The following factors to be kept in mind before pricing :
Cost of Production : The most important factor affecting price of a product or service is its cost. While fixing the price of a product or service all total costs (Fixed costs, semi variable costs or variable costs) and desired profit is added. No business firm likes to sell its product below the marginal cost of product. Moreover, profits are also must for the survival of business.
The Utility and Demand : Utility means the satisfaction which a customer receives from a consumption of a product. The buyer is ready to pay up to the point where the utility from the product is at least equal to the sacrifice made in terms of price paid. Demand also plays an important role in determining the price of the product. If there is less demand for the product, it would not be sold at a very’ high price and viceversa. Thus demand should be predicted correctly before setting the price.
Extent of Competition in the market: If there is higher degree of competition, the price will be fixed at the lowest level and if there is lesser degree of competition, the price will be fixed at the upper limits. In addition, while fixing prices, the quality , price and features of competing products must be considered.
Government and Legal Regulations : Government and legal regulations also play an important role in fixation of prices. Sometimes the prices are fixed by the government for essential commodities.
For example, government fixes the low price for life saving medicines for the diseases like cancer, aid etc. No business enterprise can charge more price as fixed by the government.
Pricing Objectives : Pricing objectives are another important factor affecting the fixation of price.
These objectives include :
• If a firm wants to capture a share of the market. It will fix the low prices so that greater number of people can be attracted.
• In case of keen competition the firm can use the sales promotion techniques like discount, rebate etc.
• Sometimes high prices are charged to cover high quality and high cost of research and development.
