Internal and external factors affecting pricing decisions
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LEVEL 2 MANAGEMENT ASSIGNMENT ESSAY TITLE: Internal and external factors affecting pricing decisions Primary SUBJECT AREA: Marketing NAME: Evgueni Nod MATRICULATION NO: 0007927 For Office Use only: Submission Date: Misc: INTRODUCTION 3 ACKNOWLEDGMENTS 3 INTERNAL FACTORS AFFECTING PRICING DECISIONS 4 Company's objectives 4 Marketing-mix strategy 5 Costs 5 Organisational consideration 5 EXTERNAL FACTORS AFFECTING PRICING DECISIONS 7 Type of market 7 Price-demand relationship 8 Competitors' costs, prices and offers 8 Other external factors 9 SUMMARY 10 BIBLIOGRAPHY 11 APPENDIX 1 12 Introduction "There are two fools in every market. One charges too much; the other charges too little." Russian proverb "Pricing is the moment of truth - all of marketing comes to focus in the pricing decisions"1 These words show the significance of the concept of price and how important it is to set prices of company's products carefully in order not to be a 'fool' in the market. Price is the only marketing-mix variable that earns revenue. All the other marketing-mix elements - product, place and promotion generate only costs. The product might be perfectly designed, efficiently distributed and well promoted but all these do not matter unless price covers all the costs. It is, therefore important that managers understand how to set prices and what factors to consider. In setting prices a manager first must consider the company's overall marketing objectives and the role of price in the marketing-mix. Should he set prices to maximise current profits or to maximise long-run market share or to prevent competition from entering the market? He must also consider the costs as they set the floor for the price. Beyond costs, managers must understand the relationship between price and demand for the product and must set prices to match the value that consumers receive from the product and consumer perception of the price.
Organisational consideration It is very important to decide who within a company should set prices. Who handles pricing shows how important it is for an organisation to set prices carefully and how important price is considered to be. In small companies, pricing usually is handled by the top managers. In large companies prices are often set by divisional or product line managers. In some industries, where price is a major factor that affects consumer buying decisions, it is normally for marketing department to set the prices or to have a special pricing department that derives the best price for a particular product and then reports to the marketing department or top manager. Traditionally, these industries are: railways, aerospace, power companies, oil and gas companies. I can add to this list mobile phone industry because the decision of consumers on what company to choose is very much determined by prices these companies charge for their products and services. In Orange case, for example, setting prices is a duty of the marketing department. It derives the best price for the whole UK market but all Orange outlets are free to vary prices of mobile phones in a certain range according to the local market conditions. External factors affecting pricing decisions External or environmental factors that affect company's pricing include the type of market in terms of competition, the nature of the demand, competitors' pricing and other environmental influences. Type of market Companies' pricing strategies vary with different types of market. Economists recognise four major types of market, each needs different pricing strategy. They are pure monopoly, pure competition, monopolistic competition and oligopolistic competition. Under pure monopoly, the market consists of only one seller and many buyers.
Company's costs set the lowest level for the price. The company must charge the price that at least will cover the costs. The demand for company's products and services set the highest level for the price. All the other factors determine in what position within that range price is set. The company might charge the lowest price it can, if survival is the main company's objective. This price will only cover all the cost of producing, distributing and selling the product or providing the service. A little higher than the lowest price may be charged if the company's main objective is market-share maximisation. If the company wants to maximise its current financial results, it might derive and charge the price that will produce the highest profit. If the firm competing in the poorly competitive market, it is not able to set its price higher or lower than the market price. "A seller cannot charge more than the going price because buyers can obtain as much as they need at the going price. Nor would sellers charge less than the market price because they can sell all they want at this price"4. If the firm is a monopolist, it can charge whatever price it wants within set range. But it will not always charge the highest price for some reasons: to prevent the market from new entrants, to prevent government regulation, etc. Managers also need to remember that price is only one of marketing-mix variables. It should be co-ordinated with product design, distribution and promotion. For example, the company may charge high price for high-quality product. Finally, some other environmental factors are to be considered when setting prices. Inflation, interest rates, boom or recession affect consumer perception of the price and, therefore, consumer buying decisions. Managers need to take that into account as well.
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