question_answer 24)

What are the factors affecting determination of the price of a product or service? Explain.

Answer:

There are number of factors which affect the fixation of the price of a product. Some of the important factors in this regard are discussed as below (i) Product Cost The cost sets the minimum level or the floor price at which the product may be sold. There are broadly three types of cost—fixe<d costs, variable costs and semi variable cost. Total cost is the sum of all these three. Generally, all firms try to cover all their costs, at least in the long Sun. In addition, they aim at earning a margin of profit over and above the costs. (ii) The Utility and Demand The utility provided by the product and the intensity of demand of the buyer sets the upper limit of price, which a buyer would be prepared to pay. Infect the price must reflect the interest of both the parties to the transaction — the buyer and the seller. The buyer may be ready to pay up to the point, where the utility from the product is at least equal to the sacrifice made in terms of the price paid. The seller would, however, try to cover the costs. According to the law of demand, consumers generally purchase more-units at a low price than at a high price. (iii) The Extent of Competition in the Market The price is also affected by the nature and degree of competition. The price will tend to reach the upper limit in case there is less degree of competition while under free competition, the price will tend to be set at the lowest level. (iv) Government and Legal Regulations In order to profit the interest of public against unfair practices in the field of price fixing, Government can intervene and regulate the price of commodities. Government can declare a product as essential product and regulate its price. (v) Pricing Objectives Pricing objectives are another important factor affecting the fixation of the price of a product or a service. Apart from price maximization, the pricing objectives of a firm may include. (a) Obtaining Market Share Leadership if a firm objective is to obtain larger share of the market, it will keep the price of its products at lower level, so that greater number of people are attracted to purchase the products. (b) Surviving in a Competitive Market If a firm is facing difficulties surviving in the market because of intense competition or introduction of a more efficient substitute by a competitor. (c) Attaining Product Quality Leadership In this case, normally higher prices are charged to cover high quality and high cost of R & D (Research and Development). (vi) Marketing Methods used Price Fixation Price is also affected by other elements of marketing such as distribution system, quality of salesmen employed, quality and amount of advertising, sales promotion efforts, the type of packaging, product differentiation, credit facility and customer service provided.