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Question
Explain 'Price' as an element of marketing-mix. Also, explain any four that affect the fixation of price of a product.
Solution
Price refers to the amount of money which is paid by a consumer to obtain a product. Price is the most important factor determining the demand for a product. Demand for a product shares a negative relation with its price. The price charged by a firm affects its revenue and profits. Moreover, pricing is used as a competitive tool by firms which produce substitutable products. Marketers must analyse properly the various factors which determine the price and decide a suitable price for the product. Thus, it is important for the firm to carefully decide the price of the product:
Factors affecting the price of a product or service:
1)
Cost of product: Cost of the product is the most important factor determining the price. The cost of a product can be of the following three types:
Fixed cost: These are costs which remain fixed irrespective of the level of output. For example, cost of machinery and land.
Variable cost: These are costs which vary in direct proportion with the level of output. As the level of output increases, the variable costs also increase and vice versa. For example, cost of labour and raw material
Semi-variable cost: Similar to variable costs, these are costs which vary with the level of output but not in direct proportion. For example, commission paid to intermediaries
Generally, a firm decides such a price for its product so that it can cover the various costs and earn a profit over and above it.
2)
Demand for product: Another important factor determining the price of a product is the elasticity of demand for the product. Price elasticity of demand implies how responsive the demand is to the changes in price.
Elastic demand: The demand is said to be price elastic if a given proportionate change in price leads to a more than proportionate change in demand. In such a case, charging a higher price by the firm would lead to a large fall in demand
Inelastic demand: The demand is said to be price inelastic if a given proportionate change in price does not bring about any significant change in demand. In such a case, it is possible for a firm to charge a higher price. This is because even at the higher price, the demand will not fall much.
So, goods generally having an elastic demand have a comparatively lower price than those which have an inelastic demand
3) A degree of Competition in the Market: In case there is high competition in the market, it is not possible for a firm to charge a higher price. This is because if the firm charges a higher price, consumers would shift the demand to its competitors.
4) Government Regulations: At times, the government regulates the prices of certain commodities. For example, in the market for agricultural products such as wheat and rice, the government intervenes in price determination.
5) Objectives of Pricing: There are various objectives which a firm considers while deciding the price of its product. Some important objectives of pricing:
- Profit Maximisation: Profit maximisation is one of the basic objectives of every firm. If the firm aims at profit maximisation only in the short run, then it may decide a higher price for the product. In contrast, if the firm wishes to maximise profits in the long run, then it would charge a lower price at present so that it can acquire a greater share of the market and build up consumer loyalty
- Acquiring Market Share: If a firm aims at acquiring a greater market share, then it would charge a lower price so that it can attract a greater number of customers towards its product
- Surviving Competition: If the firm has to survive in high competition, then it must keep the price of the product low, else it will lose customers to competitors.
- Focus on Quality: If the firm aims at improving the quality of the product, it may even charge a higher price so as to cover the additional costs.
6) Method of Marketing: Another important factor determining the price of a product is the methods of marketing used by the firm. For example, if the firm decides to use intense advertising, then it may charge a higher price so as to cover the costs.
RELATED QUESTIONS
Answer the following question:
After acquiring the necessary knowledge and skills on starting an Aloe vera Farm. Ashok wanted to be the leading manufacturer of Aloe vera products worldwide. He observed that the products were expensive as the demand of the products was more than supply. He was also keen to promote methods and practices that were economically visible, environmentally sound, and at the same time protecting public health.
Ashok's main consideration was about the amount of money paid by the consumers in consideration of the purchase of Aloe vera products. He also thought that competitors' prices and their anticipated reactions must also be considered for this.
After gathering and analysing information and doing correct marketing planning, he came to know that the consumers compare the value of a product to the value of money which they are required to pay. The consumers will be ready to buy a product when they perceived that the value of the product is at least equal to the value of money which they would pay.
Since he was entering into a new market, he felt that he may not be able to cover all costs. He knew that in the long run, the business will not be able to survive unless all costs are covered in addition to a minimum profit.
He examined the quality and features of the products of the competitors and the anticipated reactions of the consumers. Considering the same he decided to add some unique features to the packaging and also decided to provide free home delivery of the products.
The above case relates to a concept which is considered to be an effective competitive marketing weapon. In conditions of perfect competition, most of the firms compete with each other on this concept in the marketing of goods and services.
(1) Identify the concept.
(2) Explain briefly any four factors discussed in the above case related to the concept so identified.
'Ganesh Steel Ltd.' is a large and credit-worthy company manufacturing steel for the Indian
market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the company decides to tap the money-market.
1) Name and explain the money-market instrument the company can use for the above purpose.
2) What is the duration for which the company can get funds through this instrument?
3) State any other purpose for which this instrument can be used.
Product cost sets the lower limits of the price, the utility provided by the product and the intensity of demand of the buyers sets the upper limit. So, in case of inelastic demand, total revenue ______ when price increases.
Style and Fit, a footwear manufacturing company has decided to offer 50 % off on all its products due to the fall in demand of its products as more efficient substitutes have been introduced in the market. Identify the pricing objective included by the firm which has made the firm resort to discounting its product.
