¡°Critically evaluate the factors a firm might consider when setting the prices of its products¡±

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¡°Critically evaluate the factors a firm might consider when setting the prices of its products¡±

According to Marcouse (1) ¡°price is one of the main links between the customer and the producer¡±. The simplest definition of price is the amount charged for a product or service. Setting the right price of a product is very important for a firm because is the only element in the marketing mix that produces revenue. It can also be very difficult to determine the right price of a product because there are several factors that a firm might consider before putting the price. The examination of these factors is vital for a firm because if the price is not ¡®right¡¯ (for the consumers) they may lose customers or lose revenue. Therefore, I will critically evaluate some of the internal and external factors a firm might consider when setting prices.

Source Kotler and others (14) Cheap Custom Essays on ¡°Critically evaluate the factors a firm might consider when setting the prices of its products¡±

The graph above shows the various factors affecting the price decisions of a product. If a firm wants to set the right price for its products it must considerate these factors in order to do so. The pricing decisions are made by evaluating the internal factors (marketing objectives, marketing mix strategy, costs and organisation for pricing) and the external factors (nature of the market and demand, competition and other environmental factors).

The Marketing Objectives are significant when setting prices because different firms may differ in their objectives. There are a lot of objectives a firm may have but the clearer a firm is about its objectives, the easier is to determine the prices of its products. The most common objectives are survival, profit maximisation, market-share leadership and product-quality leadership. If the main objective of a firm is the survival of the company, the price of its product must be low and profit is not as important as the survival of the firm; for example the Sega Dreamcast, being a more powerful console than the Sony Playstation one, was struggling to survive because it was not doing very well in the video-games market. Sega lower the console prices at the same level of the Playstation one but they could not afford their losses so they had to remove its product from the market. Profit Maximisation consists in setting prices high in order to obtain maximum welfare from the products. IBM is a great example to describe this type of marketing objective; they sell their computers at high prices even when competitors offer the same or almost the same characteristics for their computers. The advantage of IBM is that the have loyal customers, but they are gradually losing those customers because there is little difference between their products and the competitors products. Market-share leadership is when a firm sets its prices at the lowest price possible in order to gain market share and hopefully be the leader of its market. For example, SKY TV set the prices of their TV boxes very low in order to take over other competitors (ITV Digital). This strategy is damaging SKY TV¡¯s profits but is damaging even more its competitors. Product-quality leadership consist in creating the best products in the market. Sony is a good example because they have the best walkman technology (innovation) in the market. They were the first developers of the walkman technology and they keep innovating in order to create the best product in the market.

Another factor a firm might consider when setting prices is the Marketing Mix Strategy. The elements of the marketing mix (product, price, promotion and place) are linked. Decisions made for other marketing mix elements may affect pricing decisions. Products can depend on price or non-price factors. If a product depends on price factors, the pricing decisions will be made first and then the other decisions from the marketing mix elements will take place. For example a lot of Japanese firms such as Sharp, Nissan and Toyota apply a technique called target costing where they try to make a product within a cost range, if they achieve the target costing they can then proceed to set the price. If a product depends on non-prices factors, the pricing decisions will depend on the decisions made on the other elements of the marketing mix. For example, Sony provides their customers good products that guarantees a long life, thus the people will not need to spend on this product in the future for malfunctioning.

Cost is a very important factor to evaluate when a firm is setting prices. The price set for a product is expected cover the cost of production, a contribution, distribution, effort put on the product. Therefore having low cost of production is a major advantage against competitors, because a firm is able to set prices below competitor¡¯s prices and yet be profitable. There are two variables firms should consider in order to lower their costs. Firstly, the cost of production at different levels, a firm may reduce costs by determining the quantity at where the costs of production are minimum. For example, if a bakery produces (hypothetical data) less than 400 pieces of bread, the bakery is increasing their cost per unit because they are not using fully their machinery, if it produces 400 pieces of bread we can see how the cost per unit are at the lowest because the fixed costs are spread thought the unit but if the bakery tries to make more than 400 pieces of bread the machinery may break down leading to an increase in the cost per unit.

Source Kotler and others (14)

Secondly, a firm might increase productivity from production experience. After a period of time the workers at a firm may know some tricks or shortcuts to do a faster and better job on the firm, therefore by increasing quality and quantity a firm may reduce its costs. Henry Ford, by deskilling of work and studying the most efficient workers of his factory, could determine how the productivity of his firm might make more products reducing costs of production.

The nature of the market and demand is a very important factor a firm might consider when setting prices, because there are different types of markets that contain different types of demand for the products. There are four types of markets and these are perfect competition, where the suppliers are price takers and the non-price marketing mix elements play little role, such as agricultural goods. Monopolistic competition where the suppliers have some power over the price and the non-profit marketing mix elements can help a firm to gain economies of scale. Oligopoly where the suppliers have a lot of power over the product¡¯s price and a price-cut from one company is likely to lead to a price cut in the competitors¡¯ price. Monopoly where there is only one supplier that have absolute control over the price of the product. A non-regulated monopoly has the power to charge high prices for their products. Demand is also different among products. The demand for most of the goods is a downward sloping curve, but the demand for luxury goods is different. From the graph below we can compare the demand curves for most goods and for luxury goods. If a perfume price is increased from p1 to p the customers will be attracted to it because they think an expensive perfume is better, but if the price is increased from p to p the costumers will think the perfume is overpriced and the sales will fall.

Source Kotler and others (14)

The price elasticity of a product is essential when setting prices for a product. The price elasticity of demand measures the responsiveness of demand to a change in price. A product can be elastic or inelastic. The demand in elastic products change little in comparison to the inelastic products, therefore it is better for a elastic product to be sold as cheap as possible and for an inelastic product to be sold as high as possible in order to maximise profits.

Source Kotler and others (14)

Finally, competition is another factor a firm might consider when setting the price of a product. Competitors are always trying to find the best way to take over the rivals market using pricing and marketing strategies, hence, the firm might ask other customers to see how their service is or it may check the competitors¡¯ prices. The firm must also look at the quality of the rival product to put a price on its product. For example, The Sony Playstation was launched one year and a half ago and the Microsoft Xbox was launched at the end of 001. The advantages of the Playstation (PS) is that you can play Playstation one¡¯s games and it has a wider variety of than the Xbox, but the Xbox offers a better graphic resolution that sounds very promising. The Xbox was set higher than the PS, but the PS has been more successful than the Xbox through the world, especially in Japan after the Xbox sold consoles that wrecked the DVDs (they have been repaired). If the PS price is higher than the Xbox, the PS would lose the battle because the Xbox is a more powerful console than the PS (better graphic resolution).

In conclusion, all the factors are worth considering before a firm starts to set the prices of its products. The right price will increase profitability as well as other factors like growth and development of the firm. By doing this research a firm might reduce the problem of setting the wrong price. It is hard work to consider all the factors but a good research might give guidance on the price the product should have.

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