PRICING DECISION
Price
is an important element of the marketing mix. It can be used as a strategic
marketing variable to meet competition. It is also a direct source of revenue
for the firm. It must not only cover the costs but leave some margin to generate
profit for the firm. However, price should not be so high as to frighten the
customers. Price is also an element which is highly perceptible to customers
and significantly affects their decisions to buy a product. In general, price
directly determines the quantity to be sold.
DETERMINANTS OF PRICING
Pricing
decisions are usually determined by demand, competition and cost. We
shall discuss each of these, factors separately. We take demand first.
Demand
The popular ‘Law of Demand' states that "higher the
price; lower the demand, and vice versa, other things remaining the same’’.
In season, due to plentiful supplies of certain, agricultural products, the
prices are low and because of low prices, the demand for them increases
substantially. You can test the validity of this law yourself in your daily
life. There is an inverse relationship between price and quantity demanded. If
price rises, demand falls and if the price falls, the demand goes up. Of
course, the law of demand assumes that there should be no change in the other
factors influencing demand except price. If any one or more of the other
factors, for instance, income, the price of the substitutes, tastes and
preferences of the consumers, advertising, expenditures, etc. vary, the demand
may rise in spite of a rise in price, or alternatively, the demand may fall in
spite of a fall in price. However, there are important exceptions to the law of
demand.
