Price - EdexcelKey factors that influence prices

Markets are dynamic, which means that they are constantly changing. As a result, businesses need to review the prices that they set for their products on a regular basis. To do so, they must look at the factors that influence prices.

Factors that influence pricing strategies

There are four factors that may lead a business to adopt a particular approach to its prices: changes in technology, number of competitors, market segments and where a product is in its life cycle.

Changes in technology

New technology has led to innovations such as the ‘freemium’ pricing model. This is where access to a basic version of a product is provided free of charge, with additional features being made available as add-ons that need to be paid for. This model is particularly common among software and mobile apps.

Advances in technology have also affected the frequency with which businesses review their prices. Consumers now have immediate access to pricing information. They can also check online prices with a smartphone while they are in a physical store, and they can use price comparison websites. This means that businesses have to be much more flexible in setting prices, and they may need to change them more often. However, these technological advances also benefit businesses, as they can use technology to monitor levels of customer demand and identify when they might be able to increase prices.

Number of competitors

In competitive markets, businesses often compete on price, particularly when they sell similar or identical products. A good example is supermarkets, where smaller discount chains have successfully taken market share from the established supermarkets by offering lower prices on everyday items.

Market segments

When setting prices, businesses also have to take into account the kinds of consumers their products are aimed at. In a niche market, a business will usually be able to charge a higher price while expecting a lower sales volume, as the number of competing products is likely to be small. In contrast, businesses selling to a mass market are likely to set prices at a lower level as they will expect a high volume of sales.

For example, a high-end watch will be much more expensive than an everyday watch, but it is likely that far fewer of the high-end watch will be sold. Both watches will tell the time, but they will appeal to very different market segments.

Where a product is in its life cycle

A business that introduces a new, unique product may initially choose to price the product high while accepting that there will be a low volume of sales but a high profit margin. This is likely to be effective while there is little competition. However, by the time the product has reached maturity, it is likely to be facing competition from other similar products. If this is the case, then the business may no longer be able to charge a high price for the product. If the business reduces the price, existing customers are likely to continue buying the product and other customers may switch from competing products. For example, 4K Ultra HD TVs were expensive when they were first introduced, but as more manufacturers began to produce them their price began to fall.

For generic products, businesses often use a low starting price to encourage customers to try the product during its introduction stage. This means pricing a product low with the aim of selling it at a high volume but at a low profit margin. During the growth stage, prices may be kept low initially, but will eventually rise when the product becomes more established. During a product’s maturity phase, a business might choose to keep the product’s price down in order to maintain a similar level of sales to those achieved during its growth period. During the decline stage of the product life cycle, businesses are more likely to use offers and switch to a high-volume, low-price strategy to try to maintain sales.