Factors involved in pricing policy

                     The executives problems of private pricing policy involves many considerations and right advice from the professional business economist. The following are the important factors deserving special attention in determination of a pricing policy of any firm.

1. Costs
2. Demand and consumer psychology
3. Competition
4. Profit
5. Government policy

1.Costs :  It is an important element in price determination. If price is below the cost of production it would means losses. Thus , cost analysis is important. Along the total costs, average cost and marginal costs are to be determined. For business decisions in the short run, direct / variable cost have greater relevance. The firms seek to cover full allocated costs. Economy in cost is also important for setting a lower price for the product. A high cost of production obviously calls for a higher price.

2. Demand and consumer psychology :   In pricing policy , demand can never be overlooked. Rather , demand is more important for the effective sales. Demand for a firms product depends on consumer preferences. So , the consumer psychology is very important through appropriate advertising and sales campaign , consumers psychology can be influenced and their preferences may be altered , thus, demand can be manipulated. 

           A low / high price policy is to be set in view of the elasticity of demand. If demand for the product is highly inelastic , then only rising price policy would be a paying proposition to the businessman. 

       Further , in all cases demand is not price elastic .In some cases , especially , consumer durables , example: TV sets, car ,demand  is income elastic. Thus, when income of the buyers rises , the firm can expect to sell more much goods even at high prices. 

       In case of elastic demand for the goods , a price cut would be beneficial in boosting the sales. However , consumers psychology - their anticipation about the price change is also significant. If consumers anticipate a further price cut , then the price cut policy will result in increasing the sale only marginally in the short run. But, if they feel that the price cut is final , it will definitely improve the sale to a greater extent.

3. Competition :   The nature of pricing policy largely depends on the degree of competition prevailing in the market. Under perfect competition, there is uniquely determined ruling price in the market , also the firm has no scope to design its own price policy. Under monopoly , oligopoly / monopolistic competition the firm can determine its own price policy.

4. Profits :   In determining price policy , profit consideration is also significant. In practice , however , rarely is there a goal of profit maximization . Usually , pricing policy is based on the goal of obtaining a reasonable profit.

      Further most of the businessman would prefer to hold constant price for their products, rather than going for a price cut, as far as possible. Thus , price rigidity may be the norm ( standard) of the price policy. But , rigidity does not mean inflexibility. Price fluctuation do conform  to cost changes.

5. Government policy :   Pricing policy of a firm is also affected by the government policy. If the government take action to price control , the firm has to adopt the price as per the formula and ceiling prescribed by the government , then there is little scope to pursue its own pricing. For example in India we have drug price control.