Factors Affecting Price Determination

Determining price is very challenging task. Analysis of various factors should be done to determine price. In other word, various factors affect price determination. So, they should be specially considered. Two types of factors should be studied before determining price. They are internal and external factors.

I. Internal factors

The factors which can be kept under control of business organization are called internal factors. Such factors affect price determination of the products. Internal factors include,
  1. Business efficiency: Internal factors are of different types. Among them business efficiency is one of them. It directly affects price of products. If the business firm is capable, cost becomes less and purchases of raw materials and other activities are effectively conducted. As a result, price of product can be determined low. Just opposite to it, if organization is incapable, production cost becomes high. As a result, the price needs to be determined high. As business competency can be increased, firm can keep it under its control.
  2. Organizational factors: Different organizations have their own organizational factors. Under such factors, production policy, pricing policy and prestige of the company are included. These important factors affect pricing directly. Such policies are formed by the top level management of the company. So, these types of organizational factors can be kept under the control of organization. Price can be determined by improving such organizational factors in opportune time.
  3. Cost: Without production cost, no goods can be produced. As price of product needs to be determined including production cost, then price also increases due to increase in production cost. Just the same, if production cost decreases price decreases. Mostly, the following costs are included in producing any goods.
    1. Factory expense: This type of expense is also called factory related indirect expense. This includes transport expenses, labor wages, fuel, water, factory rent, electricity, consumer goods, and factory repair and maintenance etc. expenses.
    2. Direct expense: This expense includes salary, office, direct wages, and other direct expenses.
    3. Administrative expense: This includes salary, office rent, telephone tariff, electricity, postage, telegram, director’s remuneration, office repair and maintenance, office equipment and other expenses.
    4. Selling and distribution expenses: This includes sellers’ salary, commission to distributors, external transport and transport expenses, advertisement, warehouse rent, packing fees, and other expenses. Such expenses are called direct expenses on selling and distribution. Production cost can be lowered by increasing administrative ability and efficiency. So, this factor is also a controllable factor.
  4. Pricing objective: Before determining price of any product, its objective should be taken. So, this is other important factor to affect pricing. These pricing objectives include achievement of targeted result, maximization of price, increase in sale, increase in market share, maintenance of price stability etc. Besides, objectives for facing competition and survival of the organization should be also clearly made. The objective of firm affects the price of products. If the objective is to maximize profit, price should be fixed high. But, if the objective is to expand/increase market share, price should be fixed low. The objective of price fixation is also controllable factor of firm, which can be changed or improved according to need.
  5. Other elements of marketing mix: Different elements/factors of marketing mix affect the pricing objectives. The other elements such as product, place, promotion also give pressure to decrease or increase price. They can be mentioned as follows:
    1. Product: If the product is original, pricing becomes easy. But, if it is imitated, comparative price should be fixed. In this way, price of different products can be fixed differently. Little difference in price happens at every stage of life cycle of any product.
    2. Place: Distribution channel also affects price. If the distribution channel is long, more cost needs for it. As a result, price increase. Similarly, means of transport also affect the price by increasing cost of any product. In comparison to air transport, cost for road transport becomes less expensive and dependable.
    3. Promotion: Promotional style and activities also affect price of products. newspapers, radio, television, etc. become expensive for advertisement and increase the cost of the products. But, if distributors, agents, wholesalers and retailers take the responsibility for advertisement, it becomes less costly. So, different promotional activities also affect price of products.

II. External Factors

Any factors which are beyond the control of a firm are called external factors. Such factors may be very strong and influencing. There are different kinds of external factors. They are as follows:
  1. Competition: Competition is one of the effective factors to affect pricing. Competition plays an important role in price determination. If there is no competition price, it can be fixed freely. But, if there is market competition, competitors’ products should be analyzed and suitable price should be fixed. If the products are similar in quality, price also should be fixed same. So, competitive price should be fixed for the products. Before fixing price of any product, deep study should be done on competition. Competition also may be of various types. They directly affect the price of products. Since competition is the factor not to remain under firm’s control, study and analysis should be done on it. Only then the price of products should be fixed.
  2. Suppliers: The group, or firm or organization which provides necessary equipment, raw materials, machines, operating means, etc. is called supplier. If they provide such industrial goods at easy price, price of products also becomes low. But just the opposite of it, if such industrial goods are costly, the price of products also becomes high. So, suppliers also have an important role in pricing any products. This is the second external factor. It cannot be controlled by any business firm.
  3. Pressure group: In every country, pressure groups may be formed in different ways. Save environment group and consumer group are the examples of pressure group. Such groups try to affect price of products. They give pressure to companies/business firms for their own group interest and welfare. Save the environment group can give pressure to business companies for stopping pollution. Consumer group can give pressure demanding for providing high quality products at lower rate, for more security of products, and for providing more information about products. Such pressure directly affects price. These types of pressure remain beyond the control of the company.
  4. Economic factors: Economic factor/element is one of the strong factors to affect price determination. This also affects price. This element does not remain under company’s control. Situation of inflation, deflation, overvaluation or devaluation may appear in markets. They are called, on the whole, economic elements/factors. In the situation of devaluation demand decreases, whereas in the situation of overvaluation demand increase. So, price should be determined only after studying and analyzing the economic factors/elements. If production cost increases, price should be fixed accordingly, and if production cost is low, price should be fixed low increasing rate of profit. In this way, when cost is decreased or increased, price also should be fixed accordingly. Policy to increase price in the situation of deflation and decrease in the situation of overvaluation should adopted.
  5. Market demand: Demand of target market also should be considered and studied by every business company. The total demand of the market also affects pricing. Demand for products may decrease or increase due to the reasons of total number of customers, their income, purchasing power, priority, competition among substitute products etc. A situation may appear to determine price on the basis of demand. In the situation when the total demand for products has declined, price should be decreased and when demand is increased it should be increased. If such policy cannot be adopted, price of products does not become reasonable.
  6. Government: Government makes arrangement of different policies, rules and regulations giving priority to the interest of the nation and people’s welfare. Such policies, rules and regulations also affect price determination. Government may try to keep business companies under control by interfering in price fixing and making policies and provision to provide facilities to the people. Government may make policy to provided facilities by rebating sales tax, excise duty, costume duty, etc. and just the opposite it may charge all of them to increase revenue. In this way, government policies and rules also directly affect pricing determination. If government makes policies to charge new add taxes or increases in taxes, then the business companies also increase price. If taxes are rebated, price is decreased, and if they are increased or added, price increases. So, government policy also directly affects pricing. So, government policies, rules, regulations, legal provisions etc. also are the uncontrollable external factors to affect price determination strongly.
  7. Political situation: Different political modes or situation may prevail in every country. Political situation also affects price determination. Political situation may be stable or instable according to the time. In both political situations, price of products or services may not remain same. If the political situation is stable, one rate or price is fixed, and if it is unstable, another rate is fixed. Government may or may not interfere in pricing. Method of determining prices differs between the interference and free situation. In some countries, there may be legal provision to fix prices of products by government. So, business competitors should compulsorily face such situation.
  8. Market intermediaries: In every market, different intermediaries remain active. They can be identified/ known as agents, distributors, intermediaries, transporters, finance companies, wholesalers, suppliers etc. If such intermediaries change their prices, prices of products or services also should be changed. In other word, if prices of such intermediaries increase or decrease, price of products or services should also be increased or decreased. No company can control their activities but are compelled to fix prices according to the main-stream of the intermediaries.

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