Nothing will confuse you in a
business except pricing your product or service. Surely, you won’t like to
charge your customers less than your product’s worth, also you won’t like to
charge your customers at a price that withdraw your product or service from the
market. So, what you need to do? There
are some factors that must be considered before pricing the products and
services. These factors are illustrated below.
Cost of Production
Cost of production is crucial
factor for determining price of the product. A company cannot sell its product
less than the cost of its production. Therefore, it is compulsory to compile
data related to the cost of production before determining the price. There are
two types of cost: fixed cost and variable cost. Fixed costs are those that
remained unchanged, for example, factory rent and staff salary. While variable
costs are those that change with the volume of production, for instance, direct
material and direct labor. The price of the product is determined on the basis
of the total cost.
Demand for Product
The demand for a product also
have a great influence on price of the product. As the demand changes the price
also changes accordingly. Therefore, demand for the product should also be
considered before fixation of price. Generally, higher price is fixed if demand
is more than supply and vice versa.
Price of Competitor
Competition is another factor
which influence the price. If there is less competition, the higher demand will
be for your product and vice versa. Thus, the price of competing firms should
also be kept in mind while determining price of your own product. Let’s take a
real example, if a buyer wants to buy a pair of shows and he gets it at a lower
price than yours, what will he do? Of course, he will buy the product from
where he gets the product at a lower price.
So, it is desirable to keep the price low in case of cut throat
competition.
Objective
The objective of any firm is
to earn and maximize the profit. Therefore, when a firm determine the price of
its product, a certain amount of profit is added in the cost of product. By
providing high quality products at a reasonable price with customer support,
the firm can beat the competition and dominate the entire market.
Government Regulations
Generally, a monopolist firm
charge high price for its product or service. In order to protect the interest
of the public, the government intervenes and regulates the price of the
products. So, if price of the product is already fixed by the government, it
should also be considered.
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