Determinants of Price

Determinants of Price

Concept of Price 

In a modern money using economy, price refers to the exchange value of a commodity or service, in terms of money.

In the primitive barter economy, the exchange value of a commodity would be expressed, in terms of another commodity.

 features of price:

(i) Price is the only element of marketing-mix that generates revenue for the firm; other elements of marketing-mix viz. product, place (i.e. channels or distribution) and promotion – give rise to costs.

(ii) Price is the most flexible element; as it can be adjusted quickly. Other elements viz. product, place and promotion are less flexible to adjust.

(iii) Price is a silent information provider. It helps the customer judge product benefits. In fact, higher prices are taken as an indicator of higher product quality; specially when the product is new and it is difficult to measure product benefits objectively.

Determinants of Price of a Product:

While pricing a product, the important factors to be considered are usually the following:

(1) Cost of Production:

The price of the product must be so fixed as to recover the full cost of production from the price charged; otherwise all production activities will have to be stopped, in the long-run.

(2) Profit-Margin Desired:

The price of the product should include a reasonable (or targeted) margin of profits; to ensure profitable selling.

(3) Competitors’ Pricing:

In the present-day competitive marketing world, no businessman could ignore the pricing policies adopted by competitors; while doing the pricing his own product. In any case, the price of the product to be charged by a manufacturer must not be substantially different from the prices charged by competitors for similar types of products.

(4) Government’s Policy of Price-Control:

Where, in particular cases, the Government has fixed maximum retail prices; the pricing policy followed by a manufacturer must have to be in tune with governmental regulations, in that regard.

(5) Consumers’ Buying Capacity:

Since under the modern marketing concept, a product is made according to the needs and preferences of target consumers; the pricing of the product must be done in a manner so as to suit the pocket of the target consumers. In case otherwise, the product may not appeal to them; and selling the product may become a ‘big’ problem.

(6) Product-Life Cycle Stage:

While pricing a product, the manufacturer must pay attention to the particular stage of the product-life cycle; which a product is passing through. For example, price of the product must be kept low during introductory stage; it could be slightly raised at the growth stage and finally at the saturation point, the price must be again lowered.

(7) Demand-Supply Conditions:

Whether the price of the product should be high or low; would much depend on the demand- supply conditions relevant to the product in question. If demand is more than supply; even a high price might work well. On the contrary, when demand is less than supply, only a low price could attract the consumers.

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