Factors That Affect The Pricing Decision
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Published: Mon, 5 Dec 2016
In Finland, Lukka and Granlund (1996) observed that product cost information had its greatest importance in pricing, tendering and cost reduction decisions.
In Italy, Cescon (1999) noted the most important uses of product costs were in cost reduction, pricing, make-or-buy and investment decisions, and its least important role related to decisions about distribution channels.
Based on the above quotations, the costs of the product, its inputs including the amount spent on product development, testing, and packaging required to be taken into account when a pricing decision is made. Therefore, product costs are very important to make a pricing decision.
In Australia, Joye and Blayney (1990) found that product costs were of major importance in the pricing decisions of the majority of companies. Therefore, cost is a major factor that will affect pricing decisions. Variances between actual and budgeted cost are inherent in business. Actual cost may not correspond with budgeted cost, thus, it is important to have a thorough planning on how can these cost affect company profit.
Profit planning must take into account expected changes in cost. An
increase in cost with no corresponding change in selling price will
greatly affect company profits. Thus, the ability of the enterprise to limit suppliers bargaining power as to control the price of raw materials and production will be greatly influence the pricing decision.
“A product’s cost can be classified as fixed or variable costs,
according to whether the volume changes.” quoted by Dominiak Louderback, 1997. Fixed cost is the cost that remains the same regardless of the level of production or the level of sales such as property taxes, rent, advertising, insurance, and utilities. Moreover, variable cost is the cost that changes in a directly proportion to changes in production volume such as sales commission, packaging, labeling and shipping costs.
In many manufacturing companies, labor costs remain constant over wide ranges of output, so managers can consider labor as a fixed cost for many short-term output decisions. In addition, most overhead costs change only when managers decide to restructure the company, so these costs do not change as output fluctuates from day to day. The only cost that definitely does go up and down with production is the material cost. Hence, the cost of material will increase especially when economic downturn and the price of product will increase eventually.
In spite of all, the product cost information was significantly more important when used directly in decision making. This may be because product cost information may be regarded as being more important when it is actually being used in a decision rather than as a guide for possible future decisions. Product cost information may be significantly more important in continuous production process manufacturing than in discrete-part and assembly manufacturing for product mix, output level and product discontinuation decisions because continuous production processes lead to the production of many different products for which a variety of product related decisions will need to be made.
“Placement under marketing mix involves all company activities that make the product available to the targeted customer”, quoted by Kotler and Armstrong, 2004. With this, the easier the targeted customers can get the product, the more success of your company in distributing product. Distribution is getting your product to the consumer. Once you know your market area and have safely processed and packaged your product, you have to place it where your customer can buy it.
“On a general note, while planning placement strategy under marketing mix analysis, companies consider six different channel decisions including choosing between direct access to customers or involving middlemen, choosing single or multiple channels of distributions, the length of the distribution channel, the types of intermediaries, the numbers of distributors, and which intermediary to use based on the quality and reputation”, quoted by Proctor, 2000.
Therefore, distribution is important because it affects sales, profits and competitiveness. It can contribute up to fifty percent of the final selling price of some goods. Without distribution even the best product or service will fails. Author Jean-Jacques Lambin believes that a marketer has two roles which are organizing exchange through distribution and organizing communication. Moreover, distribution can be classified by channels, coverage, locations, transportation, logistics and others aspects.
Physical distribution or Place must integrate with the other ‘P’s in the marketing mix such as price, product and promotion. For example, the design of product packaging must fit onto a pallet, into a truck and onto a shelf, prices are often determined by distribution channels, and the image of the channel must fit in with the supplier’s required ‘positioning’. You can see how Coca Cola further integrate the timing of distribution and promotion in the Hall Of Fame later. In fact, they see distribution as one of their “core competencies”.
In addition, geographical pricing is setting different prices for a customer in different parts of the world which is includes shipping costs. Therefore, there will be difference price on the same product in differences country. Although within a country, the same product will be charged to different prices, which may be caused by the urban or metropolitan area, income distribution and others factors.
Apart from that, distribution strategy is influenced by the market structure, the firm’s objectives, its resources and its overall marketing strategy. All these factors are addressed in the section on selecting Distribution Channels.
The first strategic decision is distribution intensity which include of intensive, selective and exclusive distribution. Intensive distribution aims to provide saturation coverage of the market by using all available outlets. For many products, total sales are directly linked to the number of outlets used such as cigarettes and beer. Intensive distribution is usually required where customers have a range of acceptable brands to choose from. In other words, if one brand is not available, a customer will simply choose another.
The second one is selective distribution which involves a producer using a limited number of outlets in a geographical area to sell products. The producer can choose the most appropriate or best-performing outlets and focus effort on them. Selective distribution works best when consumers are prepared to “shop around” or they have a preference for a particular brand or price and will search out the outlets that supply.
The last one is exclusive distribution which is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area.
The next strategic decision clarifies the number of levels within a channel such as agents, distributors, wholesalers, retailers, franchisees, direct marketing and others. In some Japanese markets there are many intermediaries involved. In the marketing channel of distribution in Japan, especially in the retail sector, the number of retailers had been increasing from 1950s to the beginning of 1980s consistently. However, it has begun to decrease in the beginning of 1980s, explained by Hisao Fujimoto. Companies such as Ford, Ferrari, Toyota, and Nissan use specific dealers to make their products available, whereas companies such as Nestle involve a whole chain of wholesaler retailers to reach its customers.
In conclusion, distribution is playing a big role in the pricing decision. The business communities should place the product efficiently and effectively, and set a reasonable price for selling. There is some advice for the consumer, that is consumer should shop for the best price as they can find regardless of how long the levels of distribution and how far the place of selling the product from you.
Economic environment of the country is an important factor affecting the pricing decisions. Inflationary and deflationary conditions will also affect the pricing decision of a company.
Inflation is a rise in the average price level of goods and services in an economy over a period of time. Money loses purchasing power during inflationary periods since each unit of currency buys progressively fewer goods. Consequently, inflation also reflects erosion in the purchasing power of money which is a loss of real value in the internal medium of exchange and unit of account in the economy. Therefore, a company should decrease the price of product when there is an inflation so the consumer will be afford to buy it.
On 20 July 1993, Alan Greespan, chairperson of the Board of Governors of the Federal Reserve System, testified before a congressional committee. He said: “The role of expectations in the inflation process is crucial. Even expectations not validated by economic fundamentals can themselves add appreciably to wage and price pressures for a considerable period, potentially derailing the economy from its growth path.”
However, deflation is a decrease in average price level of goods and services in an economy over a period of time. While lower prices may seem ideal from a consumer’s point of view at first, but deflation leads to rising of unemployment and falling in production, a situation from which it is extremely difficult to recover. Therefore, a company should charge a higher price on product when selling it so that it can be able to pay for salary of employees and covered the production cost.
On the other hand, the prices are increased in boom period to cover the increasing cost of production and distribution. To meet the changing economic conditions, several pricing decisions are available such as price can be boosted to protect profit against rising costs, price protection system can be linked with the price on delivery to current costs and emphasis can be shifted from sales volume to profit margin and cost reduction.
On March 16 alone, five days after the earthquake and tsunami and as the nation’s nuclear crisis was worsening, United States investors put $700 million into Japanese Exchange Traded Funds, according to the data from Trim Tabs, an investment research organization. That was twice the previous largest daily inflow on record, in 2003. After the earthquake, investors waited for two trading days before acting. But on Wednesday, March 16, after stocks in Tokyo fell by about 10 percent, investors in the United States responded by moving heavily into E.T.F.’s. One reason may be that Japanese stocks still have far to go in their recovery. Though the Nikkei 225 index in Tokyo has bounced back from recent lows, it is still down 9.43 percent since before the earthquake.
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