Price refers to the money paid by the customers to obtain a product and this price affects its demand. Thus, pricing plays an important role in the marketing of goods. The price charged by a firm is an essential element of marketing mix as it affects both revenue and profits of the firm. In addition to this, pricing also acts as a competitive tool. Firms producing similar substitutable products compete with each other on the basis of price. Thus, the firms must pay due emphasis on proper pricing of their products. The marketers must analyse properly the various factors that determine the price and decide a suitable price for the product.
The following factors affect the determination of the price of a product or a service.
(i) Cost of the product: It plays an important role in determining the price, which involved in the production, distribution and sale of the product. Cost of product can be classified into three broad categories, viz., fixed cost, variable cost and semivariable cost. Fixed costs refer to those costs that do not vary with the level of output produced. For example, for the production of a good, a firm incurs cost on the purchase of machinery, land, etc. Such costs are fixed costs. On the other hand, Variable costs refer to those costs that vary in direct proportion with the volume of production. That is, as the level of output increases, the variable cost also increases.
(ii) Demand for the product: While determining the price, a firm must also consider the demand for its product. Thus, the elasticity of demand plays an important role. Elasticity of demand refers to the proportionate change in demand due to a given proportionate change in price. If due to a small proportionate change in price, the demand changes by a larger proportion, the demand is said to be elastic. That is, demand is said to be elastic, if a small rise (or fall) in price leads to a relatively large fall (or rise) in price. In this case, the firm cannot charge a higher price as it would lead to a large fall in the demand. On the other hand, demand is said to be inelastic, if a change in price does not affect the demand much.
(iii) Degree of competition in the market: Generally, higher the competition in the market, lower is the price that a firm can charge for its product. This is because in case of high competition, if a firm attempts to charge a high price, it would lose its customers to the competitors. On the other hand, if a firm faces very little competition for its product, then it has the freedom of charging a higher price.
(iv) Government regulations: At times, to protect the interest of public at large, the government intervenes in the determination of price. For example, in case of essential commodities, the government can declare the maximum price that can be charged.