1. Market demand
In addition to being affected by costs, product pricing is also affected by market demand, that is, by the relationship between product supply and demand. When the market demand for a product is greater than the supply, the price should be higher; when the market demand for a product is less than the supply, the price should be lower. Conversely, price changes affect the total market demand, thereby affecting sales volume and the realization of corporate goals. Therefore, when setting prices, companies must understand the impact of price changes on market demand. An indicator that reflects the impact is the price elasticity of demand for products.
The price elasticity of demand refers to the sensitivity of the market demand for products to price changes. The factors that are usually used to measure the size of demand elasticity are:
The percentage of change in quantity and the percentage of change in price, that is, the price elasticity coefficient of demand.
Influence on product demand price
(1) The importance of the product to people’s lives. The demand elasticity of daily necessities is small, while the demand elasticity of luxury goods is large. (2) The substitutability of the product. The demand elasticity of products that are difficult to replace is small, while the demand elasticity of products that are easy to replace is large. (3) The number of uses of the product. The demand elasticity of products with a single purpose is low, while the demand elasticity of products with a wide range of uses is high.
(4) The popularity of the product. The demand elasticity of products that are already popular and saturated in society is low, while the demand elasticity of products with low popularity is high.
2. Competitors’ strategies and prices
(5) The unit price of the product. The demand elasticity of daily necessities with low unit prices is low, while the demand elasticity of high-end products with high unit prices is high. When setting prices, companies must also consider competitors’ costs, prices, and market supplies. Consumers make judgments about the value of products based on the pricing of similar products of competitors. In addition, a company’s pricing strategy may affect the competition it faces. A certain product
or drive competitors out of the market.
If a product adopts a high-pricing, high-profit strategy, it may attract competition, while a low-pricing, low-profit strategy can deter competitors.
When estimating competitors’ pricing strategies, companies need to think about several questions: (1) Compared with competitors’ products, what is the consumer value of the company’s products? (2) What is the current strength and pricing strategy of competitors?
(3) How does the competitive environment affect consumer price sensitivity?
Relative to competitors’ pricing, what principles should companies follow when making pricing decisions? The answer is easier said than done.
3. Government or industry organization intervention. No matter what price is set, it must provide consumers with a value higher than the price.
In order to maintain economic order or for other purposes, the government may intervene in the pricing strategy of enterprises through legislation or other methods. Government intervention includes setting gross profit margins, setting maximum and minimum prices, limiting the price fluctuation range or setting approval procedures for price changes, and implementing price subsidies. For example, some state governments in the United States have adopted rent control laws to keep rents at a lower level and milk prices at a higher level; the French government has kept gem prices at a low level and bread prices at a high level; some places in my country have restricted business gross margins to prevent excessive profits. In addition, some trade associations or industry monopoly organizations will also intervene in the pricing strategies of enterprises.