Basic Factors that Affect the Price in Any Market - Essay Example

Factors Affecting Price in Any Market Introduction: Price makes up one of the four P’s of marketing. According to Groucutt, 2005, p. 249, price may be defined as “a measure of the value exchanged by the buyer for the value of the product or service offered by the seller”. The significance of price is that frequently it has been considered to be the only component of the marketing mix with revenue generating potential and in that lies the emphasis of fixing the right price for a product. Price of a product however, is impacted on by several factors making the issue of fixing the right price seldom an easy proposition. It is for this reason that the factors affecting the price in any market assume importance in marketing management. Basic Factors that Affect the Price in Any Market: The basic factors that affect the price of a product may be taken as the cost of research and development, cost of making the product, organizational profit policies, local taxes and surcharges, economic value of the product, competitive forces, market conditions, and geography. Cost of research and development of the product, cost of making the product, and organizational profit policies are taken as internal factors, while local taxes and surcharges, economic value of the product, competitive forces, market conditions, and geography are external factors (Groucutt, 2005). The costs involved in research and development vary considerably. For a product like a passenger aircraft the costs involved in research and development are considerable, while in the case of some other products and services the costs of research and development may be small. Nevertheless there is a cost involved and becomes a part of the cost factor (Groucutt, 2005). Another factor that is involved in the cost factor is the cost of production of the product. Cost of production includes fixed costs and variable costs. Fixed costs are costs that do not alter irrespective of the number of items produced and sold, such as rent. Variable costs are costs that get altered by the number of items produced and sold, like energy costs (Lancaster & Withey, 2006). With price as the key to revenue generation in the marketing mix for an organization, the organizational policies involved in the price of the product hinge on the profit policies of the organization (Cheverton, 2004). Local taxes and surcharges are a part of the price that the customer pays for the product and it is essential that these factors play a role in the price of a product. The economic value of the product is the perceived value of the product from a customer’s perspective. Organization is general operate in competitive markets and hence face competition from other organizations with same or similar products. These competitive forces have an impact on the price of a product made available in a market. Any market place is dynamic rather than static and there are factors that cause the dynamic nature of the market place, which may be taken as the market condition. For example the economic conditions of a market determine the quantum of disposable income available for the purchase of products and services. Multi-national organizations tend lower prices in markets of the developing world, while maintaining higher prices in markets of the developed world. The final factor is the geography of the market. Costs in transporting and distributing products vary depending on the geography of the market and the distances over which the products have to be transported to reach the consumers in the market (Groucutt, 2004). Considerations in Pricing Decisions: The factors that affect the price of a product are factors that are internal to the organization marketing the product and there are external factors too. This leads to considerations in pricing decisions that are internal to the organization as well as external to the organization marketing the product. The considerations that are internal to the organization are the marketing objectives of the organization, the marketing mix strategies of the organization, costs that relate to the product, and organizational considerations. An example of marketing objectives as a consideration in pricing decisions relates to market positioning, while an example the consideration of marketing mix strategies in pricing decisions lies in the careful coordination required with the other marketing mix elements in pricing decisions. One of the elements that make up the cost considerations in pricing decisions is the total costs involved in the production of the product. Moving on to organizational considerations in pricing decisions, an example of this lies in the authority that sets the price. In small organizations this responsibility may rest with the top management, while in larger organizations the responsibility may lie with product line managers (Pricing Products: Pricing Considerations and Approaches). Considerations in pricing decisions that are external to the organization are nature of the market and demand, competitor pricing and offer strategies, and other environmental elements. Components of the nature of the market include consumer perceptions of price and value of the product and the type of competition in the market, while the consideration of competitor pricing and offer strategies the prices of competing products and the pricing strategy of the competition in the market. Elements of the environmental considerations include, economic conditions, social considerations and government levies and regulations (Pricing Products: Pricing Considerations and Approaches). Value to the Customer Approach in Pricing: The approach of using value to the customer in pricing is called value based customer approach, and this approach may be taken as using the buyer’s perception of value as the key ingredient in pricing (Pricing Considerations and Strategies). Such a consideration stems from oft repeated marketing cliché that ‘the customer is the king’. Such an approach removes the undue focus on the price itself in the marketing mix, and instead makes the price simply the marker at which the organization is content to trade a product for revenue. It is far different from a cost based approach, where an organization takes into consideration all the costs involved in the development and manufacture of the product and reaching it to the customer and simply adds on a percentage of profit. Instead the focus is on the value of the product to the customer’s perspectives, wherein the price may be much higher then existing competition, but provides benefits that outweigh the enhancement in price for the product. Value to a customer comes in several ways. Let us take the example of a can of paint. To get the can of paint a customer has to drive down to the nearest store, spending money on petrol. Buy a paint brush and thinner to use the paint, white spirit to remove any stains on the floor, and finally find that some of the paint in the can is extra and has to be simply thrown away. All this works out to costs for the customer in the use of the product. Let us say that there is a can of paint that is made available in the market that removes these usage costs. From the perspective of the customer there is value in paying more for this can of paint, as long as the extra price paid does not exceed the costs in use. Thus the basis of value based customer approach lies in understanding what customers expect and want from a product and the value that the customer puts on the product, which is reflected in the price. Such an approach is more logical for it makes the customer the focus of the pricing decision and leaves the customer more satisfied, without the feeling of having been taken advantage of (Cheverton, 2004). Role of Cost in Pricing Decisions: Cost has a significant role to play in pricing decisions. Assuming that costs are accurately calculated, it provides the marker for the expenses involved in the product. Price is the revenue generating element in the marketing mix and if the pricing decisions are to be made relevant to revenue generation, then there has to be a marker over which only will the price generate revenue. Cost provides this marker for profit or revenue generation and is the significant role of cost in pricing decisions (Cheverton, 2004). My Recommendations in Setting Prices: I recommend that cost be used as the marker below which the price of the product cannot be considered. I recommend that cost plus an arbitrary percentage of profit not be the means to arrive at the price of a product. Instead the price of the product should be based on the value to the customer. This is quite likely to mean larger profit margins for the better products from the perspective of the customers and lower profit margins for the others. There may also be some products whose value to the customer realizes a price lower than the cost. Such products need to be either discarder or feature enhanced to provide more value to the customer and hence higher prices. Literary References Cheverton, P. 2004, Key Marketing Skills, Second Edition, Kogan Page Limited, London. Groucutt, J. 2005, Foundations of Marketing, Palgrave Macmillan, Hampshire. Lancaster, G. & Withey, F. 2006, Marketing Fundamentals, Butterworth-Heinemann, Oxford. ‘Pricing Considerations and Strategies’, [Online] Available at: http://www.apibm.nuk.edu.tw/03.bachelor/data/Min-Hsin/%E8%A1%8C%E9%8A%B7%E7%AE%A1%E7%90%86/Ch.09.ppt (Accessed on August 01, 2008). ‘Pricing Products: Pricing Considerations and Approaches’ [Online] Available at: http://mkt.shidler.hawaii.edu/PPT/BUS312/kotler10_basic.ppt (Accessed on August 01, 2008). Read More