Basic Factors That Affect Price in Any Market

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BASIC FACTORS THAT AFFECT PRICE IN ANY MARKET 14

BasicFactors That Affect Price in Any Market

Abstract

Inmarketing, pricing decisions are exceedingly vital because they helpan entity in establishing the best price at which it will sell itscommodities or services. Thus, pricing objective is not sufficientfor an organization, but a business needs to put into deliberationdifferent factors before establishing the fee at which to attach toits services or products. The factors that an entity should take intoaccount are either internal or external to the firm. The purpose ofthis report is to explore the essential elements that affect price inany market, as well as the considerations factored in whendetermining the price.

KeyWords: Price, pricing decision, market

Pricerefers to the value paid for the acquisition of a commodity. It helpsin determining the ownership of a product or the right to use a givenservice. Therefore, it is considered as a key element in the market,where the exchange of services and goods occurs (Paul &amp Kapoor,2008). Businesses must establish the value at which to offer theirservices or products since this gives customers the opportunity toselect where to purchase commodities or acquire services. Forinstance, depending on the income of the consumer, he/she can be in aposition to determine where to buy merchandise by analyzing thedifferent rates provided by firms that offer them. In marketing, theprice is also seen as important because it helps in setting up acompetition. Firms that are price-takers have to ensure they offerfees that are competitive in the market to remain aggressive (Paul &ampKapoor, 2008). Firms have to consider different factors that have aninfluence on the price to be adopted.

Whatare the basic factors that affect price in any market?

Whenmarketers are involved in setting prices, it is critical to take intoaccount several factors that originate from the actions and choicesof businesses. Most of the aspects can be controlled by an entity,but some of them are difficult to change (Rao, 2009). The factorsthat can be directed by a marketing organization fall under internalelements. Alternatively, external aspects are unmanageable in natureimplying firms cannot be in a position to alter them to theiradvantage. These factors are discussed in the paragraphs that follow.

InternalFactors

Thereare different internal factors which include costs, the image of thebusiness, credit period offered, predetermined objectives, productlifecycle, and other marketing mix elements.

Costs

Marketersusually use a simple approach of setting the price where they add thedifferent costs associated with producing a commodity, plus anappropriate markup. This technique of establishing value has aproblem in that it may run into difficulties since it does notprovide accommodation for external elements such as competition anddemand. When factoring the costs of generating a commodity and theexpected profit, it is tricky to estimate the future costs. However,the use of this approach is suitable for a one-time sale circumstance(Rao, 2009). For instance, it can be best applied in contract biddingwhere the supplier has to consider adding a realistic margin so as tocover the selling price as well as profit. When considering costs inthe determination of price, it is crucial for a marketer to have theknowledge of break-even point, which is the point where the totalrevenues would be equal to the total costs (Chandrasekar, 2010). Foran entity to be in a position to make profits, the revenues must behigher than the total costs incurred.

Imageof the Business

Theprice at which a commodity will be sold can be determined based onthe image of the organization in the market. The image of a businessrefers to the appeal that the brand of an organization attracts fromthe customers (Rao, 2009). Companies whose brands have highrecognition in the market have the ability to set the price of theirproducts at a higher rate, compared to entities whose brands are nothighly recognized. For instance, companies such as Procter &ampGamble and HUL can set their prices at a higher charge since theirbrands command superior reputation in the market.

PredeterminedObjectives

Mostbusinesses have competitive pricing objectives well specified, withwhich price plays a role. These objectives could be geared towardsmaintaining price leadership, market share, undercutting competition,maintaining growth, or even discouraging the entry of new rivals tothe market. Depending on the assessment of firms, they setshort-term objectives as well as long-term ones by using theirknowledge of competitive strengths and weaknesses in a manner thatpredicts the way rivals would use viable pricing as a response(Kumar, 2010). Based on the predestined ideas, a firm would determinethe fee at which it would sell its commodities or services. Forexample, in case the intention of an organization is to increasereturns on investment, then it is likely that the entity would chargea higher value for its services and merchandise. Alternatively, abusiness whose goal is to capture a vast market share would considercharging a low charge for its services or products.

CreditPeriod Offered

Organizationsusually set the credit period that can be offered to their customersdepending on the nature of the commodities that they offer. In mostcases, the longer the credit period associated with a product, thehigher the price charged on the commodity (Kumar, 2010). Also, theconverse is true. For instance, in case a business gives itscustomers a credit period of three months, and another one offers atime of ten months, the firm that provides three months is likely tocharge a lower price compared to the one that offers ten months.

ProductLifecycle

Whenestablishing the price at which to sell a commodity, it is importantto put into account the stage of the product. Depending on thelifecycle, a firm can determine whether to charge its products highlyor lowly. For example, in case the commodities of a firm are at theintroductory stage, then the business would charge a low fee so as toattract customers. Alternatively, in case the products are at thegrowth stage, then the organization may consider charging high prices(Chandrasekar, 2010).

OtherMarketing Mix Elements

Appropriatepricing facilitates other marketing mix activities. For instance,when a product becomes highly-priced, it has to be followed bysuperior quality while the brand has to be supported by effectiveadvertising so as to create an image of prestige. Alternatively, whenan entity sets its fee at a low level to gain entry into a market, orenhance its market share, it should select the level of promotion aswell as distribution programs. Therefore, other marketing mix aspectsare critical when setting the commodity fee (Kumar, 2010).

ExternalFactors

Accordingto Haron (2016), there are external factors that should be consideredwhile determining the price at which an organization should sell itscommodities or services. These elements include customerexpectations, market and demand, direct competitor pricing, relatedproduct pricing, government regulation, and primary product pricing.Apart from these elements, the economic conditions have also beenidentified as another aspect.

CustomerExpectations

Theexpectations of customers, as well as channel partners, are crucialin the setting up of a price. When deciding whether to buy acommodity, customers usually evaluate the entire worth of the productmore than they assess the price (Haron, 2016). Thus, when making thejudgment concerning the price to sell products, it is crucial formarketers to carry out research that would determine the levels thatare satisfactory. Price elasticity is a vital aspect to think aboutwhen considering customer expectations since consumers are likely tomake purchasing verdicts based on the way they perceive price to beelastic (Haron, 2016). For instance, in case the price is elastic, anorganization should be very careful to increase the price of aproduct because customers would respond slowly to purchasing thecommodity. Therefore, the fee to be charged can be based on the priceelasticity of the product.

Marketand Demand

Thetype of market and demand are important factors in the setting ofprices. Consumers, as well as industrial buyers, are likely tobalance the value of a commodity against the benefits of owning it.Therefore, before setting the charge, a marketer needs to have theknowledge of the relationship amid price and demand for commoditiessince different types of markets have varying price-demandrelationships.

Accordingto Kotler &amp Armstrong (2006), the pricing freedom of the sellerdiffers with the type of market. In a pure competition, the marketcomprises of many sellers and buyers that trade in uniformcommodities. In this market, sellers are not in a position to chargeabove the going market price. Therefore, when setting the price inthis market, a marketer should consider the ongoing price in themarket. Under a pure monopoly, there is only one seller. In the caseof a government monopoly, prices may be set below cost because theproduct being sold is crucial to buyers who may not be in a positionto pay the full cost (Kotler &amp Armstrong, 2006). Also, the pricemay be set so as to cover costs or generate considerable revenue.Sometimes, the price is set high so as to slow down consumption. Fora regulated monopoly, the government allows an organization to setprices that would produce a fair return. However, for a non-regulatedmonopoly, a marketer is free to set the charge at any level that themarket can bear. Alternatively, in an oligopolistic competition, itis critical to set prices depending on what the available sellers areoffering. Furthermore, in a monopolistic market, sellers are free toset the price of their commodities depending on the promotion andbranding.

DirectCompetitor Pricing

Inbusiness, competitors are vital in influencing different aspects,including pricing. When setting the price, it is important formarketers to conduct research concerning the price being offered bythe direct rivals of an organization (Haron, 2016). This will becritical for the entity in coming up with the value that iscompetitive in the market. However, direct competitor pricing may notbe important for market leaders since they are in a controllingposition to set prices.

RelatedProduct Pricing

Commoditiesthat provide new ways for explaining customer needs may look to thepricing of goods that customers are currently utilizing even thoughthese products may not seem to be direct competitors (Haron, 2016).Therefore, it is important to understand the price of a relatedproduct because it helps in providing a basis on which to set outlay.For instance, when setting the price for pens, one may need tounderstand the price of notebooks.

GovernmentRegulation

Governmentrules, as well as regulations, need to be considered when fixing theprice level for a commodity. For some products, the government canannounce administered prices, and thus the marketer has to considersuch rules when setting up prices. Marketers should be aware ofregulations which influence how prices are set in the market. Sincethese regulations are government endorsed, there may be legalconsequences in case the rules are not followed (Haron, 2016). Forinstance, changes in the sales tax and luxury tax imposed by thegovernment may affect the pricing decision for a hotel business.Furthermore, at times, the government may be involved in fixing theminimum and maximum prices that businesses may be required to chargefor commodities. In such a scenario, organizations would be forced toset their fees within the guideline provided by the government.

PrimaryProduct Pricing

Organizationsmay be dealing with complementary products to a primary product,which may determine the price that would be commanded by thecomplementary commodities (Haron, 2016). In most cases, the pricingof the matching products is influenced by the variations in pricesmade to the primary commodity because customers may tend to comparethe charge set for the complementary product based on the value ofthe primary commodity. Therefore, one has to consider the rate of theprimary product in order to establish the charge he/she would attachto the matching commodity.

EconomicConditions

Whilesetting prices, it is exceedingly imperative for marketers toconsider the economic conditions that prevail in the market. Economicconditions such as interest rates may influence the price that wouldbe attached to a commodity (Majumdar, 2001). For instance, when theinterest rates are high, the charge for products would be set to below so as to influence the purchasing decision of consumers sincethere are fewer resources to spend. Therefore, economic conditionspresent in the market are crucial in the determination of prices.

Whatconsiderations enter into the pricing decision?

Whenan organization is making pricing assessments, there are criticalconsiderations that need to be entered into the verdict. Theincorporation of these reflections is central since it helps anentity to come up with the best price judgments (Keegan &amp Green,2016). The paragraphs that follow will explore these considerations.

IsPrice a Reflection of the Product’s Quality?

Priceand quality are two aspects that go together. In a situation wherecommodities are of high quality, the price charged may be high whilelow-quality products attract low rates. Therefore, when making valuedecisions, it is important to ensure that the prices of goods andservices reflect their quality (Keegan &amp Green, 2016). This wouldbe critical to avoid an instance where customers are not interestedin purchasing commodities or services because they fail to mirror theperceived quality that they can derive from them. Companies that donot consider this aspect may end up making losses since prices mayfail to match quality resulting in decreased sales.

Competitivenessof the Price

Thechief objective of any business is to realize profits from itsoperations. The attainment of gain is essential to ensure that theentity continues and expands its operations. This being the case,there is a need for a firm to ensure that it remains competitive inthe market where it operates. One of the ways of ensuring thatbusiness remains aggressive is through offering competitive prices.Therefore, when making price verdicts it is crucial for a firm toensure that the charge represents competitiveness, and this can bejudged from the local market conditions where the firm operates (Rao,2009).

ThePricing Objective of a Firm

Everyfirm enters a market with definite objectives. The goals of anorganization determine the pricing decision that it is likely tomake. For instance, the aim of a firm may be to penetrate a market.In such a circumstance, the business may consider using penetrationpricing so as to realize its goal. In the penetration pricing, theentity would be forced to charge its services or commodities at a lowrate so as to penetrate the market quickly (Keegan &amp Green,2016). Alternatively, in case an organization desires to attain theobjective of market skimming, the business would be required tocharge a premium price. Therefore, based on the goal that an entitywants to accomplish, there would be a form of pricing that would beused. This makes the pricing intention of an organization asignificant consideration when making pricing decisions.

TheNeed for Price Segmentation

Pricesegmentation is where one commodity produced by a given organizationis charged differently in the market (Rao, 2009). Where pricesegmentation is to be considered, there would be the need todetermine the costs associated with the different targets toestablish the price that would be attached to each targeted segment.Also, in a scenario where there would be price segmentation, targetcosting process would be important, where target costs would need tobe allocated to the various functions of the product being offered.This is an indication that the need for price segmentation would playa critical role in the determination of fees.

TheType of Discount and Allowances to Customers

Discountsand allowances have the impact of reducing the prices that consumerspay. For instance, in case an organization offers a trade discount toits customers, it implies that the company would end up getting feweramounts in terms of expected sales value after the deduction of thetrade discount (Keegan &amp Green, 2016). An allowance providedwould also have the same impact. Therefore, when a firm isconsidering offering discounts and allowances, it would need tofactor these two in its price choice. In case no discounts orallowances are to be considered, the price to be charged for thecommodities would also be influenced since the firm would need tofactor this in its charges.

Latitudeof Adjusting Prices Incase Costs Change

Whendetermining the price that would be attached to a product or service,it is crucial to think of the pricing options available in case thefirm realizes an increase or decrease in costs. This would aid inhelping the company adjust its prices with ease when its coststructure changes (Rao, 2009). For instance, in case an organizationhas the knowledge of the elasticity of demand for its product, itwould be better placed to alter its prices in case its costs changes.

Conclusion

Whenestablishing the price that an organization would sell itscommodities or offer services, there are internal and externalfactors that have to be put into consideration. The internal factorsare those aspects that can be controlled by an organization while theexternal ones are unmanageable in nature. Internal factors includecosts, the image of the business, credit period offered,predetermined objectives, product lifecycle, and other marketing mixelements. Alternatively, external elements include economicconditions, customer expectations, market and demand, directcompetitor pricing, related product pricing, government regulation,and primary product pricing. As seen in the analysis, the aboveelements are momentous in setting the price. On the other hand, whenan organization is making pricing decisions, there are criticalconsiderations that need to be entered into the judgment. Theseaspects include latitude of adjusting prices in case costs change theneed for price segmentation, type of discount and allowances to beoffered, competitiveness of the price, price objective of a firm, andwhether the price reflects the quality of the product. These need tobe factored in price choice.

References

Chandrasekar,K. S. (2010). Marketingmanagement: Text and cases.New Delhi: Tata McGraw-Hill.

Haron,AJ. (2016) Factors Influencing Pricing Decisions. IntJ Econ Manag Sci5: 312. doi:10.4172/2162-6359.1000312.

Keegan,W. J., &amp Green, M. C. (2016). Globalmarketing.Boston: Pearson.

Kotler,P. &amp Armstrong, G. (2006). Principlesof marketing.Upper Saddle River, NJ: Pearson Prentice Hall.

Kumar,P. (2010). Marketingof hospitality and tourism services.New Delhi, India: Tata McGraw Hill Education.

Majumdar,R. (2001). Productmanagement in India.New Delhi: PHI Learning.

Paul,J. &amp Kapoor, R. (2008). Internationalmarketing: Text and cases.New Delhi: Tata McGraw-Hill.

Rao,V. R. (2009). Handbookof pricing research in marketing.Cheltenham, UK: Edward Elgar.

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