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Pricing Decisions

Price is the only element of the marketing mix that generates revenue and it is also the most important determinant of the profitability of the business by way of sales volume. It is the competition that contributes the maximum to the importance of pricing. customers compare the prices of various products to decide a particular brand to purchase.

Factors Influence Pricing:

There can be two sets of factors influencing the pricing decisions of any enterprise. These factors can be economic, psychological, quantitative or qualitative in nature. The two sets of factors are
Internal Factors: It is related to the firm. It includes
  • Corporate objectives of the firm.
  • Image sought by the firm through pricing.
  • Price elasticity of demand of the product.
  • Costs of manufacturing and marketing.
  • Stage of the product in its life cycle.
  • The intensity of competition.
  • The characteristics of the product.
  • The volume of production and economies of scale.
External Factors: It is related to the macro-environment of the firm. These are
  • Market composition.
  • Buyer's attitude towards the product.
  • Bargaining power of consumers.
  • Competitor's pricing policy.
  • The general state of the economy.
  • Government controls and regulations.
  • Societal considerations.

Pricing Objectives:

The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set a price.
Maximum Current Profit: Companies estimate the costs and demands associated with various prices and choose the price that produces maximum sales, cash flows and return on investment.
Maximum Long-term Profit: Firms set the price in order to capture the largest market share by beating the competition. To confirm the long-term sales, an appropriate price should be fixed, keeping in mind customers purchasing power and competitors' reactions.
Companies Survival: In case companies are facing over capacity, lower sales, intense competition or changing customer needs. Companies need to work on survival as long as the prices cover variable and fixed costs, the company stays in business.
Maximum Market Penetration: some companies believe that lowering prices, higher sales volume and large market share can be achieved. This will lead to lower unit costs and higher long-run profits. A low price stimulates market growth.
Maximum Market Skimming: companies introducing a high-tech innovative product set higher prices to maximize market skimming. Sony is the frequent practitioner of market skimming pricing.
Product Quality Leadership: A company might aim to be the quality leader in the market. Their products are characterized by high quality, taste, status and luxury with prices just high enough not to be out of the consumer's reach.

Steps in Pricing Procedures:

Step 1: Setting the pricing objective.
Step 2: Determining the demand elasticity for the price, estimating the total demand in the market.
Step 3: Estimating costs of manufacturing and marketing. The different costs involved in the production are
Fixed Costs/Overheads: These costs don't vary with the production or sales revenue. These include monthly rents, interest, salaries etc.
Variable Costs: These costs are directly related to the level of production. These costs are constant in terms of units produced. These are variable costs as there is a variation in the number of units produced.
Total Costs: This is the sum of fixed and variable costs at a given level of production.
Average Costs: It is the cost of per unit at the production stage.
Step 4: Analysing competitor's costs, prices and offers.
Step 5: Selecting a price method, keeping in mind the market share, price image for the brand, type of customer segment, life cycle stage of the product.
Step 6: Selecting the final price.
Step 7: Periodical review of sales as well as adjusting the price to the demand.
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