What are the internal factors to consider when making price decisions?
The selection of a price for a product depends upon both internal factors and external factors. Internal factors relate to factors inside the organization itself, whereas external factors consider competition and consumer behavior in the marketplace.
Internal factors that influence price
The main internal factors that influence the price decisions are: marketing objectives, marketing strategy and costs – each of these factors will be discussed below.
Marketing objectives refer to the intention or goal for the brand/product. The overall plan is for the brand will significantly influence how the product is priced in the marketplace. The following list provides a series of examples/scenarios that would push the price the brand above/below its key competitors.
- If the brand is trying to grow market share, then the price is generally set below the key competitors in order to win a greater share of sales.
- If the brand is defending against a competitor, then the price is generally set around the same level as the competitor, or possibly slightly below their price.
- If the brand is trying to build profitability, and a slightly higher price is likely to deliver enhanced unit margin.
- If it is a relatively new brand trying to win first time sales in the marketplace, then some form of discounting is generally required.
- If the brand wants to build its image and reputation as a higher quality brand, then it will be necessary to price the product above the competition.
- Opposite to the previous point, if the brand wants to be positioned as a “value" brand, then ongoing pricing below the competition will be required.
As you can see from the above list of pricing scenarios, marketing objectives typically revolve around the following key goals:
- market share (sales) leadership
- perceived quality leadership
- profit maximization
- successful new brand /product introduction
- competitor defense
- to support a discount/value positioning
Some other short-term goals – in addition to the above list – would include:
- discounting to reduce stock levels
- charging a price premium when the product is in short supply
- increasing/decreasing price according to seasonal demand
- offering a reduced price in conjunction with a major campaign by a retail partner
Marketing mix strategy
In addition to determining prices based upon marketing objectives, the combination of price within the marketing mix also needs to be considered – price needs to be consistent with the offering of the product and its quality, retail channel (place), and communication strategy.
Again a series of examples are offered to help explain how price decisions can be made within the marketing mix.
- Convenience products sold through many retailers (such as, soft drinks and candy bars) are typically priced in line with competition, usually at a relatively low price (place mix)
- Products sold through department stores specialty stores will generally have a higher level of price (place mix)
- Obviously the perceived quality of the product itself – relative to its key competitors – will determine the extent to which the product is priced against these competitors (either above or below) (product mix)
- A stronger brand however, does allow for a price premium position against key competitors. Although it is assumed that stronger brands generally have the perception of having higher-quality products anyway (as per the previous point) (product mix)
- If the product is a relatively generic product with not too many distinctive benefits, then pricing point just below the competition is appropriate (product mix)
- But if the product carries significant and unique benefits to consumers, then a price premium can be warranted (product mix)
- If a celebrity is used in the advertising or if the brand can afford regular TV advertising, then a higher price point would be expected by consumers (promotional mix)
- Opposite to the above point, low-cost leaflet or local advertising only carries the perception of a lower cost product (promotional mix)
It is important to remember that the marketing mix is a set of elements designed to work together and communicate the overall offering and brand/product strategy and positioning. Therefore, the brand’s price point should be mainly considered to be a marketing element, rather than purely a financial device.
The 3rd main internal factor to consider when setting prices is the firm’s cost structure. There are two aspects of costs to consider, namely the variable costs of the product itself and the fixed costs of the firm that need to be recouped through the margins of individual products.
Variable costs are the easiest to understand. But there are two aspects to consider – costs of the product itself and production costs.
Variable costs of the product itself relate to the quality of the product – the higher the quality of ingredients/components of the product, then the higher the cost to make the product. This is still considered to be an internal factor for setting prices as each firm has a different bargaining position and will be able to negotiate different supplier prices. For example, McDonald’s would be able to buy their meat patties at a much lower cost than a single independent hamburger store.
The other variable cost is the cost of production. That includes staff time, production/machinery costs, set up costs and so on. Again a larger and more experienced firm is more likely to have a cost advantage over a smaller player and be in a position to have a lower overall variable cost – known as a cost leadership position.
Fixed costs relate to non-production costs, often associated with head office costs, rental costs and total marketing costs. Firms need to recover these costs across their sales. Again large firms with a broad range of successful products have an advantage.