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Internal Factors:
Cost of product or service
Variable costs
Full absorption costs
Total costs
Replacements, Standard or any other cost base
Price geared toward return on investment
Loss leader or main product
Quality of materials and labour inputs
Labour intensive or automated process
Markup percentage updated
Usage of scarce resources
The pricing decision is potentially a very complex one because it often has to adjust to the requirements of different groups within the firm. For example, finance and accounting may be concerned with price only in relation to costs and the organisation’s ability to meet certain specified financial targets.
Marketing may focus attention on general market reactions and the ability of price to generate a required level of sales, while a sales department may be rather more concerned about the reaction of individual customers. Furthermore, the complexity of the pricing decision can be compounded by the degree of uncertainty that exists in relation to the marketing environment in general, and consumers, competitors and distributors in particular. Basic economic theory suggests that there is a relationship between price and the level of demand, and that demand will be lower at high prices and higher at low prices. This general principle probably holds for most markets; however, there are always instances of higher prices leading to higher demand. These typically occur when the price is taken as an indicator of quality, so that demand is higher for a higher-quality product. Some consideration must be given to the basic principle of a negative relationship between price and quantity because revenue depends not just on price but on quantity sold.
Furthermore, costs may also be affected by quantity in that some products may be significantly cheaper when produced on a large scale. When a high level of sales is a target, then it must be recognised that this will often only be achieved by adopting a relatively lower price. In addition to considering the negative relationship between price and quantity, however, it is also important to consider the responsiveness of price to quantity. If demand for a product is described as elastic, it means that quantity is responsive to demand and only a small change in price may be required to produce a large change in quantity demanded. From a marketing perspective, this suggests that it will be relatively easy to increase sales with only a small reduction in price.
By contrast, when demand is described is inelastic, then it suggests that quantity demanded is not very responsive to price. In such circumstances, reducing price will have very little impact on the level of sales, unless that price reduction is very substantial. The economic approach to consumer demand considers reactions to price in a narrow sense. From a marketing perspective, we would also want to think about consumer perceptions of value and the benefits they receive from the product. If additional features, which are highly valued by the consumer, can be added to a product, then the price of that product can be increased significantly, irrespective of the cost. If on-site warranties for personal computers are highly valued by consumers, then including these as a product feature will allow a manufacturer or retailer to charge a higher price over identical products without such features. What is important is not what these features cost, but how highly the consumers value them.
There are a variety of internal factors that affect the pricing process. At the most general level, the nature of internally determined business objectives will affect the level of price. In particular, if market share or sales growth is a prime objective, then it is likely that the price that is set will have to be towards the lower end of the range, while if product profitability is the main requirement, then a rather higher price may be acceptable Equally important as an influence is the way in which the product has been positioned. In particular, if the product is to be positioned as a quality or prestige product, then that image must be supported by a high price – a cheap Porsche isn’t a Porsche. Indeed, this link may be taken a stage further – consumers can encounter difficulties in judging the quality of certain products, particularly when specialist knowledge or information is required.
Examples of such products might include vintage wines, designer clothes and many consumer durables. While in some instances, brand names can be used to provide the consumer with information regarding quality, another option is to use price to signal quality. A high price is often taken as an indicator of a high quality.
Thus, for example, the recent advertising campaign for Stella Artois lager uses the idea that the lager is expensive to reassure the customer that it is of a high quality. The use of price as a signal for quality is perhaps most common in services, since the consumer cannot form a judgement of the quality of the service until it has been purchased, and in the absence of information from others who have previously used that service, the price is perhaps one of the best indicators to the consumers. However, a word of warning is appropriate – price can be used to signal quality, but if the quality is not in evidence, the organisation is unlikely to be able to sustain a quality premium in the longer term. When we talk about internal influences on pricing, however, the most widely recognised influence is cost. Although price must be determined in relation to the level of demand and the willingness of consumers to pay, costs cannot be ignored. Costs are typically categorized under two headings – fixed and variable. Fixed costs refer to those costs that are incurred irrespective of the level of sales for a product, while variable costs refer to those costs that relate directly to the number of units sold. To identify the cost of a particular product requires that its share of fixed costs is identified along with the variable cost on a per-unit basis. The price that is set should cover variable costs and make a contribution to fixed costs, though this will depend on the level of sales.
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