Week 7-8 (March 15-26, 2021)

Pricing and Costing Cristy T. Dioneda-Docdocos,MAMPA

2nd Semester SY 2020-2021 Instructor

Introduction

The entrepreneur must be able to acquire sufficient knowledge about various aspects of pricing
in order to achieve firm’s sales and profit goals. Therefore, a marketer or an entrepreneur should adopt a
well-planned approach for pricing decisions and should know the factors that influence the pricing
decisions before setting the price of a product. This module will guide you on understand the price and
the factors that influence the pricing decisions.

Learning Objectives

After studying this topic, the students should be able to:

1. Describe price
2. Distinguish the internal and external factors that influence pricing decisions
3. Relate the pricing decisions of business enterprises

Pre-test

1. what is price?
2. What are the internal factors that affects pricing decision?
3. What are the external factors that affects pricing decision?

Key Concepts

THE PRICE

Price is the second variable in the marketing mix. If it is set correctly, there is a chance that the firm’s
sales and profit goals will be achieved.

Price is the money, good, or service exchanged for the ownership or use of a good or service. When one
hundred pesos is paid for a sack of corn, that amout is the price of the corn. When a boy is asked to
carry a sack of a corn from the parking area to the store and is paid a kilo of corn, the price of the service
is one kilo of corn.

Pricing is an activity that decide the amount required as a payment for something offered for sale.

FACTORS AFFECTING PRICE DECISIONS

The factors influencing pricing decisions are divided into internal and external factors on the basis of
whether the management has control over the factors or not.

If the management has control over the factors, it will come under internal factors, if not it will come
under external factors. So the internal factors are within the control of the management and are
particularly related to the internal environment of a firm.

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A. INTERNAL FACTORS
1. Company Objectives: This has considerable influence on the pricing decisions of a firm. Pricing
policies and strategies must be in conformity with the firm’s pricing objectives. For example- if
a company desires a targeted rate of return on capital investment, then the pricing decisions
are so made that the total sales revenue from all products, exceeds the total cost by a sufficient
margin, to provide the desired return on the total capital investment.

2. Organization Structure: Another significant internal factor affecting pricing decisions is the
organisational structure of the firm. Generally, the top management has full authority for
framing pricing objectives and policies. Some firms allow workers’ participation in decision
making and therefore in such firms, all the employees give their views and suggestions for the
pricing policy. This is helpful to the firm if the firm has several products, requiring frequent
pricing decisions and where prices differ in different markets.

Similarly, the marketing manager also helps and assists the top management in framing the
pricing policies and strategies. The determination of the selling price is a major policy decision
for the firm and the cost accountant can make an important contribution to this decision making
process by providing the management with costs, which are relevant to the pricing decision at
hand.
3. Marketing Mix: Price, product, promotion and place are the four ‘p’s of a marketing mix. The
pricing policy of a firm must consider the other components of a marketing mix as well, because
these factors are closely related. Moreover, these factors will change according to changing
market conditions and will be different for each market. Thus, marketing research and the
marketing information system can be utilised to form the appropriate pricing policy.
4. Product Differentiation: If a product is different from its competitive products, with features
such as a new style, design, package, etc., then it can fetch a higher price in the market. For
example- Lee, Arrow and Park Avenue shirts, are sold at a high price in the market. Thus, if the
product has distinguishing features, then the firm has greater freedom in fixing the prices and
customers will also be willing to pay that price.
5. Cost of the Product: Pricing decisions are based on the cost production. If a product is priced
less than the cost of production, the firm has to suffer the loss. But the cost of production can
be reduced, by co-ordinating the activities of production properly, the firm can reduce the price
accordingly.

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B. EXTERNAL FACTORS
1. Demand: Market demand for a product or service has great impact on pricing. If there is no
demand for the product, the product cannot be sold at all. If the product enjoys good demand,
the pricing decision can be aimed to utilise this trend.
2. Competition: There has been a revolutionary change experienced in the Indian market after the
liberalisation and opening up of the economy. The impact of competition is more pronounced
than in the earlier days. The market is flooded with too many products, both Indian and foreign.
The number, size and pricing strategy, followed by competitors have a significant role to play in
the pricing decision. If the product cannot be differentiated with special features, a firm cannot
charge a higher price than that of its competitors.
3. Buyers: If there are no ready takers for the product, it is said to have failed in the market. Pricing
decision is thus related to the characters, nature and preferences of the buyers.
4. Suppliers: They supply the required items of production to the firm. As already pointed out, the
firm can reduce the price, if it can reduce the cost of production. If not, the usual tendency is to
charge the increased cost of production to the consumer. For example- the price hike for petrol
or diesel will automatically increase the price of vegetables, fruits, provisions, etc. If a firm could
get the required raw materials at reasonable rates from suppliers, then it can also price the
goods at a less rate.
5. Economic Conditions: This also affects the pricing decision of a firm. In a depressed economy,
business activities will be considerably less, but in a boom condition, there will be hectic
business activity. Therefore, economic conditions affect the demand for goods and services. So,
in a depressed economy, in order to accelerate business one sells goods at a lesser price, but in
a boom period, goods can be sold at a high price.
6. Government Regulations: The government has the power to regulate the activities of business
firms, so that they do not charge high prices and don’t indulge in anti-social activities. The
government does this by passing various acts; For example- the MRTP Act, Consumer Protection
Act, etc.

Read:
Other articlehttps://theintactone.com/2019/09/13/mm-u4-topic-2-factors-influencing-pricing/

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Task

Read and understand the topic and get ready for an online graded recitation by the 2nd week of this
module.

References

A. Online References

• Pricing Decisions: Internal and External Factors (With Diagram) Article shared by : Shreyasi
Chose https://www.yourarticlelibrary.com/marketing/pricing/pricing-decisions-internal-and-
external-factors-with-diagram/50888
• Factors Affecting Pricing Decisions Article shared by Akansha S.
https://www.businessmanagementideas.com/marketing/pricing-decisions/factors-affecting-
pricing-decisions/18821
• Factors Influencing Price. https://theintactone.com/2019/09/13/mm-u4-topic-2-factors-
influencing-pricing/

B. Book References
• Kuratko, Donald F. (2017). Entrepreneurship. Cengage Learning.
• Barringger, Bruce R. & R. Duane Ireland (2013). Entrepreneurship Successfully Launching New
Ventures, Fourth Edition, Pearson Education Limited, Edinburg Gate, Harlow, Essex, England,
• Medina, Roberto G. (2015), Entrepreneurship and Small Business Management, Rex
Bookstore, Manila, Philippines
• Scarborough, Norman M.(2013). Essentials of Entrepreneurship and Small Business
Management, Sixth Edition, Pearson Education Limited, Edinburg Gate, Harlow, Essex,
England.

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