Pricing factors, pricing process and principles

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

For an effective business organization, it is necessary to have a clear understanding of what price is, pricing factors, what are the principles for pricing goods and services. Let's talk about how and what prices are made up of, what functions they perform and how to correctly determine the adequate cost of products.

Price concept

The basic element of the economic system is the price. This concept intertwines various problems and aspects that reflect the state of the economy and society. In its most general form, the price can be defined as the number of monetary units for which the seller is willing to transfer the goods to the buyer.

In a market economy, the same goods can cost differently, and the price is an important regulator of the relationship between market entities, a tool of competition. Its value is influenced by many pricing factors, and it consists of several components. The price is volatile and subject to permanent changes. There are several types of prices: retail, wholesale,purchasing, contractual and others, but all of them are subject to a single law of formation and existence on the market.

Price functions

A market economy differs from a regulated economy in that prices have the opportunity to freely realize all their functions. The leading tasks that are solved with the help of prices can be called stimulation, information, orientation, redistribution, balancing supply and demand.

The seller, by announcing the price, informs the buyer that he is ready to sell it for a certain amount of money, thereby orienting the potential consumer and other traders in the market situation and informing them of his intentions. The most important function of setting a fixed price for a commodity is to regulate the balance between supply and demand.

It is with the help of prices that manufacturers increase or decrease the quantity of output. A decrease in demand usually leads to an increase in prices and vice versa. At the same time, pricing factors are a barrier to discounts, since only in exceptional cases can manufacturers lower prices below the cost level.

Pricing process

Setting a price is a complex process that takes place under the influence of various phenomena and events. It is usually carried out in a certain order. First, the pricing objectives are determined, they are closely related to the strategic objectives of the manufacturer. So, if a company sees itself as an industry leaderand wants to occupy a certain segment of the market, it seeks to set competitive prices for its product.

Further, the main price-forming factors of the external environment are evaluated, the features and quantitative indicators of demand, and market capacity are studied. It is impossible to form an adequate price for a service or product without assessing the cost of similar units from competitors, so the analysis of competitors' products and their cost is the next stage of pricing. After all the "incoming" data is collected, it is necessary to select pricing methods.

Usually, a company forms its own pricing policy, which it adheres to for a long period. The final stage of this process is the final price fixing. However, this is not the final stage, each company periodically analyzes the established prices and their compliance with the tasks at hand, and according to the results of the study, they can reduce or increase the cost of their goods.

principles of pricing

The establishment of the cost of a product or service is not only carried out according to a certain algorithm, but is also made on the basis of basic principles. These include:

• The principle of scientific validity. Prices are not taken "from the ceiling", their establishment is preceded by a thorough analysis of the external and internal environment of the company. Also, the cost is determined in accordance with objective economic laws, in addition, it must be based on various pricing factors.
• The principle of target orientation. Priceis always a tool for solving economic and social problems, so its formation should take into account the tasks set.
• Principle of continuity. The pricing process does not end with the establishment of the cost of goods in a specific time period. The manufacturer monitors market trends and changes the price accordingly.
• The principle of unity and control. State bodies constantly monitor the pricing process, especially for socially significant goods and services. Even in a free, market economy, the state is assigned the function of regulating the cost of goods, to the greatest extent this applies to monopolistic industries: energy, transport, housing and communal services.

Types of factors affecting the price

Everything that affects the formation of the value of goods can be divided into external and internal environment. The former include various phenomena and events that the manufacturer of the product cannot influence. For example, inflation, seasonality, politics, and the like. The second includes everything that depends on the actions of the company: costs, management, technology. Also, pricing factors include factors that are usually classified by subject: manufacturer, consumers, state, competitors, distribution channels. Costs are separated into a separate group. They directly affect the cost of production.

There is also a classification within which three groups of factors are distinguished:

• not opportunistic or basic,those. associated with a stable state of the economy;
• opportunistic, which reflect the variability of the environment, these include fashion factors, politics, unstable market trends, consumer tastes and preferences;
• regulatory, related to the activities of the state as an economic and social regulator.

Basic system of pricing factors

The main phenomena that affect the cost of goods are indicators that are observed in all markets. These include:

• Consumers. The price is directly dependent on demand, which, in turn, is determined by consumer behavior. This group of factors includes such indicators as price elasticity, buyers' reactions to them, market saturation. The behavior of consumers is influenced by the marketing activity of the manufacturer, which also entails a change in the cost of goods. The demand, and accordingly the price, is influenced by the tastes and preferences of buyers, their income, even the number of potential consumers matters.
• Expenses. When setting the price of a product, the manufacturer determines its minimum size, which is due to the costs that were incurred in the production of the product. Costs are fixed and variable. The former include taxes, wages, production services. The second group is the purchase of raw materials and technologies, cost management, marketing.
• Government activity. In different markets, the state can influence prices in many ways. Forsome of them are characterized by fixed, strictly regulated prices, while others are controlled by the state only to ensure compliance with the principles of social justice.
• Channels of distribution. When analyzing price-forming factors, it should be noted the special significance of the activities of the participants in the distribution channels. At each stage of the promotion of products from the manufacturer to the buyer, the price may change. The manufacturer usually seeks to retain control over prices, for which he has various tools. However, retail and wholesale prices are always different, this allows the product to move in space and find its final buyer.
• Competitors. Any company seeks not only to fully cover its costs, but also to maximize profits, but at the same time it has to focus on competitors. Since too high prices will scare away buyers.

Internal factors

Those factors that the manufacturing company can influence are usually called internal. This group includes everything related to cost management. The manufacturer has various opportunities to reduce costs by looking for new partners, optimizing the production process and management.

Also, internal price-forming demand factors are associated with marketing activities. The manufacturer can contribute to the growth of demand by conducting advertising campaigns, creating excitement, fashion. Internal factors also include product line management. Manufacturercan produce similar products or products from the same raw material, which helps to increase profitability and reduce prices for some products.

External factors

Phenomena that do not depend on the activities of the manufacturer of goods are called external. They include everything related to the national and global economy. Thus, the external pricing factors of real estate are the state of the national economy. Only when it is stable, there is a steady demand for housing, which allows prices to rise.

Also, external factors include politics. If a country is at war or protracted conflict with other states, then this will necessarily affect all markets, the purchasing power of the consumer and, ultimately, prices. The actions of the state in the field of price control are also external.

Pricing strategies

Given various pricing factors, each company chooses its own path to the market, and this is realized in the choice of strategy. Traditionally, there are two groups of strategies: for new and for existing products. In each case, the manufacturer relies on the positioning of its product and on the market segment.

Economists also distinguish two types of strategies for an already existing product on the market: a sliding, falling price and a preferential price. Each pricing method is associated with a market and marketing strategy.