Pricing is undoubtedly one of the most important decision areas of manufacturing performance management. Price and sales volume together decide the revenue of any business. As the sales volume in itself is dependent on price, pricing really becomes the key to the revenue of the business. Pricing is crucial to profits as well.
Stated simply, price is the exchange value of a product. In fact, price revolves around two elements- utility and value. Utility is the generic property of the product to satisfy a need or want of the customer. Value is the quantitative worth the consumer attaches to the product, for which he is willing to part with a certain quantum of money.
Two categories of factors - internal factors and external factors - influence the pricing decisions of any enterprise. In each of these categories some may be economic factors and some psychological factors; again some factors may be quantitative and yet others qualitative. The firm has certain objectives- long term as well as immediate- in pricing. For example, it has certain costs of manufacturing and marketing; and it seeks to recover these costs through the price.
The firm may have a basic philosophy on pricing. The pricing decisions of the firm have to be consistent with his philosophy. Pricing also has to be consistent with the overall objectives of the firm. The firm is also seeking a particular public image though its pricing policies. All these constitute the internal factors that influence pricing. Moreover, pricing strategy has to fit into the overall marketing strategy. It cannot exist interdependently.
In addition, any business firm has to encounter a set of external factors while formulating its pricing strategy. In the first place, the nature of the economy and the nature of competition have to be reckoned with. The purchasing power of consumers has also to be reckoned with. The bargaining power of major customer groups and supplier groups is another important consideration.
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