For effective business organization it is necessary to have a clear understanding of what price is, pricing factors, what are the principles of pricing of goods and services. We will talk about how and what prices are made up of, what functions they perform and how to correctly determine the adequate cost of production.
Price concept
The basic element of the economic system is price. In this concept, various problems and aspects are intertwined that reflect the state of the economy and society. In its most general form, the price can be defined as the number of monetary units for which the seller is ready to transfer the goods to the buyer.
In a market economy, the same goods can cost differently, and price is an important regulator of relations between market entities, an instrument of competition. Its value is influenced by many pricing factors, and it consists of several components. Price is volatile and subject to permanent changes. There are several types of prices: retail, wholesale, purchasing, contractual and others, but they are all subject to a single law of formation and existence on the market.
Price features
A market economy differs from a regulated one in that prices have the opportunity to freely implement all their functions. The leading tasks that can be solved with the help of prices include stimulation, information, orientation, redistribution, and the establishment of a balance between supply and demand.
The seller, having announced the price, informs the buyer that he is ready to sell it for a certain amount of money, thereby orienting the potential consumer and other traders in the market situation and informing them of his intentions. The most important function of establishing a fixed cost of goods is to regulate the balance between supply and demand.
It is with the help of prices that manufacturers increase or decrease the number of manufactured products. A decrease in demand usually entails an increase in prices and vice versa. At the same time, pricing factors are a barrier to discount, since only in exceptional cases can manufacturers lower prices below the cost level.
Pricing process
Pricing is a complex process that takes place under the influence of various phenomena and events. It is usually carried out in a certain order. First, pricing goals are determined, they are closely related to the strategic goals of the manufacturer. So, if a company sees itself as an industry leader and wants to occupy a certain segment of the market, it seeks to establish competitive prices for its goods.
Next, the main pricing factors of the external environment are evaluated, the features and quantitative indicators of demand, market capacity are investigated. It is impossible to form an adequate price for a service or product without assessing the cost of similar units from competitors, therefore, an analysis of competitors' products and their cost is the next stage in pricing. After all the “incoming” data has been collected, it is necessary to choose pricing methods.
Typically, a company forms its own pricing policy, which it adheres to over a long period. The final stage of this process is the final pricing. However, this is not the final stage, each company periodically analyzes the set prices and their compliance with the challenges, and according to the results of the study, they can reduce or increase the value of their goods.
Pricing principles
The determination of the value of a product or service is not only carried out according to a certain algorithm, but is also carried out based on basic principles. These include:
- The principle of scientific validity. Prices are not taken "from the ceiling", their establishment is preceded by a thorough analysis of the external and internal environment of the company. Also, the cost is determined in accordance with objective economic laws, in addition, it must be based on various pricing factors.
- The principle of target orientation. Price is always an instrument for solving economic and social problems, so its formation should take into account the tasks set.
- The principle of continuity. The pricing process does not end with the establishment of the value of the goods in a specific time period. The manufacturer monitors market trends and changes the price in accordance with them.
- The principle of unity and control. Government agencies constantly monitor the pricing process, especially for socially significant goods and services. Even in a free, market economy, the state is assigned the function of regulating the value of goods, to a large extent this applies to monopolistic sectors: energy, transport, housing and communal services.
Types of factors affecting the price
Everything that affects the formation of the value of the goods can be divided into external and internal environment. The former include various phenomena and events that a product manufacturer cannot influence. For example, inflation, seasonality, politics and the like. The second includes everything that depends on the actions of the company: costs, management, technology. Also, pricing factors include factors that are usually classified by subjects: producer, consumers, government, competitors, distribution channels. In a separate group allocate costs. They directly affect the size of the cost of production.
There is also a classification within which three groups of factors are distinguished:
- not market or basic, i.e. related to the stable state of the economy;
- opportunistic, which reflect the variability of the environment, these include factors of fashion, politics, unstable market trends, tastes and preferences of consumers;
- regulatory related to the activities of the state as an economic and social regulator.
Basic pricing system
The main phenomena affecting the cost of goods are considered indicators that are observed in all markets. These include:
- Consumers. Price is directly dependent on demand, which, in turn, is determined by consumer behavior. This group of factors includes indicators such as price elasticity, customer reactions to them, and market saturation. The behavior of consumers is influenced by the marketing activity of the manufacturer, which also entails a change in the value of the goods. The demand, and therefore the price, is influenced by the tastes and preferences of customers, their income, even the number of potential consumers matters.
- Costs. When setting the price of a product, the manufacturer determines its minimum size, which is due to the costs that were incurred in the production of the product. Costs are constant and variable. The first include taxes, wages, production services. The second group includes the purchase of raw materials and technologies, cost management, marketing.
- Government activities. In different markets, the state can influence prices in many ways. Some of them are characterized by fixed, strictly regulated prices, on others - the state only monitors compliance with the principles of social justice.
- Channels of distribution. Conducting an analysis of pricing factors, it should be noted the special significance of the activities of participants in the channels of distribution. At each stage of product promotion from manufacturer to buyer, the price may change. The manufacturer usually seeks to maintain control over prices, for this he has various tools. However, retail and wholesale costs are always different, this allows the product to move in space and find its final customer.
- Competitors. Any company strives not only to fully cover its costs, but also to maximize profits, but at the same time it has to focus on competitors. Since too high prices will scare off buyers.
Intrinsic factors
Those factors that a manufacturing company can influence are usually called internal. This group includes everything related to cost management. The manufacturer has various options for reducing costs by searching for new partners, optimizing the production process and management.
Also, internal pricing demand factors are associated with marketing activities. The manufacturer can contribute to the growth of demand by conducting advertising campaigns, creating hype, fashion. Internal factors also include product inventory management. A manufacturer can produce similar products or products using the same raw materials, which helps to increase profitability and lower prices for some products.
External factors
Phenomena that do not depend on the activities of the manufacturer of the goods are usually called external. They include everything related to the national and global economy. So, external pricing factors of real estate is a state of the national economy. Only when it is stable, is there a steady demand for housing, which allows prices to rise.
External factors include politics. If a country is in a state of war or a protracted conflict with other states, then this will certainly affect all markets, the purchasing power of the consumer and, ultimately, prices. External are government actions in the field of price control.
