When you go to buy a toothbrush, you can see that the price varies from around 15 Rs. to 100+ Rs. There is a reason behind the price variance. And here we are going to understand some of the most common factors considered before pricing is determined.
Costs involved in creation of the product:
This includes the direct manufacturing cost. This also includes the indirect costs involved such as administrative, marketing etc. Given the cost, the manufacturer can now decide on the profit margin and accordingly set the price of a product. This alone does not determine the final price of the product.
Eg: Pricing a professional service, consider the fee charged by the instructor. To this add the indirect costs of maintaining the office, supplies and other administrative expenses that are needed in fulfilling this service. Now that you have the sum of direct and indirect costs, add to this the required profit margin, and get the selling price.
There are other important factors that influence the price; let us look at some of those.
In the event of a new product launch, the demand for such a product is understood by various methods like market research and surveys. This gives a clear indication of the price that the customers are willing to pay to buy this.
For instance when the walkman was introduced long ago, it was the first of its kind that allowed a music lover to carry music with him. This would give the manufacturers a competitive advantage, to quote a high price. But later as other competitors enter the market the price would have to be adjusted to suit the competition.
Positioning of the brand:
Positioning plays a key role in determining the price of the product.
Eg: A designer bag would cost perhaps 20 times that of a regular or economic bag. A discount store might offer the products that fall in the economy range, whereas a designer studio is a place only for the expensive and elite products.
Maximize profit margin:
This is applicable for products where the sales are sporadic. An example here could be a piece of art from the 10 Century. The uniqueness of the product also justifies an increase in profit margin in this case.
This is a strategy adopted while entering the market. Lowering costs ensures a greater market penetration and once the customer base is established, the prices are increased.
Eg: A popular DTH provider had adopted this, and was successful in gaining a big share of the market.
What is it that differentiates your product or service? One could choose to be a low cost provider and stay out of the competition. On the other hand, being a high cost product while providing great quality of service could be another differentiator.
Short term profit maximization:
In this case a firm aims to make as much profit as possible as quickly as possible; maximum market penetration and long-term profit considerations are ignored. All actions such as increase income and cut down costs should be undertaken and those that are likely to have adverse impact on profitability of the enterprise should be avoided. It is simple and has the in-built advantage of judging economic performance of the enterprise.
Short term revenue maximization:
This factor influences pricing, if the company is looking at increasing its revenue, to increase the market share by lowering the price. This is similar to Maximize quantity.
In case of certain product there are legal clauses, which don’t allow you to sell them at a price higher than the ones set by the judiciary. In certain others, the competitive influence does not allow you to sell your product for any higher, unless you have a clear competitive advantage. Price wars created by reducing the selling price of a competitor product forces you to reduce the price, to stay profitable.
In some cases due to the market decline or market saturation and price war, the prices are lowered to a significant level.
Eg: The recent recession forced prices to be lowered to continue luring customers to spend money.