Pricing decisions are a crucial aspect of a business's operations and can have significant impact on its profitability and overall success. These decisions involve determining the price at which a product or service will be offered to customers, taking into account a variety of factors such as the cost of production, competition, market demand, and the value that the product or service provides to the customer.
There are several different approaches to pricing that businesses can consider when making pricing decisions. One common approach is cost-based pricing, where the price of a product or service is determined based on the costs incurred to produce it. This approach takes into account the direct costs of production, such as materials and labor, as well as indirect costs such as overhead and marketing expenses. By setting prices based on the costs of production, businesses can ensure that they are covering their expenses and earning a profit.
Another approach to pricing is value-based pricing, which involves setting prices based on the perceived value of the product or service to the customer. This approach takes into account the benefits and features that the product or service offers, as well as the demand for it in the market. By setting prices based on the value that the product or service provides to the customer, businesses can ensure that they are maximizing their profits and attracting customers who are willing to pay a premium for a high-quality product or service.
A third approach to pricing is competitive pricing, where the price of a product or service is determined based on the prices of similar products or services offered by competitors. This approach helps businesses to stay competitive in the market and ensures that they are not pricing their products or services too high or too low relative to their competitors.
There are several factors that businesses need to consider when making pricing decisions, including the costs of production, market demand, competition, and the value that the product or service provides to the customer. By carefully considering these factors and using a combination of different pricing approaches, businesses can ensure that they are setting prices that are both profitable and attractive to customers.
Factors Affecting the Pricing Decisions
Key Takeaway In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. Economists argue that pricing should be set with a recognition of demand considerations not just of costs. Factors Affecting Price Determination There are numerous factors that affect marketing decisions. Under this strategy, price is set high to skim as much as possible in the early stage of the product life cycle. The various factors which may generate insensitivity to price changes are variability in consumer behaviour, variation in the effectiveness of marketing effort, nature of the product, importance of after sales service, the existence of highly differentiated products which are difficult to compare and multiple dimensions of product quality. In market penetration objective, the unit cost of production and distribution starts decreasing after reaching certain targeted level of sales.
In order to ensure the fair price it is necessary to examine the cost structure of various concerns of the same industry and the fair return on capital expected for existing and further development of the industry. The fact is that at a particular time or in the short run there is something like a going rate for a product. Basic pricing strategies can be divided into three broad categories: 1. Also, you should not ignore the drawback. Companies resolve the pricing issue by selecting a pricing method that includes one or more of these three considerations.
As price goes up, demand falls and volume declines again — a downward spiral. The manufacturer will realize this return on investment providing its costs and estimated sales turn out to be accurate but what if sales do not reach 50,000 units, manufacturer can prepared Break Even Chart to learn what would happen at other sales level. And company wants to charge a price that covers its entire costs of producing, distributing and selling the product, including a fair return for its effort and risk. Thus, the situation arises whereby the decision to reduce capacity is continually deferred and short-term incremental costs are used for long-term decisions. If demand hardly changes with a small change in price, we say the demand is inelastic.
Factors to Consider When Setting a Price: ADVERTISEMENTS: h. Competition — Another factor that influences pricing is competition. Standard Cost Pricing : Standard cost pricing is based on the cost standards developed in Management accounting systems. The success of demand-based pricing depends on the ability of marketers to analyze the demand. Unless sales responds strongly, this strategy will compound disaster, in that continued low sales at the lower price known as price war, will make an even smaller contribution to fixed overheads. If certain price sensitive industries have a separate pricing department that can either directly determine the best prices.
One important thing to note is that pricing strategies often change. Specifically, the price elasticity of demand is given by the following formula: 3. Formulating and implementing a price rate Pricing Strategy is very beneficial for the customers, traders, organization. Product Costs The costs of the product—its inputs—including the amount spent on product development, testing, and packaging required have to be taken into account when a pricing decision is made. Break Even Analysis It is a point when the investment and revenue of an enterprise is equal; after this point an enterprise gains profit. On the other hand, standard costs use costs from efficient operations plus the agreed profit.
Comparable and substitute products iv. Sufficient capacity is available for all resources that are required to fulfill the order. So, that the lowest cost can be obtained for the determination of effective prices for the manufactured products or services. However, now many other elements are considered as more determining than price alone in Consumer Behavior. The unit cost of production and distribution fall with increased output. ARPU also reveals the relative value of your product—if you have a high ARPU relative to the revenue of the company, you know you have a product that's driving a better value ratio.
What Is Pricing? Objectives, Strategies, Factors Influencing
Demand-based pricing helps the organization to earn more profit if the customers accept the product at the price more than its cost. A low price would discourage actual and potential competition. Similarly, if the organization has a goal to increase sales by 18% every year, then the reasonable prices have to be set to increase the demand of the product. Provide continuous employment iv. Of course, it is.
Pricing Decisions: Influencing Factors, Methods and Economic Approach
Life cycle costs provide important information for pricing. Conclusion The topic Pricing Strategy is one of the important topics of the syllabus and students can get a good understanding of the topic with the information provided above. Specifically, the sellers on the market do involve in preparation of marketing strategies. Figuring out how consumers will respond to prices involves judgment as well as research. Increase in production causes an increase in marginal cost the varying amount in total cost required to produce and sell an additional unit of production. Rigidity of wage rates ii.
So businesses should focus on the pricing that is consumer oriented. Practice will help students to get good confidence before appearing in the examination. Also, pricing can be done more quickly. As volume increases, the fixed cost and full cost per unit decreases. InÂcreasing prices may cause the loss of a customer to a competitor or it may cause a customer to choose a less expensive substitute product. Such objective is prevalent in a price sensitive market.
