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Pricing is the most important function of all enterprises. Since every enterprise is engaged in the production of some goods and services incurring. Some expenditure to sell in the market. It must set a price for it's product.
Every manager endeavours to find the price which would best meet it's objective. On the other hand if the price is set too high the seller may not find enough customers to buy his product. On the other hand if the price is set too low the seller may not able even to recover his costs. Thus there is a need for the right place.
Price denotes the exchange value of an Unit of a good expressed in terms of money. The pricing decision needs to be renewed and reformulated from time to time.
Determinants of price:
Determination of prices is an important function in all enterprises. Price affects profit through it's effect both on total revenue and total cost.
The factors governing the pricing strategies of a firm may be divided into two
1. Internal factor:
a) The costs
b) Management policy towards the gross margin and the sales turnover etc.
2. External factor:
The external factors influencing the price decisions are
a) The competition in the market.
b) The elasticity of supply & demand.
c) Trends of the market.
d) Purchasing power of buyer's.
e) Government policy towards price etc.
Factors determining price/ price determinants:
1. Objectives of business
2. Competition
3. Product & promotional strategies
4. Nature of price sensitivity
5. Influence of middlemen
6. Routinisation of pricing
7. Government regulation
1. Objectives of business:
The fundamental objective of a firm is to service in the business. Apart from this there are so many objectives for a business. Very often organisation fix a target rate of profit . Achievement of this target depends on the force of competition. Thus pricing policies are never established without full consideration of it on the other policies and pratices of the firm.
2. Competition:
To come out with a pricing policy manager must have a perfect understanding of the competitive environment. Usually when a seller cuts his selling price soon other competitors also follow. If the manufacturers product is of a superior quality he can charge a premium pricing and there by he can gain competitive advantage over the competitors.
3. Product & promotional strategies:
When a marketing strategy is formulated for a product the four components considered are the
a )Product itself
b) Pricing
c) Promotion activities
d) Distribution of products through the channel to the consumer.
4. Nature of price sensitivity:
Managers should not ignore the factors that minimize price sensitivity. When designing price strategies some of the factors that minimize price sensitivity are marketing effect of the Organisation, nature of the product itself, existence of highly differential products etc.
5. Influence of middlemen:
Middlemen are the ones who stock the finished product of the manufacturer to sell it to the customer. These are also called the channel of distribution. The manufacture will like his products to be sold to the end consumer with as much less price as possible. So that consumer buy more but middlemen may not allow for the low markup. Further if the manufacturer reduce his price the profit for middlemen goes down. These dynamics cause problem among the manufacturer and the middlemen.
6. Routinization of price:
The pricing pratice is often routinized but the extend of the routine varies from company to company and from product to product. The degree of routinization depends on the factors such as the number of pricing decisions, speed required by pricing decisions the quality of available information and the competitive market.
7. Government Regulation:
Inorder to safeguard the interest of the public the government acts on their behalf to prevent the abuse of the monopolistic government formulates policies and enacts law to control prices. Which may be against the interest of the public.
Objectives of Pricing policy:
Pricing strategies are considered a part of the general strategies for achieving a broadly defined goal. Some of the objectives are
1. Profit Maximization:
Profit ensures that the organisation will move on to be a viable business in future. But profit should be from the entire product line. Firm's should set a price such it enhances the sale of the entire product line rather than yield profit from only one product.
2. Long-term welfare of the firm:
The pricing policies must be decided that the sale of the product from the firm is for over a long period of time and that to retains customers for their life time.
3. Facing competition:
The pricing policy must fit into diverse competitive situations and ensure a place for the organization in the market.
4. Flexibility to economic change:
Pricing policies must be able to be flexible to vary prices to meet the changes in the economic conditions affecting the various consumer industries.
5. Satisfying rate of returns:
Pricing should help achieve a satisfactory rate of return for the organization.