[Business and Management] -> [Marketing]: Internal and external factors affecting pricing decisions
Submit date:17/11/2005
Document level:Master
Language: English
Username:100009 (View other documents by this user)
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Keywords:General Theory

 

 
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Abstract:
These words show the significance of the concept of price and how important it is to set prices of company’s products carefully in order not to be a ’fool’ in the market. Price is the only marketing-mix variable that earns revenue. All the other marketing-mix elements – product, place and promotion generate only costs. The product might be perfectly designed, efficiently distributed and well promoted but all these do not matter unless price covers all the costs. It is, therefore important that managers understand how to set prices and what factors to consider. In setting prices a manager first must consider the company’s overall marketing objectives and the role of price in the marketing-mix. Should he set prices to maximise current profits or to maximise long-run market share or to prevent competition from entering the market? He must also consider the costs as they set the floor for the price.
Beyond costs, managers must understand the relationship between price and demand for the product and must set prices to match the value that consumers receive from the product and consumer perception of the price. For example, if Orange, the leading UK mobile phone network, charges for a minute of talk more than the customers’ perceived value, its service will be poorly used and some of its customers will switch to competitive networks. Finally, competitors’ prices and offers must be considered.
Thus, a company (like Orange) sets its prices on the basis of numerous factors – overall marketing objectives, costs, competitors’ prices and offers, and consumer perception of the price and demand. But it is also important to adjust prices to account for different buyers and different market situation. Orange, for example, has a large range of different mobile phones models and accessories priced from £0 to £199,99 and various talk plans from 2p to 35p per minute in order to fit any consumer preferences and pocketbooks.
Acknowledgments
I want to thank one person who helped me in writing this work. Karen Laverly, the manager of Orange retail shop (128 Buchanan st., Glasgow, G1 2JW) agreed to answer my questions (see Appendix 1) about the company she worked for and provided me with practical information on my topic.
Internal factors affecting pricing decisions
Internal company factors that affect pricing decisions are company’s objectives, company’s marketing-mix strategy, its costs and organisation.
Company’s objectives
It is easier for a company to set prices if it is clear about its objectives. It may easily use price as a tool to achieve what it wants. The most common objectives are:
- Survival. A company may set survival as its main objective because of the heavy competition or demand declines as a result of changing customer needs. In this case, profits are less important than survival and, therefore, low prices may be set to increase demand.
- Current profit maximisation. If a company wants current financial results rather than long-run performance, it may estimate costs and demand at different price levels and set price that will produce the maximum profit.
- Market-share maximisation. Some companies set prices as low as possible in order to obtain the dominant market share. As market-share leaders, they will have higher long-run profits in the future.
- Market-share gain is a variation of the previous objective. If, for example, a company wants to increase its market share from 5% to 10% within a 2-year period, it sets market-share gain as its fundamental objective. In this case the company needs to search for the price that will achieve this goal.
- Quality leadership. If a company wants to produce the highest-quality product or to provide the highest-quality service on the market, it may charge a high price for some reasons. Firstly, price of a product is always associated with its quality, therefore, high price may be charged to cover the quality. Secondly, higher costs that are due to higher quality must be covered.
- Other objectives. A company may also use prices to achieve any other goals. It can set low prices to prevent the market from new entrants or avoid government intervention. Prices can be increased to slow down sales and increase inventories.
Sometimes, a company may decide that it wants to achieve two or more objectives at a time. Orange, for example, has set quality leadership and market-share maximisation as its main objectives. It is trying to provide the highest-quality services at the mobile phone market and at the same time it wants to be the most widespread network in the UK. And it may be two these efforts that have made the company a leader.
 
Catalogue:
INTRODUCTION 3
ACKNOWLEDGMENTS 3
INTERNAL FACTORS AFFECTING PRICING DECISIONS 4
Company’s objectives 4
Marketing-mix strategy 5
Costs 5
Organisational consideration 5
EXTERNAL FACTORS AFFECTING PRICING DECISIONS 7
Type of market 7
Price-demand relationship 8
Competitors’ costs, prices and offers 8
Other external factors 9
SUMMARY 10
BIBLIOGRAPHY 11
APPENDIX 1 12

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