Factors Affecting Pricing Decisions in International Marketing (IM 10 Dec 2020)

Factors Affecting Pricing Decisions

The factors influencing pricing decisions are divided into internal and external factors on the basis of whether the management has control over the factors or not.

If the management has control over the factors, it will come under internal factors, if not it will come under external factors. So, the internal factors are within the control of the management and are particularly related to the internal environment of a firm.

 

The internal factors affecting pricing decisions are:

1. Company Objectives:

This has considerable influence on the pricing decisions of a firm. Pricing policies and strategies must be in conformity with the firm’s pricing objectives. For example- if a company desires a targeted rate of return on capital investment, then the pricing decisions are so made that the total sales revenue from all products, exceeds the total cost by a sufficient margin, to provide the desired return on the total capital investment.

 

2. Organization Structure:

Another significant internal factor affecting pricing decisions is the organizational structure of the firm. Generally, the top management has full authority for framing pricing objectives and policies. Some firms allow workers’ participation in decision making and therefore in such firms, all the employees give their views and suggestions for the pricing policy. This is helpful to the firm if the firm has several products, requiring frequent pricing decisions and where prices differ in different markets.

Similarly, the marketing manager also helps and assists the top management in framing the pricing policies and strategies. The determination of the selling price is a major policy decision for the firm and the cost accountant can make an important contribution to this decision-making process by providing the management with costs, which are relevant to the pricing decision at hand.

 

 

3. Marketing Mix:

Price, product, promotion and place are the four ‘p’s of a marketing mix. The pricing policy of a firm must consider the other components of a marketing mix as well, because these factors are closely related. Moreover, these factors will change according to changing market conditions and will be different for each market. Thus, marketing research and the marketing information system can be utilized to form the appropriate pricing policy.

 

4. Product Differentiation:

If a product is different from its competitive products, with features such as a new style, design, package, etc., then it can fetch a higher price in the market. For example- Lee, Arrow and Park Avenue shirts, are sold at a high price in the market. Thus, if the product has distinguishing features, then the firm has greater freedom in fixing the prices and customers will also be willing to pay that price.

 

5. Cost of the Product:

Pricing decisions are based on the cost production. If a product is priced less than the cost of production, the firm has to suffer the loss. But the cost of production can be reduced, by coordinating the activities of production properly, the firm can reduce the price accordingly.

 

External Factors Influencing Pricing Decisions:

1. Demand:

Market demand for a product or service has great impact on pricing. If there is no demand for the product, the product cannot be sold at all. If the product enjoys good demand, the pricing decision can be aimed to utilize this trend.

 

2. Competition:

There has been a revolutionary change experienced in the Indian market after the liberalization and opening up of the economy. The impact of competition is more pronounced than in the earlier days. The market is flooded with too many products, both Indian and foreign. The number, size and pricing strategy, followed by competitors have a significant role to play in the pricing decision. If the product cannot be differentiated with special features, a firm cannot charge a higher price than that of its competitors.

 

3. Buyers:

If there are no ready takers for the product, it is said to have failed in the market. Pricing decision is thus related to the characters, nature and preferences of the buyers.

 

4. Suppliers:

They supply the required items of production to the firm. As already pointed out, the firm can reduce the price, if it can reduce the cost of production. If not, the usual tendency is to charge the increased cost of production to the consumer. For example- the price hike for petrol or diesel will automatically increase the price of vegetables, fruits, provisions, etc. If a firm could get the required raw materials at reasonable rates from suppliers, then it can also price the goods at a less rate.

 

5. Economic Conditions:

This also affects the pricing decision of a firm. In a depressed economy, business activities will be considerably less, but in a boom condition, there will be hectic business activity. Therefore, economic conditions affect the demand for goods and services. So, in a depressed economy, in order to accelerate business, one sells goods at a lesser price, but in a boom period, goods can be sold at a high price.

 

6. Government Regulations:

The government has the power to regulate the activities of business firms, so that they do not charge high prices and don’t indulge in anti-social activities. The government does this by-passing various act; For example- the MRTP Act, Consumer Protection Act, etc.

To quote one case, Nestle has advertised that they are giving one Kit Kat chocolate free with another product of the company, the MILO beverage. Actually, the company increased the price of MILO, by adding the price of a bar of KIT KAT to it. This attracted the attention of the MRTP enquiry committee. The company was asked to cancel the offer and was also punished for wrong trade practices.

 

Factors Affecting Pricing Decisions (15 Factors)

(1) Objectives:

Many companies have established marketing goals or objectives and pricing is based to achieve such goals. On the basis of the marketing objectives, the pricing policies are adopted. The various policies may be- (1) Cost-oriented pricing policy; (2) Demand- oriented pricing policy; and (3) Competition-oriented pricing policy.

 

(2) Costs:

The most decisive factor in pricing is the cost of production. In the past, fixing of price was a simple affair- just add up all the costs incurred and divide the final figure by the number of units produced. Adding necessary profits with the cost of production would give the price. The main defect with this approach is that it disregards the external factors, particularly demand and the value placed on goods by the ultimate consumer.

Again, under this approach, the manufacturer believes that whatever may be the price, the consumer will buy. Furthermore, today, on account of the various lines of production as well as distributing, the overhead costs finding the cost of production is not so simple.

 

(3) Demand:

In consumer-oriented marketing, the consumers influence the price. Every product has some utility for the buyer. It gives the buyer service, satisfaction, pleasure, the consumer would continue to buy the product. Higher the demand for a product, lesser the need for giving additional discounts, credit etc. to the distributors and dealers. This leads to higher-price realization.

 

(4) Competition:

Another factor that influences pricing is competition. No manufacturer is free to fix his price without considering competition, unless he has a monopoly. To avoid competitive pricing, a firm may decide that its product may be sufficiently different from that of the others. This is achieved through methods of advertising, branding, etc.

Sometimes, a higher price may itself differentiate the product. This is known as prestige pricing. But this is possible only when the product is backed by perfect quality. Sometimes the opposite also takes place. It is seen that many products are sold at low prices, mostly in the initial stages. This is referred to as “Mark down Prices” or Price Cutting.

 

(5) Distribution Channels:

Distribution channels also sometimes affect the price. There are many middlemen working in the channel of distribution between the manufacturer and the consumer. Each one of them has to be compensated for the services rendered. This compensation must be included in the ultimate price which the consumer pays. Because of these costs, sometimes it happens that the price of products becomes so high that the consumer rejects it.

 

(6) Supply of the Product:

If the supply is less than demand, then the price of the product will be more.

 

(7) Achieve Planned Return on Investment:

While fixing the expected rate of return, the cost of the product, inflation rate, profits desired, etc. are taken into account.

 

(8) Availability of raw materials in the domestic market will generally enable the firm to bring down cost of production. The firm can fix a low selling price.

 

(9) Profit Expectations:

If the firm expects higher price per unit of the product, they may charge a higher price for the product.

 

(10) Trade Barriers:

Trade restrictions such as duties, taxes and quotas would increase the price of the product and the firm fixes a higher price to recover the taxes and duties.

 

(11) If the brand is very popular among consumers, the manufacturer can charge a higher price for the product.

 

(12) If the purchasing power of the consumers is high then the company can charge a higher price for the product.

 

(13) Promotion cost would normally increase the selling price as the company would like to recover the cost from the consumers.

 

(14) Research and Development:

Many large organizations spend millions of rupees in developing new products and new processes and would like to recover the cost of research by increasing the price of the products.

 

(15) Legal constraints, Government interference-such as control of prices, levying of taxes etc. are other considerations which also affect the pricing of the products.