Author: Jim Riley Last updated: Sunday 23 September, 2012
Marketing - Factors to consider when setting a price
The price a business charges needs to take account of, and be consistent with, the objectives of the business.
For example, it may be that the objective is to position the business as the highest quality provider – in this case, a higher price should be used to signal high quality to the consumer. Exclusive designer fashion labels and luxury holiday businesses apply this strategy (using “premium” or luxury prices).
At the other end of the pricing scale, a business that positions itself as a low-cost or discount provider will look to set prices that are lower or as low as any rival. The strategy is to gain advantage by offering the lowest prices (not just in the short-term). The battles in the discount supermarket and low-cost airline markets are great examples of this strategy in action.
Factors to consider when setting price
There are several factors a business needs to consider in setting the price:
Objectives – what are the marketing objectives of the firm?
Competitors – this is really important. Competitor strength influences whether a business can set prices independently, or whether it simply has to follow the normal market price
Costs – a business cannot ignore the cost of production or buying a product when it comes to setting a selling price. In the long-term, a business will fail if it sells for less than cost, or if its gross profit margin is too low to cover the fixed costs of the business
The state of the market for the product – if there is a high demand for the product, but a shortage of supply, then the business can put prices up.
The state of the economy – some products are more sensitive to changes in unemployment and workers wages than others. Makers of luxury products will need to drop prices especially when the economy is in a downturn
The bargaining power of customers in the target market – who are the buyers of the product? Do they have any bargaining power over the price set? An individual consumer has little bargaining power over a supermarket (though they can take their custom elsewhere). However, an industrial customer that buys substantial quantities of a product from a business may be able to negotiate lower or special prices.
Legislation in the market – some businesses operate in markets where prices are regulated by government legislation – e.g. the rail industry
Other elements of the marketing mix – it is important to understand that prices cannot be set without reference to other parts of the marketing mix. The distribution channels used will affect price – different prices might be charged for the same product sold direct to consumers or via intermediaries. The price of a product in the decline stage of its product life-cycle will need to be lower than when it was first launched
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