Whatare the basic factors that affect price in any market? What are theconsiderations for entering into a pricing decision?
Thisstudy sought to explore the factors that influence pricing decision.The researcher conducted a systematic review of literature thatinvolved desk research on previous research works mainly contained inmarketing journals. Two major categories of factors were identified:external and internal factors. Firms have control over internalfactor that includes objectives of the firm and marketing strategies.External factors include those that firms have no or limited controlover, such as competitors, customer expectations, and governmentregulations.
Factorsthe Influence Pricing Decisions
Productprices are among the most crucial elements of marketing product mix.They enable an organization to generate cash while also dictating thelong-term survival of the business in the market. In marketingtheory, the price is one of the five P’s (Product, Place, Position,Promotion, and Price) that dictate customer attention, motivation,and loyalty. A Marketing strategy aids organizations in defining,promoting, and distributing products while also strengthening theirrelationships with customers (Musonera & Ndigijamana, 2011). Apricing decision depends on the type of market within which thecompany operates. For instance, a monopolist may set and adjustprices quite easily whereas a company in a perfectly competitivemarket has no control over product prices because they are determinedby the interaction between the forces of demand and supply.
Additionally,pricing international markets such as the export market differ fromthose of the domestic market. Lack of understanding of the factorsthat impact pricing decisions exposes marketers and their companiesto significant levels of risks. According to Rosenbloom and Adras(2008), the development and implementation of marketing strategies,including pricing decisions represent critical managerial decisionsfor succeeding in any market. Several factors influence market pricedecisions. This research sets out to identify the basic factors thataffect price in any market and the considerations to enter into apricing decision. The approach used in this study is a systematicreview of the literature on this study topic as found in marketingjournals.
2.Review of Literature
Thissection situates the topic within the wide range of theoreticalliterature on the topic. The past two decades have witnessed anincreasing amount of marketing literature as witnessed in manypublications and marketing journals. The systematic review ofliterature seeks to identify common themes in the literature on thefactors influencing pricing decisions. Furthermore, the researcherexamined the concept of pricing strategies because they areinfluenced by company objectives that are also linked to determinantsof prices. In the first part, the researcher explains the theoreticalframework that underlies prices and pricing decision.
Theneoclassical theory was developed by Marshall to explain themechanism through which prices influence customer behavior. Accordingto Marshall, customers possess distinct tastes and preferences. Theybase their purchase decisions on the level of satisfaction or utilityderived from consuming a certain product. The term utility is used toimply satisfaction of individual wants, the power that occupiesindividual consumers mind, and that is applicable to every product orservice.
Pricesindicate the amount of money that an individual must be willing togive up in order to obtain a product or service. Marshall argues thatthe quantity of a product that an individual may be willing toacquire depends on the relationship that exists between the marginalutility derived from acquiring an extra unit of the product and theprice of that extra unit. He introduced the concept of diminishingmarginal utility to describe the situation where the utility derivedfrom additional unit decreases with each additional unit concept. Inother words, the neoclassical price theory by Marshall argues thatthe price of products depends on the level of utility derived fromconsuming the product. As such, higher prices are translated to implyhigher levels of utility. In addition, Marshall argued that anindividual is only willing to pay less for additional units becauseof diminishing marginal utility.
2.2Factors that affect prices
Theconcept of price describes the amount of money that is charged forgoods or services. Often, product price constitutes the sum of theproduction cost, profit requirement and the cost of distribution ofthe product. In competitive markets, firms strive to offercompetitive prices that can enable them to remain in the industry inwhich they operate. Several factors have been identified to influenceprices in the market. In a study by Haron (2016), two categories offactors were identified. These are internal factors and externalfactors. The following sections describe the two factors in detail.
Haron(2016) argued that internal factors that affect pricing are based oncompany choices as well as actions that are often controlled by thecompany. Although the company has the freedom to alter these factors,quick and unnecessary adjustments are not always realistic. Forinstance, the pricing of the company product may depend on theefficiency of the manufacturing equipment. If marketers establishthat manufacturing costs can be reduced by increasing output, theycan increase output with the view of reducing production costs andeventually reducing the product price. However, this would also meanthat the company implements changes in its manufacturing facility.
Marketingdecisions, including those that affect product prices, depend on theobjectives of the company. According to Kashani and Quelch (2009),the objectives of a company include the following:
Returnon investment– A firm may come up with a marketing objective that requiresreturns on operations to attain a certain percentage of its capitalinvestment. This target, together with the firms estimated level ofsales, could be used to determine suitable pricing levels for thefirm`s products
Cashflow– Firms may wish to structure their pricing in a way that ensuresthe firm`s income against associated production and marketing costs.Often, this objective is applicable in situations involving newproducts and where new income from the new products is only meant tomeet initial production costs while the firm focuses on establishingthe product in the market.
Marketshare-Pricing decisions enable firms to increase market share or retain agiven percentage of its current market. Lower prices may increasepopularity of the firm`s prices, therefore, helping the firm toacquire a larger market share
Maximizingprofits-,a firm`s desire to maximize profit is determined by the level ofprices set by the firm. Mature products that appeal to stagnatingmarket may require the firm to set price levels that optimize profits
Costsof production– the costs of production include both variable and fixed costs.The price of the final product depends on the total costs used toproduce the product and the desired profit.
MarketingStrategy-A company’s marketing strategy include marketing decisions that aremade with the view of enabling the company to meet the demands of itstarget market and attain its business objectives. Price is animportant marketing mix factor that works in collaboration withdecisions about other marketing mix factors to attain set objectives.For example, firms that offer high-quality products would set theirprices with a range that depicts the high-quality nature of theproduct. Some firms often base their marketing strategies on quality,durability, and service in an attempt to de-emphasize price becausethe price is a key selling feature of the firm’s products.
Theseinclude constantly changing factors, which the firm has no controlover but have a significant impact on the pricing decisions. Often,marketers conduct market research to understand and monitor thedynamics of the factors in the market it operates. According to Haron(2016), these factors differ depending on the market within which afirm operates. In his research, Haron (2016) identified sixcategories of external factors that influence prices in the market.
Theelasticity of demand– The demand for a product is the amount that consumers want andare willing and able to purchase. The change in demand in relation toprice changes over time describes its elasticity price plays animportant role in the elasticity of demand. Accordingly, marketersare required to understand the mechanism through which price changesaffect the market.
Theelasticity of demand yields three categories of demand scenarios.Elastic demand describes a scenario where a given percentage changein price yields a larger and opposite percentage shift in demand. Inother words, products with elastic demand are highly sensitive toprice changes. Inelastic demand describes a scenario where a givenpercentage change in the price of products yields a smaller andopposite shift in demand. In this case, price increase causes anincrease in total revenue while a decrease in price leads to decreasein total revenue. Finally, unitary demand describes the scenariowhere percentage change in price yields a proportional change indemand change in price does not affect total revenue.
Customerexpectations– Customers base their purchase decisions on the overall worth ofthe product or the utility they derive from the product. What ismore, customers are concerned about the overall product’s worthmuch more than its price. Marketers are required to conduct marketresearch to ascertain the price points that meet the expectations ofcustomers (Akaka and Alden, 2010).
Pricingstrategies of direct competitors– Every marketing strategy, including pricing strategies, mustconsider strategies that are used by competitors. However, theeffects of competitor information on the actual pricing strategyadopted by any firm depend on the competitive nature of the market.For instance, market leaders may not base their decisions on thoseadopted by competitors because of the little influence held bycompetitors products in the market within which the operate.
Theprice of related product– Products is related in different ways. Complementary products arethose that are used together, substitutes are those that serve thesame purpose. The nature of the relationship between products plays acrucial role in product pricing because their demand is related. Forinstance, if a firm charges higher prices for a product that hassubstitute product, consumers will most likely prefer the substitutebecause of lower prices.
Governmentregulation– Governments play an important role in pricing through itslegislative powers. For instance, the government may raise the priceof a given product by increasing taxes on the product. This is mainlydone to encourage or encourage the consumption of certain products.Accordingly, marketers need to understand government regulation thataffects pricing in the market in which its products are sold.
Accordingto Musonera and Ndigijimana (2011), environmental factors also play afundamental role in pricing decisions environmental factor includescustomers, competitors, and the public.
Customersare the center of every marketing strategy including pricingdecisions. In a highly competitive market, the higher limit of theprice to be charged for a product is set by the interaction betweendemand and supply forces in the market. However, sole suppliers havethe freedom to set prices without considering the effects ofcompetition. Ideally, marketing experts need to understand the demandschedule for products and services to be priced (Zukin, 2004).
Timefactor in demand must also be considered because effective demand ismeasured over a specified period. The ability of the consumer to buydepends on the level of income, which measures the ability as well asthe willingness to buy. Only then can effective demand be achieved.Consumers tend to react to price changes price changes can eitherlimit or promote effective demand. Moreover, consumers may assessprices differently since due to information difference, consumers maybe more or less informed about product prices and characteristics.Therefore, decision makers must recognize the prevailing differenceand use the information about consumer heterogeneity to developeffective pricing strategies and tactics.
Firmswithin the same industry are constantly evaluating strategies adoptedby others in the market. Ideally, the impact of a pricing strategyattracts a reaction from both the consumers and competitors. Asargued earlier, competitive structure depends on the market structurewithin which the firm operates. Whereas competition is quite intensein perfectly competitive market structures, monopolists, andmonopolistic firms experience little or no competition. According toMusonera and Ndigijimana (2011), the prices set by competitors aremore decisive in individual pricing decisions in markets where manyundifferentiated firms operate. Moreover, market structures and levelof competition vary depending on the stages of the product in theproduct life cycle.
Publicsinclude players other than customers and competitors. They includeother individuals, groups or institutions. The most important publicin the pricing decision process is the government. In most countries,the government influences pricing decision through legal constraintsincluding laws and regulations. The majority of government laws aimat constraining competitive pricing behavior and protection thewelfare of its citizens. For instance, governments may discourage theconsumption of a harmful product such as alcohol by setting laws thatincrease taxes on alcohol with the aim of increasing prices to alevel that make it expensive for individuals. In other cases, thegovernment may encourage the supply and consumption of a givenproduct by issuing incentives aimed encouraging the public toincrease consumption of the said product (Zukin, 2004).
3.ANALYSIS AND DISCUSSION
Thepresent study seeks to explore the factors that influence pricingdecisions in the market. The systematic review of literatureconducted in the previous section led to the grouping of thesefactors fewer than three major themes. External, internal andenvironmental factors. The diagram below describes a framework thatcan be used to understand the factors that influence pricingdecisions.
Figure1: Factors influencing Pricing Decisions
Pricingis one of the most important decisions that marketers face today.Often, the simplest approach to pricing is to consider the productioncosts and the target profit set in the company’s objectives.However, the whole process is more complicated, setting pricesinfluence competition, market share, and the long-term survival of abusiness in any industry. Given its importance, marketers andmanagers consider several factors before developing a pricingstrategy for the company.
Thesystematic review of marketing literature led to the grouping of thefactors affecting pricing decisions into two broad categories. On onehand, internal factors are controlled by the company and include thecompany objective, marketing strategies, and production costs. On theother hand, external factors are those that exist outside the companyand the company has no or limited control over, they include customerexpectations, the elasticity of demand, pricing strategies ofcompetitors and the nature of the market within which the companyoperates.
Obviously,market structures play a crucial role in pricing decisions. The maintypes of market structures include perfect competition and monopoly.Since products in the highly competitive market are differentiatedand dependent upon demand and supply, prices in these markets aremore sensitive to the determinants of pricing decisions than those inmonopolistic markets. In order to come up with relevant and effectivepricing strategies, managers and marketers must remain updated withthe dynamics of price determinants. This can only be achieved throughconstant market research and constant contact with the customers.
3.2Failures of the current pricing practices
Daviesand others (2016) argue that price changes is a tactic that firmshave absolute control and is a matter of choice. According to them,the most successful managers in competitive markets often engage inconstant actions that aim to increase their market share. However,the researchers observed that current pricing decisions are oftenmade using naïve pricing decisions that are based on hunch,convention, and fear rather than on the basis of competitive andstrategic framework that attempts to predict the reactions ofcompetitors, resellers, and consumers (Davies et al., 2016)
Commonpractice in pricing involves cost-plus pricing strategies. Davies andothers (2016) were of the view that although this technique is simpleand easy to comprehend, it can lead to pricing decisions that limitthe gains that could be obtained through better assessment ofcustomer value and price sensitivity. They suggest that a moreeffective approach would be to model customer demands using variousdemand modeling techniques.
Nonetheless,even explicit modeling of customer demands is based on pureestimates, implying that overall price levels are not optimally set(Davies et al., 2016). Sophisticated managers who base their pricingstrategies on explicit models targeting customer demand fail becausethe scope of their decisions involves forecasting competitorreactions to their decisions. The researchers recommended a model,Strategic Marketing Anticipation Response and Timing (SMART) pricingmodel that targets competitor actions, channel members and customermarkets to provide pricing strategies both for long-term andshort-term basis. The SMART framework looks at crucial informationfrom market data, survey and managerial judgment to build threemodels, the competitive reaction model, reseller behavior andconsumer purchase behavior. The three models are integrated to builda comprehensive dynamic market simulation.
Pricingis one of the challenging yet important decisions in marketing. Whensetting a price for a product, marketers often include the costproducing and distributing the product, and the target profit.However, the actual price of the product is influenced by many otherfactors identified in the literature, including the objectives of afirm, competitors, and customer expectations. Proper pricing takesinto account each individual factor depending on the market withinwhich the firm operates. In highly monopolistic markets, few firmsset prices without considering competitors. However, in perfectlycompetitive markets, competitions, as well as the forces of demandand supply, play key roles.
Inour systematic review of the literature, the key factors influencingpricing decision were broadly categorized into internal and externalfactors. According to Haron (2016), internal factors are those thatexist within an organization and can be controlled by theorganization. Organizational objectives, market position, and cashflow requirements are among internal factors that influence pricingdecisions. On the other hand, external factors are those that firmshave no control over. They include customer expectations, governmentregulations, the elasticity of demand, and government regulations. Ingeneral, these factors lead to different pricing strategies
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