External factors that affect pricing includes: 

• Demand

Market demand for a product or service has great impact on pricing. If there is no demand for the product, the product cannot be sold at all. If the product enjoys good demand, the pricing decision can be aimed to utilise this trend.

Determine the expected price in a few test-markets by trying different prices in different markets and comparing the results with a controlled market in which price is not altered. If the demand of the product is inelastic, high prices may be fixed. On the other hand, if demand is elastic, the firm should not fix high prices, rather it should fix lower prices than that of the competitors.

• Competition

The price set by a business should be based on the actions of competitors, because:

• Customers will compare your business’s product with similar products the see if the price is reasonable or not.
• Distribution system (distributors, retail and whole sales shops, agents, and so on) will consider who offers the highest profit.
• If other competitors know that the product generates high earnings for the business, they will jump into the market to share in the pie.
• If current competitors think the low price strategy of a business could affect their market share and profit, they might work together to start a price war.

Please view the COMPETITOR PRICING SHEET in the “EXERCISE FILES” – this is an example of how to track your comptetior pricing.

Other factors:

– Economic conditions: bull market, bear market, or inflation. Example: when the economy declines, people may start to think about saving money. The price should be adjusted (reduced) to suit the customer’s awareness at the time.

–State regulations: for example: price for petrol, telecom, public transportation, exchange rates, and so on.

• Supplier

A supplier, supplies the required items of production to the firm. As already pointed out, the firm can reduce the price, if it can reduce the cost of production. If not, the usual tendency is to charge the increased cost of production to the consumer. For example- the price hike for petrol or diesel will automatically increase the price of vegetables, fruits, provisions, etc. If a firm could get the required raw materials at reasonable rates from suppliers, then it can also price the goods at a less rate.

Sometimes, however, when a manufacturer appears to be making large profits on a particular product, suppliers will attempt to make profits by charging more for their supplies. In other words, the price of a finished product is intimately linked up with the price of the raw materials. Scarcity or abundance of the raw materials also determines pricing.

• Economic Conditions

Economic conditions affects the pricing decision of a firm. In a depressed economy, business activities will be considerably less, but in a boom condition, there will be hectic business activity. Therefore, economic conditions affect the demand for goods and services. So, in a depressed economy, in order to accelerate business one sells goods at a lesser price, but in a boom period, goods can be sold at a high price.

Several pricing decisions are available:

• Prices can be boosted to protect profits against rising cost,
• Price protection systems can be developed to link the price on delivery to current costs,
• Emphasis can be shifted from sales volume to profit margin and cost reduction etc.

• Government Regulations

Price discretion is also affected by the price-control enforced by the government through enactment of legislation, when it is thought proper to arrest the inflationary trend in prices of certain products. 

Consumer Protection Act, Competition Commission