The three (3) major factors influencing pricing decisions are cost, supply and demand
Cost refers to the cost of production, which influences profits.
Supply refers to quantity available to be sold in the market
Demand indicates how much a customer wants the product
These three factors are influenced by;
Market or economic condition
Cost of production
Taxes and subsidies
Market condition determines the demand of the product. If the economic condition is good, demand for products and services tend to increase as income increase. Should there be limited quantity of supply in the market, prices can be increased taking advantage of the excess in demand.
Cost of production
A high cost of production will force the firm to raise prices to protect its profit. However, while prices may be reduced to below cost during promotion, prolong reduction will result to cash flow depletion, resulting to insolvency.
Market structure refers to the level of competition between firms in the market. What is the price of the product and how would rival firms respond to a price reduction or increase. The intensity of competition will drive the firm's marketing strategy.
Taxes and Subsidies
Countries with higher indirect taxes (VAT) tend to influence firms to charge a higher price as it aims to protect the firm's profit. While subsidized products would have a lower price, as part of the cost of production have been subsidized by the government, enabling firms to reduce prices.
Business objectives changes time to time as they are influenced by market conditions and management objectives. Should the firm aims to increase market share, it may reduce prices to increase demand and revenue of product and market share. However, should the firm aim to maximize profits, they may increase prices.
The product life cycle of the product determines how the product is priced during its entire life cycle. A product may be priced differently at every stage of the product life cycle. In example, a product can be priced below cost during launch, to encourage consumers to try the product and premium at maturity stage, to maximize profits.
Profit, Revenue and Cost
Product Life Cycle
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