Factors affecting pricing:

There are several factors that affect price determination. These are discussed below:

1. Production cost:

• Cost of producing a good that the producer has to bear is the most important of all aspects for determining the price.
• Production cost includes cost borne to procure raw material, labour, production and processing costs, administrative cost, sales and distribution expenses, etc.
• Over and above these costs, if the product is newly launched then there are also several other expenses incurred for promoting the product and putting up in the market. These costs also affect the price and can be considered indirect production cost.
• It is quite obvious that price of a product can never be lower than its production cost.

2. Demand for the product:

• Demand for the product and its price are directly related.
• Factors that affect demand include taste and preference of the consumer, number of consumers, purchasing power of consumer, number of competitors in the market, price of competitor’s product, etc.
• The producer may charge a high price if the demand is high, but if the demand is low, the price has to be kept low and competitive.
• In case if the product of competitor is in high demand or if there are more competitors in the market, the producer launching new product might have to lower its price.
• When the market is less competitive, the producer can keep a higher price and earn higher profit.

3. Competition in the market:

• The extent of competition directly affects the price of the product.
• Producers keeps competitive price when the number of competitors are more and competition is high.
• During competition, the prices are also fixed with objectives such as beating the competitor’s price, or making their entry or survival difficult in the market or even with an objective to force them to withdraw their product and quit the market.
• Contrary to this, a product having a very high brand reputation can be sold at higher price than the competitors’ product (Note: For example, iPhone).

4. Governmental and legal controls:

• Producers of monopolistic products (especially, of daily use) usually charge high price. So, the government imposes control on such business units in order to protect the interest of consumers.
• Prices of products like petrol keep on fluctuating quite frequently. Hence, the government puts a number of legal controls on such products. These factors have to be taken into consideration while determining product price.
• Government also imposes certain regulatory control on products which are essential for life such as lifesaving drugs, petrol, diesel, paper for daily newspaper, etc. So, the producers of these products have to consider these factors too while determining prices.

5. Price determination on the basis of objectives:

Over and above the factors discussed above, there are some other objectives too which the producer might consider while determining the price.

Some of them are:

(A) Maximum profit: Under this objective, the producer determines the price of the product with an aim of earning maximum profit. He does so either because there is no competition in the market or he has spent heavily in the research and development of the product.

(B) To acquire dominant position in the market: In most cases the producers keep a very low price of his product so that they can attract maximum customers and dominate the market.

(C) To sustain competition: When competitors are more and when competition is high, the business firms tend to fix prices lower than or at par with competitors.

6. Economic condition:

• Economic condition of the market plays an important role in determining the price of the product.
• If the economic condition of the country is good, price can be fixed at a higher level and if there is a recession, product price is reduced.

7. Buying behaviour:

• Consumer behavior plays an important role in determining price.
• Behaviour of consumers towards a product is affected by factors such as consumer’s habits, social and cultural structure, individual preference, his financial condition, etc.
• Due to these factors, the attitude towards the product may change and it may not get desired or expected response from the consumers. Hence, it is quite important to consider these factors too before determining the price.