisation, the 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 a 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.
(vi) 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 a product, then it will charge a high price.
Other marketing methods, which affect the price of a product are a type of packaging, distribution system, salesmen employed, customer support services, etc.
