Business blog

Q&A - What factors should a business consider when setting its prices?

There are several factors a business needs to consider in setting the price:

Competitors – a huge impact on pricing decisions. The relative market shares (or market strength) of competitors influences whether a business can set prices independently, or whether it has to follow the lead shown by competitors

Costs – a business cannot ignore the cost of production or buying a product when it comes to setting a selling price.  In the long-term, a business will fail if it sells for less than cost, or if its gross profit margin is too low to cover the fixed costs of the business.

The state of the market for the product – if there is a high demand for the product, but a shortage of supply, then the business can put prices up. 

The state of the economy – some products are more sensitive to changes in unemployment and workers wages than others.  Makers of luxury products will need to drop prices especially when the economy is in a downturn.

The bargaining power of customers in the target market – who are the buyers of the product? Do they have any bargaining power over the price set?  An individual consumer has little bargaining power over a supermarket (though they can take their custom elsewhere).  However, an industrial customer that buys substantial quantities of a product from a business may be able to negotiate lower or special prices.

Other elements of the marketing mix – it is important to understand that prices cannot be set without reference to other parts of the marketing mix.  The distribution channels used will affect price – different prices might be charged for the same product sold direct to consumers or via intermediaries.  The price of a product in the decline stage of its product life-cycle will need to be lower than when it was first launched.

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