Pricing – Factors affecting Price of a Product or Service

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Price means the amount of money which is exchanged in order to get the product or service. Price is an important factor of marketing mix because it is the factor which affects revenue and profits of the firm. No product can be introduced in the market without a price mentioned on it or without price scheme of the product or service. Every product and service has certain price mentioned, for example: fees for doctor’s consultation, ticket price for watching movies, price for buying a mobile phone, fare for bus etc. The name may differ but nature is the same. Price of every product is based on certain factors such as cost of the product, profit expected, government regulations etc. These factors should be considered because we cannot charge very less otherwise the company will run in losses and ultimately shut down and we cannot charge higher because of societal responsibility and also because of competitive charging policy.


Factors affecting Price of a Product or Service

So the factors can be described as under:

Factors affecting Price of a Product or Service

Product cost

Cost of a product or service is one of the most important factors which affect the price of the product or service. Whenever a firm is fixing price of their product or service they need to consider the amount that they have invested in its production or procurement. Every organization wants to cover the cost of the product or service along with earning some amount of profit. While in some cases the cost may not be covered initially. For example: while market penetration i.e. entering a new market or introducing a new product would require the company to set a price which is lower than the cost. But in longer run, covering cost and earning some profits is important. Without covering the cost, breakeven point cannot be achieved.

There are three main types of costs which a company considers while fixing the price. They are – fixed cost, semi variable cost and variable cost. Fixed cost is the one which do not change with the number of products produced or manufactured. For example: rent of building will remain same for the month even if we do not produce anything or we produce more than other months. Semi variable cost is the mixture of fixed and variable factors. It is fixed for certain levels and will start varying after that level is crossed. For example: an employee may be given fixed amount of salary but the bonus will vary according to the targets he achieves. Variable cost is the one which varies with the level of production. For example: electricity bill will depend on the number of units produced, if they are produced more, then the electricity bill will also be more. All these costs will be considered before deciding the price.

The utility and demand

The cost of the product helps the producer to fix the lower limit of the price. The demand of the product will help in fixing the higher limit of the price. The higher limit of the price means that the price cannot exceed the demand of the product. The buyer should be ready to pay the amount of price which the company has fixed. The rational buyer would always try to bargain a lower the price and a seller would try to cover the cost and add some profit. And to manage these two elements, the price should be according to interest of both the parties. When the demand of the product is inelastic i.e. the change in price does not change the demand or there is only small amount of change in the demand, then the firm will be in position to fix the price in their favour.

Extent of competition in the market

There are various external factors which affect the price of the firm and among those the extent of competition is one very important factor. The product and the features of the product must be carefully analysed. The reaction of the competitors should also be evaluated. A firm can fix a price which is either lower than the competitor’s price to gain more market share. They can set the same level of price or they can set the higher level of price than them. It all depends upon the demand of the product and also on the reaction of the buyers based on the price change. If the company has more loyal customers than the price change may not affect to a great extent but still they should be careful before setting a price for the product.

Government and legal regulations

Many a times, to protect the interest of the consumers, the government needs to intervene in fixing the price limit. There are certain products which can be considered essential and their price should be as low as possible so that the consumers can buy them. For example: there are certain medicines which are very necessary and the producers may not consider its necessity and fix a higher price of the product, but when the price is set high the consumers may get in trouble. Thus, the government fixes a limit for those medicines.

Pricing objectives

Depending on the organizational objective the price may be fixed. There can be two types of objectives, such as, getting increased market share for the product or survive in this competitive market. The market share can be obtained by the organization for their product or service by setting a price at low levels so that it becomes affordable for larger amount of audience. While, surviving in the competitive market means that company needs to face this intense cut throat competition of the market and introduce the products which people like and think are worth buying. But along with a good product or service, promotional schemes such as discounts, extra products coupons are also important. Another important objective can be to attain a quality of the product leadership. In this case the price is set high so to cover the large amount of cost of production and research and development. This will have limited market share but will have loyalty of the customers.

Marketing methods used

Other element in the marketing mix such as branding, packaging, channel of distribution used, the promotional schemes used etc. will also affect the price of the product. Along with the elements mentioned above, uniqueness of the product is also an element which gives a organization a leverage to fix a little higher price. For example: if a mobile phone that comes with a new and unique feature then the price can be set higher.

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