Pricing is an important part of the product development lifecycle. A good pricing strategy enables the organization to realize enhanced sales which are vital for building strong revenues. Poor pricing results in reduced sales which translates to diminished profits. Reduced sales are counterproductive hence the need to have a strong pricing strategy. Pricing for a new product is influenced by various internal and external factors. These factors often influence the final price of a product after considering internal and external factors. Pricing must accommodate the production costs and allow the producer a reasonable margin for profit. Below are internal and external factors that affect the pricing of a new product that is entering a market.
The most important factor to consider when establishing proper pricing for a product is the cost that the producer incurred when producing the product. Production costs include the cost of raw materials and labor that was used to produce one unit of an item. The cost of production is often extensive involving more than the raw materials and labor. One must also consider taxes, overheads, and all other costs that went into developing the product. Legally, manufacturers are allowed to include a profit margin of approximately 25% of the total cost of production. This consideration ensures that the producer makes a profit from their production. Without this consideration, the producer is likely to set a price that incurs a loss or one that overprices a product which affects its market acceptability.
Another major factor to consider when setting the price of a product is the companys corporate culture and public perception. The culture of a company means that it attracts a certain kind of customers who have a preferred price regime (Haron, 2016). For instance, if an organization is known for being a high-end manufacturer with a portfolio of expensive items, a new product is likely to follow suit. The company culture provides a benchmark to look up to when pricing a new product. The company culture also influences the production process directly which has a direct impact on the price of the product. The image of the firm must be upheld by setting a price that covers the companys preferred market effectively.
The other major internal factor affecting the price of a new product is the current technology used in production. Technology makes work easier and in the context of a new product it may result in a reduced cost of production. Using a computerized robotics system for manufacturing vehicles may reduce the number of people in the production chain which results in improved efficiency. On the other hand, technology may increase the cost of production if the new technology is expensive and capital intensive. This reason requires a proper evaluation to ensure that the product is priced appropriately without adversely affecting the possibility of selling the product.
One of the strongest external factors that affect the price of a product in the market is the force of demand. Demand for a product refers to the market need for a particular product based on its use and importance in the market (Haron, 2016). A product is in high demand if it is extremely necessary for daily living or the preproduction of another product. When a product is in high demand, its price should go up to reap maximum profit for the producer. When the demand for a product is low, a lower price is often inevitable to ensure that sales remain consistent despite the potential decline in profitability.
After analyzing demand, we must also assess the supply of a product in the market. Supply refers to the quantity of an item available on sale in a market. Supply is contributed by a companys supply into the market and the supplies that come from competing brands and companies. Just like demand, supply is evaluated through observing market trends to see when a product is in high supply and when it is not in high supply. When a product is in high supply, the price tends to go down since it is in excess. Excesses mean that the market is oversupplied and it is easy to acquire the product leading to poor prices. When a product is in low supply, there is an increased demand for the product which drives prices up. Hoarding is used to help a producer navigate through this problem to ensure they receive only the best prices.
Lastly, governments have a direct influence on the price of a product. Although the government has minimal influence in production, once a product is manufactured, the government has a strong influence on its price. Taxes are imposed on products to generate revenue for the government as value-added tax or customs for imports and exports. When a tax is imposed on a product, its price rises since the producer transfers that cost to the consumer. The government may also zero-rate products to implement affirmative action on an object. For instance, since the United States does not tax most of its exports, American products have a favorable price in most world markets.
Haron, A. J. (2016). Factors influencing pricing decisions. International Journal of Economics & Management Sciences, 5(1), 1-4. Doi: 10.4172/2162-6359.1000312