Pricing as a balance between manufacturer and customer, and factors affecting price

Comment on the statement

Price is the sum of money a buyer gives up to get a product; pricing is the process of deciding it. The statement is broadly right: the best price is one that is acceptable to both sides. For the manufacturer, it must cover costs and yield the target profit and market share: cost sets the minimum, or floor, below which the price cannot stay for long. For the customer, it must be no more than the value he or she sees in the product, which sets the upper limit. Competitors' prices and other factors decide where between the two the price is fixed. A price above what buyers will pay finds no buyers; a price below cost brings losses.

The factors are grouped here as internal and external:

Internal factors affecting price

1. Costs. Fixed and variable costs of production, distribution and selling, which must be recovered in the long run; costs also fall with volume and experience.
2. Pricing objectives. Survival, the highest profit, a larger market share or a quality image each lead to a different price level.
3. Product characteristics. Its newness and distinctiveness, its stage in the life cycle and its perishability.
4. The rest of the marketing mix. Price must fit the product's design, channels and promotion; a premium brand sold through exclusive stores needs a high price.
5. Who sets the price. Top management, the marketing department or the sales force, and how much room salespeople have to bargain.
6. Marketing methods used. How the product is sold, the channel, the size of the sales force, the amount of advertising and promotion, the packaging, credit terms and after-sales service, adds to cost and also changes what buyers will pay: generous service and credit support a higher price, a bare self-service model a lower one.

External factors affecting price

1. Demand. How much buyers want the product and how strongly demand responds to price; necessities respond little, luxuries much.
2. Competition. Competitors' prices, costs and likely reactions; close substitutes limit price, and the firm has most freedom where it faces little competition.
3. Government regulation. Taxes such as GST, price controls on essential drugs and other goods, and laws against unfair pricing.
4. Customers' view of value. Buyers' perception of quality, brand and benefits, and their ability to pay.
5. Channel members. Wholesalers and retailers need adequate margins, which affect the final price.
6. Economic conditions. Inflation, recession, interest rates and incomes affect willingness to pay and the firm's costs.
7. Social concerns. Fairness and the public's reaction matter, especially for essential items.

Conclusion

Pricing is a balancing act. The optimal price lies between the floor set by costs and the limit set by what customers think the product is worth, adjusted for the firm's objectives, competition, demand and regulation.