The Pricing Decision

Deciding on the price at which to sell a product is one of the most important decisions an organisation can make. If price is set too high, consumers may be unwilling to buy the product. If price is set too low, a firm may not be able to cover its costs of production.

The prices of all goods and services are likely to vary over their product life cycles as the marketing objectives of different organisations change – for example, from launching a new product, to maximising profit from the product. At any given time, short-term objectives, such as the need to fight off new competitors or to extend the life of the product, may affect the pricing strategy of a firm. Pricing low to generate sales and fight off competition may cause a firm to lose money in the short term. However, in the long run, if a firm is to stay in business, it must be able to cover its costs of production with sales revenues.

Three major factors can, therefore, be identified as influencing the pricing decisions of firms. These are:

· The costs of production (and the desire for profit)

· The level and strength of consumer demand

· The level of competition among producers to supply the market

Prices set by a firm with reference to its costs of production will be greatly influenced by the particular aims and objectives agreed by the organisation:

The need to survive. Underlying all business is the need to survive. To do this, a firm must be able to generate enough revenues to cover its costs of production. This is of particular importance to non-profit-making organisations such as charities. All donations or monies they receive are spent on their particular activities. That is, income should exactly equal costs. However, because flows of income and expenditures do not necessarily occur at the same time, charities must be careful not to overspend and operate at a loss.

The desire for profit. Covering costs may ensure business survival, but most business owners also want to earn a profit from their activities. The level of return on their investment will need to be at least as much as the interest they could have earned by placing the money in a bank account instead. In order to earn this profit, they will need to set a price for their product which will generate revenues to exceed production costs.

Expanding sales. When a firm enters a market for the first time with a new product, its long-term objective may be to maximise profit, but in the short term it will have other aims as well. For example, in order to ensure a successful launch for the product, it may decide to pitch price low and cut its profit margins to the bone. If there are a number of other similar products already on the market, it may need to keep price at this low level in order to build market share and maximise potential sales If sales do not match expectations, it may find itself left with underused capacity, in terms of labour, stocks of materials, machines, and other equipment. However, in other circumstances, launching an entirely new and unique product may allow a firm to pursue a high-price strategy. Consumers may be willing to pay a premium price for a new product. A high selling price may also be the only way the firm can justify the high cost of product research and development (R&D) and an initial supply. It may be that sales will need to expand before a firm can benefit from cost saving associated with mass production and be able to pass these on to consumers in the form of lower prices.

Setting price with regard only to the costs of production ignores the constraints imposed by external factors such as:

· The level of consumer demand

· The amount of competition among producers

· Government intervention in product markets

Дата добавления: 2015-12-08