Factors Affecting Pricing Decision

What is price?  Price is defined as an amount charged by a company to a buyer in exchange for goods or services.  On the side of buyer, it is equivalent given or asked in exchange of value or cost.  On the side of the seller, it is the amount that the business charges it customers for a product or service which is part of the firm’s total cost of investment in view of the firm’s target profit.

Internal factors affecting price 1.Marketing objectives – survival, current profit maximization, market-share leadership, and product-quality leadership. 2.Marketing mix strategy 3.Costs – (Fixed + variable = Total cost) 4.Organizational considerations

External Factors 1.The market 2.The demand 3.The competition 4.The general condition

The Market Structures Four types: 1.Pure monopoly – occurs when there is only one dominant seller of a specific good or seller. (Monopsony- a market condition when there is only one dominant buyer) 2.Oligopolistic competition- few sellers (Oligopsony – few buyers) 3.Monopolistic competition- many buyers and many sellers who trade over a range of prices rather than single market price. (sellers are able to differentiate) 4.Pure competition – many buyers and many sellers who deal with a uniform commodities such rice, salt, and sugar. (no chance of differentiation)

The Demand In the end, the consumer decides whether a product’s price is right or not. Marketing starts with customer needs and wants and ends with customer satisfaction.

Price Elasticity of Demand Elasticity refers to the degree of responsiveness of demand to price changes: Elastic demand-if the percentage change in demand is greater than the percentage change in price. D>P Inelastic demand – if the percentage change in demand is less than the percentage change in price. D<P Unitary demand – D=P

Example # 1.  The price of Brand 1 detergent is expected to increase by 10 percent by next month. If this happens, 15 percent of its buyers are expected to shift to Brand 2, a much cheaper brand. In this case, demand is elastic since the percentage change in demand (15% of buyers to shift to Brand 2) is greater than the percentage change in price (price increase of 10% on Brand 1 detergent).

Example #2  The holy redeemer School is planning to lower its tuition and other fees by 12 percent. If it does, it expects enrollment to go up by 7 percent. Since the percentage change in demand (increase in enrolment by 7%) is less than the percentage change in price (decrease in tuition and fees by 12%), then demand is inelastic.

Example 3  Agua Berna is planning to increase the price of one gallon of purified water from Php10 to Php12. if this happens, the company estimates that demand will fall from 100 gallons a day to 80 gallons a day. In this case, demand is unitary since the percentage change in demand and the percentage change in price are equal at 20%.

Effect of demand elasticity on pricing decision  Elastic demand – prices plays a vital role in consumers’ buying decision. When demand is elastic, buyers are price- sensitive, which means that price is an important factors consumers consider before buying the product  Inelastic demand – buyers are not price-sensitive as those in elastic. Consumers look for other product attributes, besides price, in making their purchase decision.  Unitary demand- the behavior or demand and price is the same so that any percentage change in price would result in the percentage change in quantity of demand.

The competition Competition plays a significant role in setting a company’s price. The price of a company’s product can be effectively set when the prices of other companies offering the same product are considered.

The general conditions  When setting prices, a company must also play by other factors within the external environment like the economy, the sociocultural characteristics, the politico – legal situation, and technological advancements.

Questions?