Price Mix: Meaning and Factors Affecting Price Determination
What is Price Mix?
Price is the value of a product or service passed on by the buyer to the seller. As a customer is very sensitive about the price of a product, it is a crucial element of the marketing mix. A slight shift by the organisation in the price of a product can shift the customers towards the competitor’s product. For example, if the price of Nescafe Coffee changes from ₹155 to ₹160, then the customers will start demanding Bru Coffee, which is still available at ₹155. Therefore, it is important for an organisation that they take pricing decisions with proper care and caution. A company should ensure that the price of a product or service matches its utility, as a consumer is always ready to pay a specific price for a product or service if it matches its utility.
The price of a product or service is its worth and is expressed in monetary terms. In simple terms, the price of a product or service is the monetary sacrifice made by a consumer, while buying it. However, the prices of different goods and services are called by different names. For example, the price for education is tuition fees, the price for services provided by a broker is a brokerage, etc.
Price Mix is an important decision, and is related to the fixing of the price of a product or service. The decisions under price mix are related to demand of the commodity, price of competitors, etc.
While fixing the price of a commodity, the marketer should keep some factors in mind such as pricing objectives, product cost, the extent of competition in the market, customer’s demand and utility, government and legal regulations, and marketing methods used.
Factors Affecting Price Determination
1. Pricing Objectives
The objective of a firm is an essential factor that plays a major role in deciding the price of a good or service. Usually, the basic objective of an organisation is profit maximisation. Besides this, other pricing objectives of an organisation are as follows:
- Survival in a Competitive Market: For surviving in a competitive market, organisations have to decrease the price of their products or services by offering discounts to the customers.
- Obtaining Market Share Leadership: If an organisation wants to capture a big market share, then it is essential for the firm to keep the price of the products or services low. In this way, more people will be attracted to the product or service.
- Attaining Product Quality Leadership: Sometimes organisations charge high prices for a product or service to cover the cost of product and research and development.
2. Extent of Competition in the Market
The next factor that an organisation has to keep in mind while determining the price of a product or service is the competition level in the market. If an organisation does not face any competition in the market, then it is free to fix any price for the product or service, as the company has a monopoly in the market. However, if the competition is tough, then the organisation has to fix the price of the product or service after keeping the competitor’s price in mind. For example, HUL cannot fix the price of Surf Excel without taking the price of Tide (a P&G product) and other detergents into consideration.
3. Product Cost
The next important factor to keep in mind while deciding the price of a product or service is the cost of the product or service. The price of the product fixed by the organisation must cover the total cost of the product. Here, total cost includes fixed cost and variable cost of the product. Fixed Costs are the cost of a product or service, which does not change whether the production level gets low or high. For example, rent of the building, cost of machinery, etc. Variable Costs are the cost of a product or service, which changes with the change in production level. For example, labour wages, cost of raw materials, fuel, electricity, power consumption, etc. The organisation fixes the price of a product or service after calculating the total cost. If there is high competition in the market and the firm has to capture a big share in the market, in this case, it has to fix the price, which can at least cover the variable cost. The fixed cost of the product or service can be ignored for a while.
4. Demand and Utility of a Customer
Another factor to keep in mind while deciding the price of a product or service is its demand. When the demand for a product is elastic, it means that there are various substitutes for that product available in the market, and thus the organisation has to bring down the price of the product. However, when the demand for a product is inelastic, it means that there are very less substitutes for that product available in the market, and thus the organisation can fix a high price for the product.
Also, when the demand for a product or service is high, then the organisation can charge a high price from the customers. But, when the demand for a product or service is low, then the organisation has to lower its price also. Similarly, if a product is offering higher utility to the consumers, then they are willing to pay a high price for the same; hence, it easy to charge a high price for those products. However, if a product is offering lower utility to the consumers, then the organisation cannot charge a higher price from them.
5. Marketing Methods Used
Different organisations use different techniques of methods of marketing to promote their products or services, and these methods affect the pricing decision of the organisation. If an organisation uses intensive advertising techniques to promote the product or service, then it can charge a higher price from the customers. Some of the other marketing techniques affecting the price of a product or service are distribution system, customer support services, type of packaging, etc.
6. Government and Legal Regulations
The government has every right to control the price of a product or service, which includes products that come in the category of essential commodities, such as Drugs, LPG, food items, etc., to protect the interest of the general public. These regulations and government interventions help in keeping a check on the monopolists so that they do not charge an unfairly high price from the customers.
Please Login to comment...