External factors affecting pricing decisions

Pricing decision of an organization is affected by various internal and external factors. As for internal factors are concerned, please refer to this article: Internal factors affecting pricing decision to know a list of factors affecting pricing decisions. Let us now discuss the external factors in this article.

External factors affecting pricing decisions

External factors include

  1. Demand,
  2. Competition and
  3. Government control.

1. Demand affect pricing decision

Generally markets can be be segmented on the basis of different groups of users, different points of consumption, and different time of production. Demand in services, supply and demand of products, demand for a product during special occasions such as festivals generally affect pricing decision of a firm.

1. Different groups of users affect pricing decision: The service provider may charge discriminatory price for the services offered by him. In order to exploit the opportunities that exist in the segment, the service provider may charge different prices, by offering the same service. For example, the sports club may charge a concessional price for senior citizens and higher prices from others. When a segment is more price sensitive than the others, a lower price may be charged in that segment.

2. Different points of consumption: The price charged for the service may vary across different points of consumption. For example, the price charged by the head office is lower than that charged by branches. Transport services collect fares at the end of the route. Both the points of production and points of consumption have an important say in pricing services.

3. Different time of production: Services are perishable in the sense that they cannot be stored. In other words, stocks cannot be built up to meet any peak in demand. So, the service managers should ensure a good fit between supply and demand. An excess production capacity in a time period cannot be transferred to another period. When there is a shortage of service in one area, it cannot be made good by excess supply located in another.

Marketing managers examine the elements of overall demand for a product and decide whether to stimulate or discourage demand from particular segments. Moreover, demand fluctuates over a period of time. Hotels located at tourist centres charge a higher tariff during peak season and charge less during off seasons. Thus, the seasonal and off-reason tariff rates are related to points of time where demand is excessive or low.

2. Competition affects pricing decision

A stiff competition prevails in the service market. Competition exists among the service providers who offer similar services. For example, banking operations in India has undergone a dramatic transformation. There has been a remarkable change in the nature of services offered by the banks. As there is a similarity in services rendered by banks, the pricing decisions of competing banks have a direct bearing on a bank’s pricing policies. Services such as money transfers and personal online payments are offered at varying prices. Where services offering are homogeneous, even a slightest reduction in prices can attract more number of customers.

3. Government controls affects pricing decision

Some service organizations are subject to government controls. Health care, electricity and water supply services are some of the organizations which are controlled by the Government. Particularly, the price policies of these organizations are framed within the guidelines provided by the Government.