Setting an effective price is really very difficult task. Because the price is the only thing that generates money. No other thing can generate money.
The price of a product determines the product profitability, performance, and quality as well. The higher price creates a bigger margin. The bigger margin actually leads to increased profits. On the other hand, low price creates opposite of the higher price. Besides, the total margin will reduce. The product performance is also of low quality.
But setting too high or too low price can effect on firm’s margin. The premium price can reduce a product’s profitability. On the other hand, too much high price both good and bad for firms. IBM found that their products are at a high price in the marketplace. But its competitors enter into the market at a low price. They are also able to capture high market share.
Too low price and too high price is compared with each other. There arises a gap between too low price and too high price. An opportunity cost exists here. The low price is usually set by the firm.
There are some critical factors. Let’s see –
- Faster technological progress:
We are living in the age of technology. This technology is made our life easier than before. But this technology is changing day by day. This means that we need to update ourselves every day. We have to open our eyes every moment. We also need to change our pricing when we found any changes in technology.
- The proliferation of new products: Proliferation means a lot of variation in the product category. We can’t set a single price for our products. Because there are many variations of products in the marketplace. We have to maintain a different price for different categories of products. For example, Shampoo is the best example. Because there are a lot of categories of shampoo under a single brand. Such as black shine, long and strong, anti-dandruff, etc. So, all these have different features. For that, we can’t offer the market at a single price.
- Increased demand for services:
As a consumer, we are much more conscious of our products. Because we have greater excess over information. These are all about substitute, complementary and competitor’s products. That’s why producers can’t charge more price. If they do it they will lose their customer.
Their customer will switch to competitors products.
- Increased foreign competition:
We are in the era of globalization. That’s why everyone from a foreign country can sell to another. Besides buyers also buy the product from anyone to another country. As a free market economy, this is really easy for businessmen. Besides, our government also provides some facilities. These are reducing trade barriers, tax, and tariff. Sometimes, the government provides cash incentives to small businessmen.
- Changing the legal environment:
If government change any rules and regulations like taxes, interest rate, tariff that all directly affected the price. Because Price is set by all factors that associating with the cost. If the price is higher, you will get a competitive disadvantage than your trade partner.
- Economic uncertainty:
This is the main factors in setting the price. Because, economic uncertainty refers to the combination of natural environment, world economic policy, and consumer movement changes. A country may face some natural calamities like flood, drought, excessive rain, an earthquake.
In that situation, the consumer can’t purchase goods as previous. So, you have to consider this situation. Try to set the price based on the situation. On the other hand, consumer tastes and preferences may change a particular product. Then the firm may face the problem of the particular product. However, at this time, the firm goes to discount sales.
So, read and remember these carefully. This will help you to grow your business more profitably.