Factors influencing pricing decisions

A firm, in making a pricing decision, must anticipate the reaction of competitors. The competitors’ pricing activities or the possibility of such activities set a lower limit to prices. In deciding prices, firms must give due weight to the quality of their product and services in comparison with the competitors’ standing in this regard. There are various factors that has its influence in pricing decisions of a company either directly or indirectly as discussed below.

Factors influencing pricing decisions:

Factors affecting pricing decisions

(Image: Factors affecting pricing decisions)

1. Reaction of Competitors influence pricing decision:

In determining a pricing policy, a company should not only consider the immediate effect of prices, but also give due weight to the reaction of competitors. It should call for an effective market intelligence of the competitors’ pricing decision. For example, if a company keeps prices below the market price with the intention of earning a huge profit in the short run, it must bear in mind the fact that the competitors, too, may resort to price cutting. In that case, they will be able to keep pace with the company’s action.

2. Differences in Quality standards influence pricing decision:

Quite often, for the vast majority of products, there are no commonly accepted standards of quality. They are largely determined by the producers’ policy with respect to a particular market or market segments and by the tastes of individuals. For example, the different dishes served at a luncheon in a five-star hotel will carry a higher price than those served in an ordinary hotel or a road-side restaurant. In this particular case, the pricing decision depends on the class of hotel and the type of customer. Therefore, for pricing such products, the manufacturer must consider the quality of his product vis-a-vis the quality of his competitors products.

3. Differences in Services rendered influence pricing decision:

Differences in services rendered also influence the pricing decision of an enterprise. If a department store delivers an order free of charge or allows its customers one or two months’ credit, its price will naturally be higher than that of the supermarket or ordinary retailer who sells goods on cash basis. The manufacturer catering to the needs of industrial buyers provides services in the form of credit, free delivery and advertisement. He has a different price policy from that of the local supplier providing goods in small quantities.

4. Size of the Company influence pricing:

The size of the company influences its pricing decision or price changes to a considerable extent. For example, the price charged by a large reputed manufacturer in a particular industry will have an impact on the pricing policies of that particular industry. Among small manufacturers, it is a common practice to quote lower prices than those of major producers, because their total sales volume in no way poses a threat to big producers. In the case of textiles, small manufacturers are able to increase their sales by quoting prices which are much lower than those of the leading manufacturers.

5. Market Conditions influence pricing decision

The condition of the market profoundly influence the pricing decision. For example, the textile industry in India is suffering from a demand recession due to unfavorable government policies and reduction in the purchasing power of consumers. But no immediate or huge cut in price has been resorted to because the manufacturers know that their competitors may match any reduction in price. Nevertheless, the overall wholesale prices have decreased.