Factors that influence pricing

Marketing’s four Ps – product, price, promotion and placement – are the basic components of any marketing mix. The decisions you make with regard to all of these elements can mean the difference between success and failure. There are many factors that will have an influence on how you set the price for your product or service, with some of them internal and some external, and most of them will fluctuate over time.

Effect of Competition
A competitive pricing strategy, where prices for a product or service are set based primarily on the prices of the competition, is best suited for a price-sensitive and highly competitive market. Whether you use this type of strategy or not, you should always take your competition’s pricing into account when setting your own pricing, unless you hold a monopoly. If consumers perceive your product and your competition’s as having equal value, you could lose out in a big way if your competitor’s price is lower than yours is.

Market Demand Pricing
The laws of supply and demand should always come into play when setting your pricing. If a product is in high demand, particularly if demand exceeds supply, then the market can bear a higher price. Conversely, if demand dwindles, consumers will not be willing to pay higher prices. Your pricing should remain relatively stable over time, but you can put promotions in place to discount the price when needed.

Price is a Part of Brand Strategy
Setting your prices without a thorough grasp of your brand objectives can destroy any brand-building efforts. Your price is a part of your brand image. Think about Walmart, which has built its entire brand around low pricing, or Tiffany & Co., whose consumers expect high-end pricing. If your products’ prices are not in line with your brand image, you will most likely confuse consumers instead of convert them.

Cost of Goods Sold
If you want to make a profit on the sale of your products, you must charge a higher price than what it cost you to actually produce and transport them. The cost of goods sold almost always plays an integral role in any pricing strategy. The exception to this is if you are promoting your product as a loss leader.

A loss leader is a product that is sold below cost as an incentive for consumers to purchase other products at normal prices. Many mobile carriers, for example, sell cell phones at hugely discounted rates so that consumers will sign on for one of their cell phone service packages.

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