Pricing is a very important part of the company’s branding and marketing strategy because it would directly affect the company’s relationship with its customers. When you set the right prices, then it would attract new customers plus retain your existing customers. The profitability of the company increases as a result.
Table of Contents
What is Pricing Decision?
When a company or business manufactures a product, then it incurs many fixed and variable costs to produce the product. The management of the company has to consider all of these costs while setting the price of a product; the whole process is called price decision.
Sometimes companies follow the simple pricing decision where they charge the roundabout the same price what other businesses are charging. Other times companies follow the complex price decision where they come up with the unique prices of the product.
Both of these types of pricing decisions have their advantages and disadvantages. But it all depends on the company’s marketing strategy. However, some other internal and external factors affect the pricing strategy of the company. We’ll discuss these factors one by one, they are as follow;
Internal Factors Affect Pricing Decision
Some of the internal factors that affect the price decision of the company are as follows;
When it comes to setting the price of the product, then it involves two parties; the marketing team and production staff. However, the marketing team comprises of company’s management, top executives, and marketing staff. They consider how the product would play out in the market.
One the other hand, the production team considers the production costs and product strategies. Usually, the final price considers both the views of the product and marketing teams.
Marketing Mix Strategy
Marketing mix means product, price, promotion, and place. Some marketing experts view price is the only dominant factor in the mix because a slight change in price can affect the promotion and distribution of the product at different places. Some companies lower the prices as a part of their marketing strategy to attract the attention of the price-conscious market.
While other companies increase the prices as a part of their marketing strategy. It doesn’t matter whether the company/business lowers the prices or increase it. The price strategy would only succeed if it follows the overall marketing objectives of the company. If a brand raises the prices, then it should add some more features and start a new marketing campaign.
Characteristics of the product are the key to the price decision of the company because different characteristics of the product in terms of shape, color, size, packaging, etc. attract the attention of the customers. Customers are willing to pay more if they like and value the characteristics of the product. It could be a new style, feature, or anything out of the ordinary.
The cost of the product is the most important factor among all because it provides the basis to set the price. Of course, the management has to consider the product’s demand and the prices of the competitors as well. Finally, the management also considers the customers’ ability to pay the price, because it would be useless to avoid customers in the price decision.
The Overall Objective of the Company
A company may have various objectives. It could be profit generation, increasing market share, the company’s value-oriented, increasing or decreasing customers’ volume, maintaining a stable price and the company’s brand image, etc. Therefore, the final price decision also matches with the overall objectives of the company.
External Factors Affecting Pricing Decision
Some of the external factors that affect pricing decision of the company/business are as follows;
Demand in the Market
The demand for the company’s product in the market also plays a huge role because it tells us about the competitors, size of the market, and customers’ preferences and their ability to pay the price.
Sometimes, a company charges different prices to customers in different markets. The purpose is to check the results that how the market is behaving at different pricing strategies. If the demand for the company’s certain product is higher, then the price would be higher. If the demand is lower, then the company would lower its prices than competitors to compete in the market.
Market competition is a very significant factor and it affects the price strategy. A firm may set high or low prices depending upon the competitor’s prices and product quality. If the company’s products are better than competitors, then the price would be higher. Otherwise, the business would set lower prices.
Suppliers provide the raw material to the company from which the business manufactures the final product. If the suppliers raise the prices, then the company has no choice but to increase the prices and pass it on to the customers.
If a company is making more profit on a certain product. When the suppliers see it, they would raise the prices of the raw material because they want to have a portion of the profit as well. However, it also depends on the abundance and scarcity of the product’s raw material.
The Economy of the Country
If the economy of the country is prosperous where people are employed and earning high salaries, then raising prices wouldn’t be a problem. In such an environment, customers are willing to pay more. However, when the economy of a country is in a recession, where people have limited sources of income. Businesses and companies have to set low prices to meet the customers’ ability to pay.
We have been talking about the customers’ ability to pay. It’s very important to consider the nature and behavior of the target market. Some customers are price conscious and the others are quality conscious. Therefore, you should know the nature of your target market.
Sometimes the government controls the prices of certain products by introducing some laws. The purpose is to control inflation so that the prices shouldn’t go higher at a certain point. Therefore, the company has to consider the local laws of the government as well.
We have studied how some internal and external factors affect pricing decision of the company. A company may have control over its internal factors. But the external factors out of the control of the company, or it may have a little control over them.