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.
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.
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.