12 Things You Must Keep In Mind While Formulating Pricing Policy for Your Business

2. Cost of the product:

Costs and price are closely related to each other. Normally prices cannot be fixed below the cost of production (including administrative and selling costs) of the product. Price also determines the costs in the long run.

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3. Competitors’ prices:

Competitive conditions affect the pricing decision of the firm. The company considers the prices fixed and quality maintained by the competitors for their products.

It may fix a price lower than or more than or equal to the prices of competitors taking the quality of its own product into consideration.

The firm should also consider the prices of substitutes (in monopolistic competition) and the effect of its pricing decision on substitutes and its own product.

Number of competitors also affects the pricing decision as they can join hands in fixing the prices of their products.

4. Market position of the firm:

The position of the firm (goodwill for quality products) in the market may also influence the pricing decision of the firm.

It is only why the different producers of identical producers of identical products sell their products at different prices.

A reputed concern may fix a higher price for its product because of faith of customers in company’s products.

5. Distribution channels policy:

The nature of distribution channels, trade discounts allowed to them and distribution expenses influence the prices of the products. The longer the channel, the higher would be the distribution costs and consequently higher prices would be fixed for such products. If, on the contrary, channel is short, prices may be fixed lower.

6. Prices elasticity of demand:

Price elasticity refers to consequential change in demand due to change in price of the commodity.

As there is an inverse relationship between price and demand, the demand will increase with the fall in prices or vice versa.

So, a high price may be fixed for inelastic goods and, on the other hand, price of elastic goods cannot be fixed at a higher end A price reduction policy ma)- suit the highly elastic goods

7. Product’s stage in the life cycle:

Pricing policy may be different in different stages of product s own life cycle. In the introductory stages prices are fixed lower to increase the demand of the product or higher to earn the maximum profit, considering the competitive situations in the market.

The policy may then, lead to slow reduction of prices with a view to expand the market. In the maturity stage, penetrating pricing may be followed.

8. Product differentiation:

In a non-price sensitive market, the price depends more on the differentiation of the product in its size, colour, quality etc.

In such markets different characteristics are added to the products in order to attract the customers and high prices may be charged. Customers may happily pay higher prices for new style, fashion, quality or packaging etc.

9. Buying patterns of consumers:

Buying patterns of consumers also affect the pricing decision of the concern. If the purchase frequency of the product is higher, lower prices should be fixed to have a low profit of margin resulting in higher total profits of the firm.

All consumer items of daily use have high purchase frequency. Low purchase frequency items may be sold at high price. Durable consumer products like T.V. and refrigerators are, therefore, priced higher.

10. Economic environment:

In recession, prices are reduced to a sizeable extent to maintained the level of turnover. On the other hand, prices are charged higher in boom period to cover the increasing cost of production and distribution.

11. Government Policy:

Price discretion is seriously hit by the government price control decision in order to arrest the inflationary trend in prices of certain commodities.

The producer of such items will have to fix as per the directives of the government. If the producer charges higher prices, the government may think of nationalizing the concern or it may take legal action.

Sometimes government starts selling those items through fair price shops or starts production. So, the prices cannot be fixed higher.

12. Social and ethical consideration:

Certain social and ethical considerations also affect the price decisions.

(i) Fair Price:

Keeping in mind the social and ethical aspects, the producer fixes the price of his product neither too high to exploit he customers nor too low to have unfairly low return to the business.

(ii) Fear of labour leaders:

With the fear of the demand of more wages, bonus and other facilities by workers, the producers fix the prices of their products as sufficiently low level, it will reduce labour dispute and promote better labour relations.

(ii) Consumers’ reactions to higher prices:

Consumers always react to high prices. They may also shift to other brand or may oppose it through concerted efforts.

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