You can say that price decision is excellent if the price can reflect a company's concerns. Therefore, you have to understand thoroughly what are the factors that influence price determination.
By the way, before reading further, I suggest you to read below article first to get more insight about basic pricing and fundamental pricing strategy. Here are the articles:
- Pricing strategy basic concept: Pricing in Marketing
- Goals of implementing strategy
- Price setting considerations
OK, now back to our current topic.
Factors that affect price decision
According to Simonson (1993), there are many factors that affect price determination, they are:
- Economic condition
- Company's objective and goal
- Marketing mix
- Nature of the market
- Cost
- Characteristic of product
- Size of business
- Competition
- Ethic and legal
- Offer/supply and demand
Let's start overview the items above one by one.
Economic condition
Economic situation is one of the factors that influence price decision. Good company always respond various kinds of economic circumstances, like inflation, recession, interest rate, government policy related to economic, social aspects, etc.
Supply and demand
Demand is a request of a number of products which will be bought at the certain level of price. Generally, the lower level price, the more customer will request. On the contrary, the higher level price, the lesser customer will request.
In this situation, you should estimate and measure the response of the customer against the offering price.
Supply is the number of offering products which will be delivered at the certain level of price.
Company's objectives
Price decision is aligned with company's objectives. I have explained it in previous article, you can read it further.
Every company has a different objectives. Below are the sample of company's objectives:
- To gain maximum profit
- To increase a sales volume
- To lead a market share
- To sustain company's wealth
- To return of the investment
- To win the competition
- To take a social responsibilities
- To penetrate a new market
- To obtain excellent financial performance
- etc.
Ethic and Legal
Regulation, ethic, and legal considerations must be observed. Because regulation and legal aspect are control tool for government in setting maximum price or minimum price in certain area and certain industry to prevent monopolistic practices, and so on.
Marketing mix
Price must be aligned with marketing mix, such as: kind of product, distribution channel / distribution system, and promotion.
Cost
Production cost is basic factor in determining a price. Why? Because a price that can't cover production cost will return losses, in other word you won't get profit.
Samples of cost:
- out of pocket cost
- operational cost
- non-operational cost
- distribution cost
- promotion cost
- variable cost and fixed cost
- material cost
- etc.
Commonly, in small company, price is set by top management (even the owner). In big company, price is set by line manager. In some industries, sales people may set the price (flexible price) to negotiate with prospective customer.
Competition
If there is only one company in one industry, theoretically this company free to set the price how much he wants. Because there is no competitor.
But, if there are many company in one industry, they will compete. As a consequence, price competition among companies will happen.
