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
Market structure
Taxes and subsidies
Business objectives
Marketing mix
Market Condition
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
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
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.
Marketing Mix
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.
RELEVANT CONCEPTS
Marketing Mix
Profit, Revenue and Cost
Competition
Government Policies
Business Objectives
Product Life Cycle
Market Share
Marketing Strategy
Business Cycle
PAST YEAR QUESTIONS
What is meant by ‘price elastic demand’? (2 marks) Feb/Mar 2018/12
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