A manufacturer should pay adequate attention to the following factors while taking any decisions relating to price of his products:
Factor # 1. Objectives of Business:
First of all, the management must review the objectives of the firm as they are the real deciding factors. A firm may have alternative objectives such as a suitable return on the capital employed, maximisation of sales, capturing market from competitors, etc.
Factor # 2. Cost or Goods:
It is a simple proposition that prices charged must be such as will enable the manufacturer to recover his cost. i.e. the average total unit cost and earn a reasonable profit. No business can continue for long if the price of product falls short of the average total unit cost and thus results in a loss.
Factor # 3. Market Position:
The next factor in pricing policies is the study of nature of market, i.e. the nature of prospective buyers of the product concerned. The management should attempt to find out the composition of their market, that is they should consider such questions as follows. Is the market of their product composed of industrial users or commercial houses or individual consumers of householders?
Does their market consist of individual consumers, and whether they are rich, middle or poor class? Is the product meant for young men or for grown-ups? Is it to be used by males or females? What motives do impel them to buy the product? What is the relative utility of the product to the consumers? What is their elasticity of demand? All such questions will guide the management in fixing correct prices.
Factor # 4. Competitor’s Price:
It is a prescriptive approach factor in deciding upon the prices of its own product by a firm. The competitor’s price policy for similar merchandise and the effect of one’s own price policy upon the price polices of the competitors, upon the sales of the merchandise in question and upon one’s reputation in the community must be considered. No sales manager can afford to ignore the prices charged by other suppliers of identical products. A price higher than the one charged by others will wean customers away from him. But a very much lower price may create a suspicion in their minds about the quality of the product and may not increase sales.
Factor # 5. The Marketing Policies Pursued by the Sales Organization:
The first important consideration here is of the channel of distribution selected to market the products. Normally, the longer the chain of distribution the higher is the margin added to cost in fixing the price. Secondly, warranties and after-sale service facilities attached to a sale will also have a bearing on the pricing of goods. Finally, proper adjustment should also be made for regular or irregular rebates, concessions, cuts on other reductions in prices; allowed to customers as an incentive to promote sales.
Factor # 6. Social and Ethical Consideration:
These include the following:
(i) Public Policy:
Sometimes, the Government may announce a general policy about pricing of goods (as these days in India Government is averse to any rise in prices of necessities of life) or may specifically fix and control prices of goods as in the case of iron and steel, cement, coal, sugar, etc. Under such circumstances the sales manager has little or no control over the prices, and he has to fall in line with the public policy.
(ii) Reasonable Price:
There has been a business ethics to charge reasonable and just prices for their products. Though the canons of ‘What the traffic will bear’ and ‘what competition will allow’ have been popular, the principle of reasonableness has also guided the prices.
(iii) Attitude of Labour Leaders:
It is also a guiding factor in pricing decisions. If prices are fixed high; workers also demand more wages and more bonus, etc.
(iv) Consumer’s Reactions to Rising Prices:
It should also be taken into account.
Factor # 7. Price Elasticity or Demand:
Price elasticity refers to consequential change in demand due to change in price of the commodity. As there is an inverse relationship between price and demand, the demand will increase with the fall in prices or vice versa. So, a high price may be fixed for inelastic goods and, on the other hand, price of elastic goods cannot be fixed at a higher level. A price reduction policy may suit the highly elastic goods.
Factor # 8. Product Differentiation:
In a non-price sensitive market, the price depends more on the differentiation of the product in its size, colour, quality etc. In such markets different characteristics are added to the products in order to attract the customers and high prices may be charged. Customers may happily pay higher prices for new style, fashion, quality or packaging etc.
Factor # 9. Product’s Stage in the Life Cycle:
Pricing policy may be different in different stages or products own life cycle. In the introductory stages prices are fixed lower to increase the demand or the product of higher to earn the maximum profit, considering the competitive situations in the market. The policy may then, lead to slow reduction of prices with a view to expand the market. In the maturity stage, penetrating pricing may be followed.
Factor # 10. Buying Patterns or Consumers:
Buying patterns, of consumers also affect the pricing’ decision of the concern. If the purchase frequency of the product is higher, lower prices should be fixed to have a low profit margin resulting in higher total profits of the firm. All consumer items of daily use have high purchase frequency. Low purchase frequency items may be sold at high price. Durable consumer products like T.V. and refrigerators are, therefore, priced higher.
Factor # 11. Government Policy:
Price discretion is seriously hit by the government price control decision in order to arrest the inflationary trend in prices of certain commodities. The producer of such items will have to fix as per the directives of the Government. If the producer charges higher prices, the government may think of nationalising the concern or it may take legal action. Sometimes Government starts selling those items fair shops or starts production. So, the prices cannot be fixed higher.
Factor # 12. Economic Environment:
In recession, prices are reduced to a sizeable extent to maintain the level of turnover. On the other hand, prices are charged higher in boom period to cover the increasing cost of production and distribution.