StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

What are the key internal factors and external factors to be considered in price decision making - Essay Example

Cite this document
Summary
While speaking in a simple and basic economics’ language, price of a product is determined by the demand for and supply of that product.The equilibrium point where demand curve intersects with supply curve is the deciding point at which price is determined…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.9% of users find it useful
What are the key internal factors and external factors to be considered in price decision making
Read Text Preview

Extract of sample "What are the key internal factors and external factors to be considered in price decision making"

?What are the key internal and external factors to be considered in price decision making? Why? Introduction While speaking in a simple and basic economics’ language, price of a product is determined by the demand for and supply of that product. The equilibrium point where demand curve intersects with supply curve is the deciding point at which price is determined. When price is considered in terms of demand and supply, it can be said that price has inverse relationship with demand and positive relationship with supply. In other words, when price increases demand decreases and vice versa, while price increases supply also increases. This is because, when price increases, the customers would like to reduce its consumption as the product seems to be more expensive. Likewise, when price increases, the firms will be encouraged to produce or supply more, as they expect more for their products. In another words, price has the tendency to be increased by the increased demand and to be decreased by the increased supply (Shapiro and Barbara, 1978). But in a real market, price is not solely determined by the equilibrium position of supply and demand, but some other factors also play crucial role in deciding the price of the products. Pricing is a more a complex and complicated process than a simple determination of demand and supply. Hence, pricing policies which are deliberately taken by the firm is the most important deciding factor which decides the price of a particular product. These pricing policies of the firm are influenced, in general, by two sets of factors- internal and external. Both the internal as well as external factors influence the pricing decisions of any enterprise or firm. These factors may be psychological, economical, quantitative or qualitative (Sawyer, 1981 and Kotler, 1997). 2. Internal Factors Pricing decisions are influenced by a number of internal factors which consist of profit margin, cost of production and other expenses, brand image and expectations of the company, suppliers’ and employees’ efficiency and responsiveness of the product to the price changes (Kotler, 1997). . These factors can broadly categorized under the following heads: 2.1 Corporate and marketing objectives of the firm. Corporate and marketing objectives of the firm mainly seek to recover the cost elements of all types, to make target returns and to maximize the profit. Coverage of the corporate cost of production as well as marketing should be an influential factor of pricing policy of the firm. Corporate objective of making specific return rates on the basis of internal cost factors is another important internal factor which play crucial role in an organization’s pricing strategy. Some important examples of other market objectives are survival of the firm in a high competitive atmosphere, current profit maximization, market share leadership and product quality leadership (Munroe, 1990). 2.2. Image sought by the firm through the price By setting a particular price or implementing a pricing policy, the firms seek a particular public image and this image plays a crucial role in the pricing policy. For example, premium prices are usually being charged for global brand. Likewise, a plant keep going by setting a low price in the hope that in future, the plant can increase the demand. In this case, survival is more important than price or profit maximization (Forman, 1998). 2.2 The Stage of the Production in its life cycle The stage of the production under which the firm goes through is an important factor in the price setting strategy. Whether the firm is going through increasing, decreasing or stagnant returns of scale and where the position of its average and marginal product curves stand, are the important things which decisively play role in the pricing policy of the firm. 2.3. Capacity Utilization and Market Contribution rates Capacity utilization has a positive influence on cost-based pricing strategies. Organizations operating at full capacity are capable of spreading the fixed cost to various units and thereby, achieving flexibility in setting the prices. Market contribution rate means the percentage of total firm profits in representation of one particular product. A product which accounts for a major chunk of the profit share to a firm affects the pricing strategy (Noble, 1995). 3. External Factors Government policies, competitor’s prices, cost of raw materials, consumers’ expectations etc. are the important external factors in the price setting strategy of a firm (Kotler, 1997). 3.1. Government Policies To save the interests of the borrowers and of some sellers, government may interfere in the price determination of the firm. Hence, government policies are taken very seriously into consideration while formulating pricing policies 3.2 Costs of raw material and other intermediary goods Prices of the raw materials and other intermediary goods are very critical in the cost of the product and hence, in the determination of the prices. 3.3 Elasticity of the demand for product Price elasticities at different levels of output determine the price of a particular product. If the product is a more or less a necessary thing, even with high price the customers would purchase it. That is, when there is nearly zero elacticity, the price changes can be possible. More prices are generally charged for products with high elasticity (Munroe, 1990). 3.4. Entry Barriers Entry barriers include the nontariff trade barriers, patents, or technological innovations or advancements. If the entry to barriers are high, firms will be in a better position to retain relatively high prices and profit without facing much competition (Neumann and Lincoln, 1991). 3.5 Switching Costs The differences in the switching cost of the customer affect the flexibility of the managers to set the prices. The differences in the switching costs can be capitalized by implementing appropriate pricing policies (Stango, 2002). 4. Why there exists pricing policy These external and internal factors influence the pricing policies of the firm to attain the following three important objectives: i) maximization of the profit: For maximizing the profit, each firm should have a pricing policy. I ii) Price stability: A stable price should be fixed in order to ensure the confidence of the customer as price fluctuating is not a good will of the firm iii) Ability to pay: The ability of the consumers has to be considered while formulating the pricing principle. Conclusion Several internal and external factors decide the pricing policy of a firm. The firm takes a decision on price by considering the above discussed factors in order to ensure, profit maximization, price stability and ability to pay of the customer Reference Kotler, Philip (1997). Marketing Management: Analysis, Planning, Implemenation and Control. Englewood Cliffs. Prentice-Hall. Monroe, Kent D. (1990). Pricing: Making Profitable decisions: New York. NY7 McGraw-Hill. Montgomery, Stephen (1988). Profitable Pricing Strategies. New York. NY7 McGraw-Hill. Naumann, Earl and Lincoln, Douglas J. (1991). Non-tariff barriers and Entry strategy alternatives: Strategic Marketing Implications. Journal of Small Business Management. 29(2).60-67. Noble, Peter and Gruca, Thomas, S (1999). Industrial Pricing: Theory and Managerial Practice. Marketing Science. 18(3). 435-454. Sawyer, M C (1981). The Economics of Industries and Firms. London. England 7. Croom Helm. Shapiro, Benson P and Jackson, Barbara (1978). Industrial Pricing to meet customer Needs. Harvard Business Review. 56(6). 119-127. Stango, Victor (2002). Pricing with Consumer Switching Cost: Evidence from the Credit Card Market. Journal of Industrial Economics. 50(4). 475-492. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“What are the key internal factors and external factors to be Essay”, n.d.)
Retrieved from https://studentshare.org/management/1417392-what-are-the-key-internal-factors-and-external-factors-to-be-considered-in-price-decision-making
(What Are the Key Internal Factors and External Factors to Be Essay)
https://studentshare.org/management/1417392-what-are-the-key-internal-factors-and-external-factors-to-be-considered-in-price-decision-making.
“What Are the Key Internal Factors and External Factors to Be Essay”, n.d. https://studentshare.org/management/1417392-what-are-the-key-internal-factors-and-external-factors-to-be-considered-in-price-decision-making.
  • Cited: 0 times

CHECK THESE SAMPLES OF What are the key internal factors and external factors to be considered in price decision making

What Are the Advantages of Using SMA Over Other Accounting Techniques

This paper "what are the Advantages of Using SMA Over Other Accounting Techniques?... focuses on the fact that the role of Strategic Management Accounting (SMA) technique in an organization to determine the key decision-making strategies for its competitive advantage.... Further, the strategic decision-making issues related to the factors like competitive pricing of products or services, the operational strategies of the business, the manufacture and development of products and the product costing are discussed in detail....
13 Pages (3250 words) Case Study

Factors That Influence Consumers Purchasing Decision

Furthermore, the group debate revealed various internal along with external factors that play a distinctive role to determine the selection and purchase procedures of products and/or services as followed by consumers in the modern-day markets.... This definition clearly exhibits the idea that consumer behavior is a decision-making procedure, which begins in the mind of the customers and leads towards a set if short-listed substitute products or services that can be purchased or availed to suffice their requirements....
15 Pages (3750 words) Essay

Consumer Purchase Decision Making Process

The assignment “Consumer Purchase decision making Process“ focuses on heterogeneity of needs and wants in various consumer segments, Marketers' role in consumer purchase decision-making process, compares Products and brands on the basis of their unique selling propositions.... nbsp;      Consumer Purchase decision making ProcessThere are five stages that are involved in the consumer purchase decision-making process.... onsumers pass through all these stages while making any purchase....
6 Pages (1500 words) Assignment

Factors that Contemporary Managers Must Consider When Estimating Production

These factors can be classified into internal and external factors.... external factors, on the other hand, include consumer concerns, demand and supply, government policies and social responsibility, among others.... internal factors include factors of production, production capacity and production cost.... mong the internal factors that contemporary managers ought to take into consideration when estimating production are factors of production as aforementioned....
9 Pages (2250 words) Research Paper

Why Pricing Decision Is Important

The strategy of the management with reference to a particular situation plays an important role though cost considerations are fundamental to decision making.... The pricing is an important area in management decision making because the profitability of any business hinges on right price for the product for making the most out of the prevailing economic situation and developments in technology, internet, and telecommunications in the context of the business.... 371) observe “making an appropriate pricing and marketing strategy is a crucial management issue in E-commerce”....
8 Pages (2000 words) Case Study

External and Internal Environments - Wal-Mart Stores

The products of the company are also offered through different e-commerce Wide range of merchandise products are also offered by the company which comes at every day low price (EDLP).... It is considered to be one of the largest retail organizations in the world and has been ranked second in the Fortune… The company is engaged in the business of running retail stores that come in various formats like discount stores, supercentres, neighborhood markets, etc....
8 Pages (2000 words) Essay

Capital Investment Decision Making

This paper, Capital Investment decision making, outlines that the assessment of the capital investment decision along with the allotment of the appropriate capital funds to the project mainly depends upon the requirement of the project and its related aspects.... hellip; As the paper highlights, the alternate name in financial terms used for capital investment decision is capital budgeting.... There is no specific criterion for the selection of the most adequate and perfect capital investment decision as it is highly dependent upon the strategic objectives of the firm....
12 Pages (3000 words) Essay

Consumer Decision Making Process

"Consumer decision making Process" paper study focuses on consumer behavior regarding the purchase of a new car.... The aim of the paper is to highlight the consumer decision-making process and accordingly, evaluate the factors, which influence buyers' decisions.... nbsp;… The customer is making a purchase of a new car is identified to focus on different factors for making his buying decision.... Subsequently, the consumer decision-making process plays an important role in making buying decisions (Al-Jeraisy, 2008)....
8 Pages (2000 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us