Factors Affecting Pricing Decisions
A number of different internal and external Factors Affecting Pricing Decisions and this may pose some complexity. In general, there is uncertainty about how consumers, competitors, resellers etc. would react to prices. Price considerations are important in market planning, analysis, marketing mix variables, demand forecasting, competitive structure, costs, and government actions. To illustrate the point, let us just look at one factor, the competitive market structure and what kind of affect this single factor can have on pricing decisions. However, it is necessary to appreciate that all internal and external factors interact to influence pricing decisions.
Internal Factors: When setting a price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.This way internal Factors Affecting Pricing Decisions.
External Factors: There is a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the Factors Affecting Pricing Decisions can vary by market.
Competitive Structure: The market conditions vary considerably and market structure affects not only the pricing decisions within a company but also the kind of likely response from other players in the same industry. Much depends on the number of buyers and sellers operating in a market and the extent of entry and exit barriers. These factors affect a company’s level of flexibility in setting prices.
A non-regulated monopoly can set prices at any level it determines to be appropriate. However, in the case of regulated monopoly, there is less pricing flexibility and the company can set prices that generate a reasonable profit. In the case of oligopoly, there are few sellers and market entry barriers are high, such as auto industry, computer processor industry, mainframe computer, and steel industry etc. If an industry member company raises its price, it hopes others will do the same. A similar response is likely to result when a company reduces its price in an attempt to increase its market share, other companies too follow suit and the initiator company gains no appreciable advantage. Monopolistic market structure means numerous sellers with differentiated offerings in terms of tangible and intangible attributes, and brand image. This allows a company to set different price than its competitors. In most successful cases, the nature of competition is likely to be based on non-price factors. Under perfect competition, there are very large number of sellers and buyers perceiving all products in a category as the same. All sellers set their prices at going market price as buyers are unwilling to pay more than the going market price. Sellers have no flexibility in price setting.