Factors to Consider When Setting Product Price
TITLE
Factors a business should consider when deciding the price of a product: • Cost of production • Level of demand • Actions of competitors • Business objectives • Type of product • Availability of economies of scale • Government or legal controls • Stage in product life cycle
ESSAY
Factors to Consider When Setting the Price of a Product
1. Cost of Production
Factors to consider include the cost of materials, labor, and transport. Additionally, businesses should calculate the breakeven point to cover fixed costs and determine the profit mark-up needed to achieve desired profitability.
2. Level of Demand
Considerations involve the state of the economy, consumer income levels, and willingness/ability to pay. Understanding the price elasticity of demand is crucial to avoid pricing a product too high that it reduces demand significantly or too low that it affects profitability.
3. Actions of Competitors
Analyzing competitors' pricing strategies, market share, and presence of substitutes in the market is essential. Whether targeting a niche or mass market, the size and intensity of competition will influence pricing decisions.
4. Business Objectives
Aligning pricing strategies with business objectives such as profit margin targets and value addition to products or services is critical in determining the optimal price level.
5. Type of Product
Factors like quality, brand image, and uniqueness of the product impact pricing decisions. Premium products may command higher prices due to perceived value, while commoditized products may need competitive pricing strategies.
6. Availability of Economies of Scale
Leveraging economies of scale can help reduce production costs per unit, allowing businesses to offer competitive prices while maintaining profitability.
7. Government or Legal Controls
Understanding and complying with government regulations, taxes, and legal controls that may impact pricing decisions is necessary to avoid penalties or conflicts with authorities.
8. Stage in Product Life Cycle
The stage in the product life cycle, whether it is a new product introduction, in maturity, or experiencing decline, will influence pricing strategies. Different stages may require adjustments in pricing to maximize profits or maintain market share.
In conclusion, businesses need to consider a variety of factors when setting the price of a product. By carefully analyzing these factors, companies can develop effective pricing strategies that satisfy customer expectations, achieve business objectives, and ensure profitability.
SUBJECT
BUSINESS STUDIES
LEVEL
O level and GCSE
NOTES
State factors a business should consider when deciding the price of a product and award 1 mark per factor:
1. Cost of production (e.g. cost of materials, labour, transport, breakeven, profit mark-up)
2. Level of demand (e.g. recession, income, consumer willingness/ability to pay, price elasticity of demand)
3. Actions of competitors (e.g. price charged by competitors, level of competition, presence of substitutes, niche or mass market, market size)
4. Business objectives (e.g. profit margin, adding value)
5. Type of product (e.g. quality, brand image, uniqueness)
6. Availability of economies of scale
7. Government or legal controls (e.g. taxes, regulations)
8. Stage in product life cycle (e.g. new product introduction, maturity, decline)