What are the factors that affect Pricing?

The management sets the price in relation to costs and the attractiveness of the target market like, customer’s ability to spend, demand, competition. The management also does the analysis for giving appropriate margins to the distributors. The possible range of prices also gets affected because of legal and ethical constraints. All these factors determine the upper and lower limit of price. These factors that affect pricing are discussed below-

1) Marketing Mix – Management can easily do variations to the price component of the marketing mix element. The other elements, product, promotion, and place (distribution channels) are not easy to change as it takes a considerable time, effort, and coordination to make changes to them. All these 4 elements are related to each other, hence pricing decision cannot be taken without considering the other elements. Change in promotion or distribution network will add to costs. Making changes to the product also results in costs because of need of different raw materials, technological investments, etc. Increase in costs will increase the lower limit of setting price. Making price changes or setting prices without considering Product, Promotion and Place elements will generally have negative impact on the entire marketing strategy and may also result in losses.

2) Organisational decision making and implementation – The skills of the management and right decision making by them goes a long way in successful pricing. The top management should work in coordination with the lower management for making an effective pricing strategy. The correct systems need to be used for the flow of information from the customers and distributors to all the concerned employees of the organisation. Arriving at a pricing decision requires effective analysis of costs, demand and competitor strategy. The organisation has to make sure that they have the right employees handling the right tasks at the right time

3) Product differentiation – How different the product is from the other offerings in the market? The difference can be in terms of its features, positioning, design, shape, etc. This difference is according to the customer’s perception about the product. Depending on the uniqueness of the product value to the customer, the organisation sets a price. For example, HUL (Hindustan Unilever) has bathing soaps targeting different customers which are priced differently basis their uniqueness.

4) Product life cycle – An organisation can opt for penetration pricing or skimming pricing strategy for its new product. Skimming pricing involves “skimming of the cream” by targeting innovators, early adopters and early majority type of customers. Penetration pricing is done to gain immediate market share by keeping lowest possible price of the product. But once the product moves to the next stages of life cycle like growth, maturity and decline, price changes need to be done to counter competition and ensure market survival. In the decline stage the prices are kept so as to cover the costs and utilisation of the inventory already bought from the suppliers. The strategy is to make as much earnings as possible to cover the fixed costs for which the organisation has already paid – raw material, etc.

5) Distribution Network – As the distributors make their earnings by selling products from manufacturers or other distributors, the organisation has to ensure that they receive their fair share of margin from sales. The organisations cannot survive without proper coordination from the distributors. Depending on the distribution network, the organisations strategy will have a direct impact on the costs and pricing. For example, an organisation can sell its products through ecommerce, or wholesalers and retailers, etc. Each channel has its merits depending on the marketing strategy of the firm.

6) Suppliers – The price at which the raw materials are bought from the suppliers, and changes in the same by the suppliers also affect the pricing decisions. The contract signed with suppliers make have changes after its renewal. Sometimes, suppliers have monopoly in the market in the absence of any other supplier for the same raw materials. The organisations always try to maintain cordial relation with the suppliers as the entire production depends on the products supplied by the suppliers. So the pricing decisions of suppliers have direct impact on the pricing decisions of the firm.

7) Buyers – The buyer behaviour of the target market also has a great influence on the pricing decisions. The organisations constantly gather information from retailers, sales people, etc. on the response of customers. The buyers can influence price decrease by majority of them not buying and giving negative feedback about the price to the distributors and sales people. Thus the organisation has to make changes to the price basis the majority of buyers in the target market.

8) Demand – Demand cannot be ignored while considering pricing decisions. The customers understanding of the product (perceived value), and the total market demand in the market affect the price strategy largely. The demand can be elastic, wherein a fall in price would result in increase in demand. For example, 10% decrease in price would result in 20% increase in demand in the target market. If demand is inelastic, a fall in price doesn’t has a significant increase in demand. For example, a 10% price reduction may increase demand by 0.2%. The firm has to study the market demand and formulate its pricing strategy. The marketing managers are concerned with the level of demand at different price levels. The cost factor also is considered when evaluating demand for pricing. If the costs have also gone up, lowering the price of a product in elastic demand, will not generate profits.

9) Competition – The pricing strategies of competitors affect the product pricing decisions. An organisation serving the same target market eats into the market share of the organisation. To gain market share as much as possible, the organisation has to constantly strive to gain more customers. The organisation invests and makes changes in the product via differentiation (to prove product uniqueness), promotion and distribution (place) to counter competition. Depending on the price changes by competitors, the firm adjusts the price of its product to stay, survive or maintain leadership in the market. A firms pricing is affected by the marketing strategies of its competitors.

10) Target market attractiveness and economy – The spending power and types of customers (early adopters, laggards, etc.) in the target market also affects the pricing strategy. If the economic condition of the target market is good, there is great opportunity for the organisation to generate sales via different pricing methods and strategies – Market penetration, market skimming, perceived value pricing, demand differential pricing, etc. If economic condition is weak, the prices are usually set low. Many times, there are no competitors in such situations, but the pricing is set so as to serve the demand in the market. If prices are set high, a competitor will usually enter the market with a low priced product.

11) Government regulations – The government regulates the prices of products through its various policies. These policies ensure that a customer is not exploited by increase in unreasonable prices. For example, the government of New Delhi (union territory and capital of India) had to intervene when customers were unfairly charged during peak season by the cab service companies.

12) Ethical constraints – With long term moral effects of pricing decisions, the management should consider its commitment to serve the society. Ethical constraints suggest that a firm should make a reasonable profit, provide quality products and make them available at the right place at the right time. Most of the organisations try to maintain an image of themselves considering the effect of non-ethical values in the long run. Is it justified to charge customer based on product value (perception) itself even if the costs are low and profit margins too high? How high the price can be set? Management considers such questions relative to its social responsibility.