What is Price Determination? In Economics Price Determination is the interaction between the demand and supply in the free market that is used to determine the costs for a good or service. Basically Meaning is Interaction of the free market forces of demand and supply to establish the general level of price for a good or service in Market. Also learn, Factors Affecting of Price Determination with Steps and Process.
In the production of Marketing is also important of Factors Affecting of Price Determination with Steps and Process.
The Factors Affecting Price Determination of Product
Main factors affecting the price determination of product are:
The most important factor affecting the price of a product is its cost. Product cost refers to the total of fixed costs, variable costs and semi-variable costs incurred during the production, distribution, and selling of the product. Fixed costs are those costs which remain fixed at all the levels of production or sales.
For example, rent of the building, salary, etc. Variable costs refer to the costs which are directly related to the levels of production or sales. For example, costs of raw material, labor costs etc. Semi-variable costs are those which change with the level of activity but not in direct proportion. For example, a fixed salary of Rs 12,000 + up to 6% graded commission on an increase in the volume of sales.
The price of a commodity is determined on the basis of the total cost. So sometimes, while entering a new market or launching a new product, the business firm has to keep its price below the cost level but in the long rim, it is necessary for a firm to cover more than its total cost if it wants to survive amidst cut-throat competition.
The Utility and Demand:
Usually, consumers demand more units of a product when its price is low and vice versa. However, when the demand for a product is elastic, little variation in the price may result in large changes in quantity demanded. In the case of inelastic demand, a change in the prices does not affect the demand significantly. Thus, a firm can charge higher profits in the case of inelastic demand. Moreover, the buyer is ready to pay up to that point where he perceives utility from the product to be at least equal to the price paid. Thus, both utility and demand for a product affect its price.
The extent of Competition in the Market:
The next important factor affecting the price of a product is the nature and degree of competition in the market. A firm can fix any price for its product if the degree of competition is low. However, when the level of competition is very high, the price of a product is determined on the basis of the price of competitors’ products, their features, and quality etc. For example, the MRF Tyre company cannot fix the prices of its Tyres without considering the prices of Bridgestone Tyre Company, the Goodyear Tyre company etc.
Government and Legal Regulations:
The firms which have the monopoly in the market, usually charge the high price for their products. In order to protect the interest of the public, the government intervenes and regulates the prices of the commodities for this purpose; it declares some products as essential products for example. Life-saving drugs etc.
Another important factor, affecting the price of a product or service is the pricing objectives.
Following are the pricing objectives of any business:
- Profit Maximisation: Usually, the objective of any business is to maximize the profit. During the short run, a firm can earn the maximum profit by charging the high price. However, during the long run, a firm reduces the price per unit to capture the bigger share of the market and hence earn high profits through increased sales.
- Obtaining Market Share Leadership: If the firm’s objective is to obtain a big market share, it keeps the price per unit low so that there is an increase in sales.
- Surviving in a Competitive Market: If a firm is not able to face the competition and is finding difficulties in surviving, it may resort to free offer, discount or may try to liquidate its stock even at BOP (Best Obtainable Price).
- Attaining Product Quality Leadership: Generally, the firm charges higher prices to cover high quality and high cost if it’s backed by the above objective.
Marketing Methods Used:
The various marketing methods such as distribution system, quality of salesmen, advertising, type of packaging, customer services, etc. also affect the price of a product. For example, a firm will charge high profit if it is using an expensive material for packing its product.
The Steps Involved in Price Determination Process.
The Price decision must take into account all factors affecting both demand price and supply price. The Process of Price Determination. The market price is the price determined by the free play of demand and supply. The market price of a product affects the price paid to the factors of production – rent for land, wages for labor, interest for capital and profit for the enterprise. In fact, price becomes a basic regulator of the entire economic system because it influences the allocation of these resources.
The pricing decisions must take into account all factors affecting both demand price and supply price. The price determination process involves the following steps:
- Market Segmentation: On the basis of market opportunity analysis and assessment of firms strengths and weaknesses marketers will find out specific marketing targets in the form of appropriate market segments. Marketers will have the firm decision on - (a) the type of products to be produced or sold, (b) the kind of service to be rendered, (c) the costs of operations to be estimated, and (d) the types of customers or market segments sought.
- Estimate of Demand: Marketers will estimate the total demand for the products. It will be based on sales forecast, channel opinions and degree of competition in the market.
- The Market Share: Marketers will choose a brand image and the desired market share on the basis of competitive reaction. Market planners must know exactly what his rivals are charging. Level of competitive pricing enables the firm to price above, below, or at par and such a decision is easier in many cases. The higher initial price may be preferred if you expect a smaller market share, whereas if you expect of much larger market share, you prefer the lower price.
- The Marketing Mix: The overall marketing strategy is based on an integrated approach to all the elements of the marketing mix. It covers - (1) product-market strategy, (2) promotion strategy, (3) pricing strategy, and (4) distribution strategy. All elements of the marketing mix are essential to the overall success of the firm. Price is the strategic element of the marketing mix as it influences the quality perception and enables product positioning.
- Estimate of Costs: Straight cost-plus pricing is not desirable always as it is not sensitive to demand. Marketing must take into account all relevant costs as well as price elasticity of demand, if necessary, through market tests.
- Pricing Policies: Price policies provide the general framework within which managerial decisions are made on pricing. Pricing policies are guidelines to carry out pricing strategy. Pricing policy may desire to meet competition or we may have pricing above or below the competition. We may have fixed or flexible pricing policies. Pricing policies must change and adapt themselves to the changing objectives and changing environment.
- Pricing Strategies: Pricing policies are general guidelines for recurrent and routine issues in marketing. The strategy is a plan of action (a movement or counter movement) to adjust with changing conditions of the marketplace. New and unanticipated developments may occur, e.g., price cut by rivals, government regulations economic recession, fluctuations in the purchasing power of consumers, changes in consumer demand, and so on. Situations like these demand special attention and relevant adjustments in our pricing policies and procedures.
- The Price Structure: Developing the price structure on the basis of pricing policies strategies is the final step in the price determination process.