{"id":1044,"date":"2022-04-21T20:32:00","date_gmt":"2022-04-21T18:32:00","guid":{"rendered":"https:\/\/support.centreforelites.com\/external-factors-affecting-pricing-decisions\/"},"modified":"2023-08-16T12:44:49","modified_gmt":"2023-08-16T10:44:49","slug":"external-factors-affecting-pricing-decisions","status":"publish","type":"post","link":"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/","title":{"rendered":"EXTERNAL FACTORS AFFECTING PRICING DECISIONS"},"content":{"rendered":"\n<p><span data-keep-original-tag=\"false\">Apart from factors within a company, external factors affecting pricing decisions in a firm also include the nature of the&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\" target=\"_blank\" rel=\"noopener\">market<\/a>&nbsp;and demand, competition, and other environmental <a href=\"https:\/\/support.centreforelites.com\/en\/elements-compounds-and-mixtures\/\">elements<\/a>. We shall be looking at each of the factors in the sections that follow.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><a href=\"https:\/\/i0.wp.com\/0901.static.prezi.com\/preview\/v2\/lghsti7saitwpxvlr4i6rlq7ih6jc3sachvcdoaizecfr3dnitcq_3_0.png?ssl=1\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" src=\"https:\/\/i0.wp.com\/0901.static.prezi.com\/preview\/v2\/lghsti7saitwpxvlr4i6rlq7ih6jc3sachvcdoaizecfr3dnitcq_3_0.png?resize=700%2C394&amp;ssl=1\" alt=\"external factors affecting pricing decisions\" title=\"External Factors Affecting Pricing Decisions 1\"\/><\/a><\/figure>\n\n\n\n<div>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69dba9d09823f\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69dba9d09823f\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#THE_MARKET_AND_DEMAND\" >THE MARKET AND DEMAND<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#Pricing_In_Different_Types_of_Markets\" >Pricing In Different Types of Markets<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#Consumer_Perceptions_Of_Price_And_Value\" >Consumer Perceptions Of Price And Value<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#COMPETITORS_COSTS_PRICES_AND_OFFERS\" >COMPETITORS\u2019 COSTS, PRICES, AND OFFERS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#OTHER_EXTERNAL_FACTORS\" >OTHER EXTERNAL FACTORS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#GENERAL_PRICING_APPROACHES\" >GENERAL PRICING APPROACHES<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#COST-PLUS_OR_FULL-COST_PRICING\" >COST-PLUS OR FULL-COST PRICING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#The_explanation_for_the_Widespread_use_of_Full-cost_Pricing\" >The explanation for the Widespread use of Full-cost Pricing<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#MARGINAL_COST_PRICING\" >MARGINAL COST PRICING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#Advantages\" >Advantages:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#Limitations\" >Limitations<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#_GOING-RATE_PRICING\" >&nbsp;GOING-RATE PRICING<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/support.centreforelites.com\/en\/external-factors-affecting-pricing-decisions\/#Customary_Pricing\" >Customary Pricing<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"THE_MARKET_AND_DEMAND\"><\/span><span style=\"mso-bookmark: bookmark1340;\" data-keep-original-tag=\"false\">THE MARKET AND DEMAND<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span data-keep-original-tag=\"false\">You were made to understand that cost sets the lower limit (or the floor) of prices. The market and demand set the upper limit (or the ceiling). Both consumer and industrial buyers balance the price of a product or service&nbsp;<\/span>against the benefits of owning it. In this regard therefore, the marketer must&nbsp;<span data-keep-original-tag=\"false\">understand the relationship between price and demand for its product. It will thus be necessary to explain how the price-demand relationship varies for different types of&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\">markets<\/a>&nbsp;and how buyer perceptions of price affect the pricing decision. We shall also be discussing the methods for measuring the price-demand relationship.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Pricing_In_Different_Types_of_Markets\"><\/span><span style=\"mso-bookmark: bookmark1342;\" data-keep-original-tag=\"false\">Pricing In Different Types of Markets<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span data-keep-original-tag=\"false\">The pricing freedom of sellers actually varies with different types of&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\">markets<\/a>. There are four types of&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\">markets<\/a>&nbsp;recognized by economists, and each poses a different&nbsp;<\/span><span data-keep-original-tag=\"false\">pricing challenge.<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">Under&nbsp;<b>pure competition,&nbsp;<\/b><\/span><span data-keep-original-tag=\"false\">for example, the market consists of many buyers and&nbsp;<\/span>sellers trading in a uniform commodity such as cocoa, maize, banking, or telephone&nbsp;<span data-keep-original-tag=\"false\">services. No single buyer or seller has many effects on the ruling market price.<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">For instance, a seller cannot charge more than the ruling price because buyers can obtain as much as they need at the going price. Neither would sellers charge less than the market price because they can sell all they want at the current ruling&nbsp;<\/span>price. If prices and profits rise, new sellers can easily enter the market. In a purely&nbsp;<span data-keep-original-tag=\"false\">competitive market, marketing research, product <a href=\"https:\/\/support.centreforelites.com\/en\/definition-of-growth-and-development\/\">development<\/a>, pricing, advertising, and sales promotion play very little or no role. Hence, sellers in these&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\" target=\"_blank\" rel=\"noopener\">markets<\/a>&nbsp;do not spend much time on marketing strategies.<\/span><\/p>\n<p>In the case of&nbsp;<b>monopolistic competition,&nbsp;<\/b>the market consists of many buyers and&nbsp;<span data-keep-original-tag=\"false\">sellers who trade over a range of prices rather than a single market price. This is because sellers can differentiate their offers from buyers. For instance, the&nbsp;<\/span><span data-keep-original-tag=\"false\">physical product can be varied in quality, features, or style, or the&nbsp;<\/span><span data-keep-original-tag=\"false\">accompanying services can be varied. Since buyers can clearly see differences in sellers\u2019 products, they will be ready to pay different prices for them thus, sellers try to develop differentiated offers for different customer segments and, in addition to price, often use branding, advertising, and personal selling to set&nbsp;<\/span><span data-keep-original-tag=\"false\">their offers apart.<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">Under&nbsp;<b>Oligopolistic competition,&nbsp;<\/b><\/span><span data-keep-original-tag=\"false\">the market consists of a few sellers who are highly&nbsp;<\/span>sensitive to each other\u2019s pricing and marketing strategies. The product can be uniform or non\u00aduniform. There are few sellers because it is difficult for new sellers to enter the market.<\/p>\n<p>Each seller is typically alert to competitors\u2019 strategies and moves. If a seller cuts its price by, say 10 percent, buyers will quickly switch to this supplier. The other suppliers must also respond by lowering their prices or increasing their services. You should note that an oligopolist is never sure that it will gain anything permanent through a price cut. On the other hand, if an oligopolist raises its price, its competitors might not fol ow this lead. In this instance, therefore, the oligopolist might have to withdraw its price increase or risk losing&nbsp;<span data-keep-original-tag=\"false\">customers to competitors.&nbsp;<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">In a&nbsp;<b>pure monopoly,&nbsp;<\/b><\/span>the market consists of just one seller. The seller may be a government monopoly, a private regulated monopoly, or a private non-regulated monopoly. In each of these, pricing is handled differently. For instance, a government monopoly can pursue a variety of pricing objectives. It might set a price below cost because the product is important to buyers who cannot afford to pay the full cost. Alternatively, the price might be set either to cover costs or to produce good revenue. It can even be set quite high to slow down consumption.<\/p>\n<p>In a regulated monopoly, the government permits the company to set, one that will allow the firm to maintain and expand its operations as needed. Non-regulated monopolies are free to price at what the&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/an-overview-of-markets-and-target-market.html\" target=\"_blank\" rel=\"noopener\">market<\/a>&nbsp;will bear. Usually, they do not want to charge full price for a number of reasons: a desire not to attract competition, a desire to penetrate&nbsp;<span data-keep-original-tag=\"false\">the market faster with a low price, or a fear of government regulation.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Consumer_Perceptions_Of_Price_And_Value\"><\/span><span style=\"mso-bookmark: bookmark1345;\" data-keep-original-tag=\"false\">Consumer Perceptions Of Price And Value<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>At the end of the day, the consumer will decide whether a product\u2019s price is right. Therefore, when setting prices, the company must consider consumer perceptions of price and how these perceptions affect consumers\u2019 buying decisions. You should remember that pricing decisions, like other marketing-mix decisions, must be buyer-oriented.<\/p>\n<p><span data-keep-original-tag=\"false\">Why consumers buy a product, they exchange something of value (the price) to get something of value (the benefits of having or using the product). This situation can be&nbsp;<\/span><span data-keep-original-tag=\"false\">represented by a&nbsp;<\/span><b>value equation<\/b><\/p>\n<p style=\"margin: 0cm 0cm 7.0pt 70.0pt;\"><b>V =&nbsp;<\/b>B\/P<\/p>\n<p>Where: V = Value<\/p>\n<p style=\"margin: 0cm 0cm 10.0pt 70.0pt;\">B = Benefits, and<\/p>\n<p style=\"margin: 0cm 0cm 10.0pt 70.0pt;\">P = Price.<\/p>\n<p>Based on this consideration, an effective, buyer \u2014 oriented pricing should therefore involve understanding how much value consumers place on the benefits they receive from the product and setting a price that fits this value. Analysing the Price \u2014 Demand Relationship<\/p>\n<p style=\"margin: 0cm 0cm 10.0pt 19.0pt;\">Each price a firm charges will lead to a different level of demand. The relationship between the price charged and the resulting demand level is illustrated in the demand curve in the following Figure<\/p>\n<figure><a 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alt=\"EXTERNAL FACTORS AFFECTING PRICING DECISIONS - Demand Curves\" width=\"225\" height=\"225\"><\/a><\/figure><p><\/p>\n<p>The demand curve shows the number of units the market will buy in a given time period, at different prices that might be charged. For normal goods, demand and&nbsp;<span data-keep-original-tag=\"false\">price are inversely related, the higher the price are inversely related, the higher&nbsp;<\/span>the price, the lower the demand. For example, the firm would sell less if it raised its&nbsp;<span data-keep-original-tag=\"false\">price from P<\/span><span data-keep-original-tag=\"false\">i&nbsp;<\/span><span data-keep-original-tag=\"false\">to&nbsp;<\/span><span data-keep-original-tag=\"false\">P<\/span><span data-keep-original-tag=\"false\">2<\/span><span data-keep-original-tag=\"false\">.&nbsp;<\/span>In the case of luxury goods, the demand curve sometimes slopes&nbsp;<span data-keep-original-tag=\"false\">upward.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"COMPETITORS_COSTS_PRICES_AND_OFFERS\"><\/span><span style=\"mso-bookmark: bookmark1357;\" data-keep-original-tag=\"false\">COMPETITORS\u2019 COSTS, PRICES, AND OFFERS<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p style=\"margin: 0cm 0cm 6.0pt 8.0pt;\">The second set of external factors affecting the firm\u2019s pricing decision is competitors\u2019 costs and prices, and possible competitor reactions to the firm\u2019s own pricing moves. For instance, a consumer who is considering the purchase of a GSM phone from NITEL will evaluate NITEL\u2019s price and value against the prices and Value of comparable products from ECONET and MIN. In addition, the firm\u2019s pricing strategy may affect the nature of the competition it faces. For example, if a particular firm follows a high-price, high margin strategy, it may attract competition. However low-price, the low-margin strategy may stop competitors, or drive them out of the market.<\/p>\n<p style=\"margin: 0cm 0cm 6.0pt 8.0pt;\">It is necessary for companies to benchmark their costs against competitors\u2019 costs so as to&nbsp;<span data-keep-original-tag=\"false\">learn whether they are operating at a cost advantage or disadvantage. You should&nbsp;<\/span>remember that costs typical y set the floor for the price a firm can charge<span data-keep-original-tag=\"false\">.<\/span><\/p>\n<p style=\"margin: 0cm 0cm 6.0pt 8.0pt;\">Companies also need to learn the price and quality of each competitor\u2019s offer. This can be done in several ways. For instance, a firm can:<\/p>\n<p>(i) Send a comparison shoppers to price and compare competitors\u2019 products<\/p>\n<p style=\"margin: 0cm 0cm 0cm 41.0pt;\">(i ) Get competitors\u2019 price lists and buy competitors\u2019 products and dismantle it for the purposes of thorough examination of the features they contain<\/p>\n<p>(iii) Ask buyers how they view the price and quality of each competitor\u2019s products.<\/p>\n<p><span data-keep-original-tag=\"false\">Once a company is aware of competitors\u2019 prices and offers, it can use them as starting point for its own pricing. For instance, if its products are similar to those of a particular competitor, it will have to place its price close to that competitor\u2019s price otherwise it will lose sales. If the company\u2019s products are not as good as those of the particular competitor in question, the company will not charge less, then it can charge more. In essence, a company&nbsp;<\/span><span data-keep-original-tag=\"false\">should use price to position its offers relative to the competition.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"OTHER_EXTERNAL_FACTORS\"><\/span><span style=\"mso-bookmark: bookmark1361;\" data-keep-original-tag=\"false\">OTHER EXTERNAL FACTORS<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Companies also need to consider other factors in their external environment when setting prices. Economic conditions can have a strong impact on a firm\u2019s pricing strategies. For instance, economic factors such as boom, or recession, inflation and interest rates affect pricing decisions because they affect both the costs of producing a product, as well as consumer perceptions of the product\u2019s price and value.<\/p>\n<p>It is also very necessary for the marketer to consider what impacts its prices will have on other parties in its environment. Of particular importance is the way re-sellers or marketing intermediaries will react to the company\u2019s various prices. In actual fact, the company should set prices that give these intermediaries a fair profit, encourage their support and loyalty, and help them to sell the product effectively. Finally, the company must also take social concerns into serious consideration. Hence, when selling prices, a company\u2019s short-term sales, market share, and profit goals may have to be tempered by broader societal considerations.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"GENERAL_PRICING_APPROACHES\"><\/span><span style=\"mso-bookmark: bookmark1365;\" data-keep-original-tag=\"false\">GENERAL PRICING APPROACHES<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>After discussing the various considerations affecting pricing policies, it would be useful to discuss the alternative pricing methods most commonly used. These&nbsp;<span data-keep-original-tag=\"false\">methods are:<\/span><\/p>\n<ol>\n<li>Cost-plus or Full-cost pricing<\/li>\n<li>Pricing for a rate of return, also called target pricing<\/li>\n<li>Marginal cost pricing<\/li>\n<li>Going rate pricing, and<\/li>\n<li>Customary prices.<\/li>\n<\/ol>\n<p>The first three methods are cost-oriented as the prices are determined on the basis of costs. The last two methods are competition-oriented as the prices here are set on&nbsp;<span data-keep-original-tag=\"false\">the basis of what competitors are charging.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"COST-PLUS_OR_FULL-COST_PRICING\"><\/span><span style=\"mso-bookmark: bookmark1369;\" data-keep-original-tag=\"false\">COST-PLUS OR FULL-COST PRICING<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>This is most common method used in pricing. Under this method, the price is set to&nbsp;<span data-keep-original-tag=\"false\">cover costs (materials, labour and overhead) and a predetermined percentage for&nbsp;<\/span>profit. The percentage differs strikingly among industries, among members-firms and even among products of the same firm. This may reflect differences in competitive&nbsp;<span data-keep-original-tag=\"false\">intensity, differences in cost base and differences in the rate of turnover and risk.&nbsp;<\/span>In fact, it denotes some vague notion of a just profit.<\/p>\n<p style=\"margin: 0cm 0cm 0cm 8.0pt;\"><span data-keep-original-tag=\"false\">What determines the normal profit? Ordinarily, margins charged are highly sensitive to the market situation. They may, however, tend to be inflexible in the fol owing cases: (i) they may become merely a matter of common practice, (ii) mark-ups may be determined by trade associations either by means of advisory price lists or by actual lists of mark-ups distributed to members, (iii) profits sanctioned under price control is discontinued.<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">These margins are considered ethical as well as reasonable. Its inadequacies are:<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l10 level1 lfo5; tab-stops: 18.35pt;\"><span data-keep-original-tag=\"false\">1.&nbsp; <\/span><span data-keep-original-tag=\"false\">It ignores demand:&nbsp; there is no necessary relationship between cost and what&nbsp;<\/span><span data-keep-original-tag=\"false\">people will pay for a product.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l10 level1 lfo5; tab-stops: 19.1pt;\"><span data-keep-original-tag=\"false\">2. <\/span>It fails to reflect the forces of competition adequately. Regardless of the margin of profit added, no profit is made unless what is produced is actual y sold.<\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l10 level1 lfo5; tab-stops: 23.7pt;\"><span data-keep-original-tag=\"false\">3.&nbsp; <\/span><span data-keep-original-tag=\"false\">Any method of allocating overheads is arbitrary and may be unrealistic. Insofar as&nbsp;<\/span>different prices would give rise to different sales volumes, unit costs are a function of&nbsp;<span data-keep-original-tag=\"false\">price, and therefore, cannot provide a suitable basis for fixing prices. The situation&nbsp;<\/span>becomes more difficult in multi-product firms.<\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l10 level1 lfo5; tab-stops: 22.7pt;\"><span data-keep-original-tag=\"false\">4. <\/span><span data-keep-original-tag=\"false\">It may be based on a concept of cost, which may not be relevant to the pricing&nbsp;<\/span>decision.<\/p>\n<p style=\"mso-list: l7 level1 lfo6; tab-stops: 24.4pt; margin: 0cm 0cm 8.0pt 0cm;\"><span data-keep-original-tag=\"false\">(a)&nbsp; <\/span>To illustrate marking pricing, suppose a jug manufacturer had the following&nbsp;<span data-keep-original-tag=\"false\">costs and expected sales:<\/span><\/p>\n<p style=\"tab-stops: 139.35pt;\"><span data-keep-original-tag=\"false\">Variable cost&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>N10<\/p>\n<p style=\"tab-stops: 139.35pt;\"><span data-keep-original-tag=\"false\">Fixed cost&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>N300,000<\/p>\n<p style=\"tab-stops: 139.35pt;\">Expected unit sale<span style=\"mso-tab-count: 1;\" data-keep-original-tag=\"false\">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>500,000<\/p>\n<p><span data-keep-original-tag=\"false\">Then the manufacturer\u2019s cost per jug is given by:<\/span><\/p>\n<p align=\"center\"><u><span data-keep-original-tag=\"false\">F i x e d C o s t<\/span><\/u><span data-keep-original-tag=\"false\">&nbsp;N 3 0 0 , 0 0 0<\/span><\/p>\n<p style=\"tab-stops: 242.9pt;\"><span data-keep-original-tag=\"false\">UnitCost=VariableCost+&nbsp;MO +&nbsp;<\/span><span data-keep-original-tag=\"false\">Unit Sale<\/span><span style=\"mso-tab-count: 1;\" data-keep-original-tag=\"false\">&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">50,000<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">=N16<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">Now, suppose the manufacturer wants to earn a 20 per cent marketing on sales. The manufacture\u2019s marking price is given by:<\/span><\/p>\n<p style=\"tab-stops: 151.9pt 308.5pt;\"><span data-keep-original-tag=\"false\">Marking Price =&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unit Cost&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;= 1416<\/span><\/p>\n<p style=\"tab-stops: 308.5pt; margin: 0cm 0cm 8.0pt 113.0pt;\"><span data-keep-original-tag=\"false\">1 &#8211; Desired Return on Sales&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1 &#8211; 0.2<\/span><\/p>\n<p style=\"margin: 0cm 0cm 8.0pt 113.0pt;\"><span data-keep-original-tag=\"false\">=N20<\/span><\/p>\n<p><span data-keep-original-tag=\"false\">The manufacturer would charge dealers N20 a jug and make a profit of N4 per unit. The dealers, in turn, will mark up the jug. For instance, if dealers want to earn 50 per cent on sales price, they will mark up the jug to N40 (N20 +50% <\/span><span data-keep-original-tag=\"false\">of N40). This number is equivalent to a marking on cost of 100 percent (N20\/N20)<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"The_explanation_for_the_Widespread_use_of_Full-cost_Pricing\"><\/span><span style=\"mso-bookmark: bookmark1376;\" data-keep-original-tag=\"false\">The explanation for the Widespread use of Full-cost Pricing<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>A clear explanation cannot be given for the widespread use of full-cost pricing, as firms vary greatly in size, product characteristics and product range, and face varying degrees of competition in markets for their products. However, the&nbsp;<span data-keep-original-tag=\"false\">fol owing points may explain its popularity:<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 24.7pt;\"><span data-keep-original-tag=\"false\">1.&nbsp;&nbsp;&nbsp;&nbsp;<\/span>Prices based on full-cost look factual and precise and maybe more&nbsp;<span data-keep-original-tag=\"false\">defensible on moral grounds than prices established by other means.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.4pt;\"><span data-keep-original-tag=\"false\">2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">Firms preferring stability, use full-cost as a guide to pricing in an uncertain <\/span>market where knowledge is incomplete. In cases where coasts of getting information are high and the process of trial and error is costly, they use it to&nbsp;<span data-keep-original-tag=\"false\">reduce the cost of decision-making.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.4pt;\"><span data-keep-original-tag=\"false\">3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>In practice, firms are uncertain about the shape of their demand curve and bout <span data-keep-original-tag=\"false\">the probable response to any price change. This makes it too risky to move away from full-cost pricing.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.4pt;\"><span data-keep-original-tag=\"false\">4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">Fixed costs must be covered in the long-run and firms feel insecure that if they <\/span><span data-keep-original-tag=\"false\">are not covered in the long-run either.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.4pt;\"><span data-keep-original-tag=\"false\">5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">A major uncertainty in setting a price is the unknown reaction of rivals to that <\/span><span data-keep-original-tag=\"false\">price. When products and production processes are similar, cost-plus pricing&nbsp;<\/span>may offer a source of competitive stability by setting a price that is more likely to yield acceptable profit to most other members of the industry also.<\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.4pt;\"><span data-keep-original-tag=\"false\">6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>Management tends to know more about products costs than other factors which are <span data-keep-original-tag=\"false\">relevant to pricing.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l1 level1 lfo7; tab-stops: 26.65pt;\"><span data-keep-original-tag=\"false\">7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>Cost-plus pricing is especially useful in the following cases:<\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l11 level1 lfo8; tab-stops: 60.45pt;\"><span data-keep-original-tag=\"false\">(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">Public utilities such as electricity supply, transport, where the objective<\/span><\/p>\n<p style=\"margin: 0cm 0cm 0cm 66.0pt;\">is to provide basic amenities to society at a price which even the poorest&nbsp;<span data-keep-original-tag=\"false\">can afford.<\/span><\/p>\n<p style=\"margin-bottom: .0001pt; mso-list: l11 level1 lfo8; tab-stops: 61.15pt;\"><span data-keep-original-tag=\"false\">(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">Product tailoring, i.e. determining the product design when the selling<\/span><\/p>\n<p style=\"margin: 0cm 0cm 0cm 66.0pt;\">price is predetermined. The selling price may be determined by the&nbsp;<span data-keep-original-tag=\"false\">government, as in the case of certain drugs, cement, and fertilizers. By&nbsp;<\/span>working back from this price, the product design and the permissible cost is decided upon. This approach takes into account the market realities by looking from the viewpoint of the buyer in terms of what he wants and&nbsp;<span data-keep-original-tag=\"false\">what he will pay.<\/span><\/p>\n<\/div>\n\n\n\n<p><span data-keep-original-tag=\"false\">(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>Pricing products that are designed to the specification of a single buyer as applicable in case of a turnkey project. The basis of pricing is&nbsp;<span data-keep-original-tag=\"false\">estimated cost plus gross margin that the firm could have got by using facilities otherwise.&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">,<\/span><\/p>\n\n\n\n<p><span data-keep-original-tag=\"false\">(d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">Monophony buying \u2014 where the buyers know a great deal about&nbsp;<\/span>suppliers\u2019 costs as in case of an automobile buying, components from its ancillary units. They may make the products themselves if they do not like the price. The more relevant cost is the cost that the buying company, say, the automobile manufacturer, would incur if it made the profit itself.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"MARGINAL_COST_PRICING\"><\/span><span data-keep-original-tag=\"false\">MARGINAL COST PRICING<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<div>\n<figure><a href=\"https:\/\/i0.wp.com\/cdn.wallstreetmojo.com\/wp-content\/uploads\/2021\/12\/what-is-Marginal-Costing.png?ssl=1\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" class=\"size-medium jetpack-lazy-image jetpack-lazy-image--handled\" title=\"External Factors Affecting Pricing Decisions 2\" src=\"https:\/\/i0.wp.com\/cdn.wallstreetmojo.com\/wp-content\/uploads\/2021\/12\/what-is-Marginal-Costing.png?resize=675%2C372&amp;ssl=1\" alt=\"external factors affecting pricing decisions - marginal cost pricing\" width=\"675\" height=\"372\" data-lazy-loaded=\"1\" data-recalc-dims=\"1\"><\/a><\/figure><p><\/p>\n<p>Marginal cost pricing<\/p>\n<\/div>\n\n\n\n<p><span data-keep-original-tag=\"false\">Both under full-cost pricing and the rate-of-return pricing, prices are based on&nbsp;<\/span><span data-keep-original-tag=\"false\">total costs comprising fixed and variable costs. Under marginal cost pricing, fixed costs are ignored and&nbsp;<b>prices are determined on the basis of marginal cost.&nbsp;<\/b><\/span><span data-keep-original-tag=\"false\">The firm uses only those costs that are directly attributable to the output of a specific product.<\/span><\/p>\n\n\n\n<div>With marginal cost pricing, the firm seeks to fix its prices so as to maximize its total contribution to fixed costs and profit. Unless the manufacturer\u2019s products are in direct competition with each other, this objective is achieved by considering each product isolation and fixing its price at a level which is calculated to maximize its total contribution.<\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages\"><\/span>Advantages:<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<div>&nbsp;<\/div>\n\n\n\n<div>1. With marginal cost pricing, prices are never rendered uncompetitive merely because of a higher fixed overhead structure. The firm\u2019s prices will only be rendered uncompetitive by higher variable costs, and these are controllable in the short run while certain fixed costs are not.<\/div>\n\n\n\n<div>&nbsp;<\/div>\n\n\n\n<div>2. Marginal cost pricing permits a manufacturer to develop a far more aggressive pricing policy than does full-cost pricing. An aggressive pricing policy should lead to higher sales and possibly reduced marginal costs through increased marginal physical productivity and lower input factor prices.<\/div>\n\n\n\n<div>&nbsp;<\/div>\n\n\n\n<div>3. Marginal cost pricing is more useful for pricing over the life-cycle of a product, which requires short-run marginal cost and separable fixed cost data relevant to each particular state of the cycle, not long-run full-cost data. Marginal cost pricing is more effective than full-cost pricing because of two characteristics of the modern business:<\/div>\n\n\n\n<p><span data-keep-original-tag=\"false\">a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span><span data-keep-original-tag=\"false\">The prevalence of multi-product, multi-process and multi-market concerns<\/span><\/p>\n\n\n\n<p>makes the absorption of fixed costs into product costs absurd. The total costs&nbsp;<span data-keep-original-tag=\"false\">of separate products can never be estimated satisfactorily, and the optimal relationships between costs and prices will vary substantial y both among different products and between different markets.<\/span><\/p>\n\n\n\n<p><span data-keep-original-tag=\"false\">b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/span>In many businesses, the dominant force is an innovation combined with<\/p>\n\n\n\n<p><span data-keep-original-tag=\"false\">constant scientific and technological <a href=\"https:\/\/support.centreforelites.com\/en\/definition-of-growth-and-development\/\">development<\/a>, and the long-run situation is often highly unpredictable. There is a series of short-run. When&nbsp;<\/span><span data-keep-original-tag=\"false\">rapid developments are taking place, fixed costs and demand conditions may change from one short-run to another, and only be maximizing contribution in&nbsp;<\/span><span data-keep-original-tag=\"false\">each short-run will profit be maximized in the long-run.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Limitations\"><\/span>Limitations<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>1. The encouragement to take on business which makes only a small contribution may be so strong that when an opportunity for higher contribution business arises, such business may have to be foregone because of inadequate free capacity unless there is an expansion in organization and facilities with the attendant increase in fixed costs.<\/p>\n\n\n\n<p>2. In a period of business recession, firms using marginal cost pricing may lower prices in order to maintain business and this may lead other firms to reduce their prices leading to cut-throat competition. With the existence of idle capacity and the pressure of fixed costs, firms may successively cut down prices to a point at which no one is earning sufficient total contribution to cover its fixed costs and earn a fair return on capital employed.<\/p>\n\n\n\n<p>In spite of its advantage, due to its inherent weakness of not ensuring the coverage of fixed costs, marginal cost pricing has usually been confined to pricing decisions relating to special orders.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"_GOING-RATE_PRICING\"><\/span><span data-keep-original-tag=\"false\">&nbsp;<\/span><span data-keep-original-tag=\"false\">GOING-RATE PRICING<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Instead of the cost, the emphasis here is on the market. The firm adjusts its own price policy to the general pricing structure in the industry. Where costs are particularly&nbsp;<span data-keep-original-tag=\"false\">difficult to measure, this may seem to be the logical first step in a rational pricing&nbsp;<\/span>policy. Many cases of this type are situations of price leadership. Where price leadership is well established, charging according to what competitors are charging may be the only safe policy.<\/p>\n\n\n\n<p>It must be noted that \u2018going-rate pricing\u2019 is not quite the same as accepting a price impersonal y set by a near-perfect market. Rather it would seem that the&nbsp;<span style=\"mso-bidi-font-family: Garamond; mso-fareast-font-family: Garamond;\" data-keep-original-tag=\"false\">firm has some power&nbsp;<\/span>to set its own price and could be a price maker if it chooses to face all the consequences. It prefers, however, to take the safe course and conform to the&nbsp;<span data-keep-original-tag=\"false\">policy of others.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Customary_Pricing\"><\/span><span data-keep-original-tag=\"false\">Customary Pricing<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Prices of certain goods become more or less fixed, not by deliberate action on the sellers\u2019 part but as a result of their having prevailed for a considerable period of time. For such goods, changes in costs are usually reflected in changes in quality or quantity. Only when the costs change significantly the customary prices of these goods are changed.<\/p>\n\n\n\n<p>Customary prices may be maintained even when products are changed. For example, the new model of an electric fan may be priced at the same level as the discontinued model. This is usually so even in the face of lower costs. A lower price may cause an adverse reaction from the competitors leading to a price war so also on the consumers who may think that the quality of the new model is inferior. Perhaps, going along with the old price is the easiest thing to do. Whatever be the reasons, the maintenance of existing prices as long as possible is a factor in the pricing of many products.<\/p>\n\n\n\n<p>If change in customary prices is intended, the pricing executive must study the pricing policies and practices of competing firms and the&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/consumer-buying-behaviour.html\" target=\"_blank\" rel=\"noopener\">behaviour<\/a>&nbsp;and emotional make-up of his opposite number in those firms. Another possible way out, especially when an upward move is sought, is to test the new prices in a limited market to&nbsp;<span data-keep-original-tag=\"false\">determine the&nbsp;<a href=\"https:\/\/motivemeaning.blogspot.com\/2022\/04\/consumer-buying-behaviour.html\" target=\"_blank\" rel=\"noopener\">consumer reaction<\/a>.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Apart from factors within a company, external factors affecting pricing decisions in a firm also include the nature of the\u00a0market\u00a0and demand, competition, and other environmental elements.<\/p>\n","protected":false},"author":1,"featured_media":1340,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center 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This could happen on a small scale, such as between a manufacturer and a retailer. It could also happen on a larger scale involving entire industries and governments. Very often, changes in the elements\u2026","rel":"","context":"In &quot;Marketing&quot;","block_context":{"text":"Marketing","link":"https:\/\/support.centreforelites.com\/en\/category\/marketing\/"},"img":{"alt_text":"ANALYSIS OF THE MARKETING ENVIRONMENT","src":"https:\/\/i0.wp.com\/support.centreforelites.com\/wp-content\/uploads\/2022\/04\/ANALYSIS-OF-THE-MARKETING-ENVIRONMENT1.jpg?fit=724%2C504&ssl=1&resize=350%2C200","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/support.centreforelites.com\/wp-content\/uploads\/2022\/04\/ANALYSIS-OF-THE-MARKETING-ENVIRONMENT1.jpg?fit=724%2C504&ssl=1&resize=350%2C200 1x, https:\/\/i0.wp.com\/support.centreforelites.com\/wp-content\/uploads\/2022\/04\/ANALYSIS-OF-THE-MARKETING-ENVIRONMENT1.jpg?fit=724%2C504&ssl=1&resize=525%2C300 1.5x, https:\/\/i0.wp.com\/support.centreforelites.com\/wp-content\/uploads\/2022\/04\/ANALYSIS-OF-THE-MARKETING-ENVIRONMENT1.jpg?fit=724%2C504&ssl=1&resize=700%2C400 2x"},"classes":[]},{"id":1072,"url":"https:\/\/support.centreforelites.com\/en\/the-factors-affecting-business-marketing-demand\/","url_meta":{"origin":1044,"position":4},"title":"The Factors affecting Business Marketing Demand","author":"centreforelites","date":"April 10, 2022","format":false,"excerpt":"\u00a0The Factors affecting Business Marketing for business products are: (i) the number of potential business users; (i ) their purchasing power; (iii) buying motives, and\u00a0(iv) buyer habits. 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