Factors that Affect Pricing Decisions
This section discusses the factors affecting a firm's pricing decisions, why companies have to conduct research before setting prices in overseas markets, and how to calculate the breakeven point. In addition to identifying its pricing objective, a company must also look at the offering's costs, the demand, the customers, whose needs it is designed to meet, the external environment - such as the competition, the economy and government regulations, and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle and its promotion and distribution.
Customers
Three factors relating to customers to consider when making pricing decisions include whether buyers perceived the product has value, how many buyers are in the market, and how sensitive buyers are to prices. Price elasticity is how sensitive buyers are to changes in the price of a good or service. If an offering is price elastic, then raising the price will
cause buyers to purchase less of the offering. If an offering is price inelastic, then raising the price will not affect the buyer's purchasing decision in the short term. However, companies do not have free rein to raise prices for offerings with an inelastic demand. Eventually, customers may find alternative offerings, rather than continue to purchase the product or service long-term. Luxury goods are viewed as having an elastic demand because increases in price result in fewer sales or less demand. Necessities are viewed as having an inelastic demand, meaning sales will not decrease significantly with the increases in price. The line between luxury and necessity goods can vary from buyer to buyer. For example, smokers keep purchasing cigarettes even after prices rise significantly, but most people would agree that cigarettes are not necessities.
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