Fixing the right price for a product is the most difficult task as it affects the volume of sales of the product of the firm as well as the profits of the firm. Although non-price factors have become more important in recent decades, price remains one of the important elements in determining the market share and profitability. Prices are set by a firm by taking into consideration factors like costs, profit targets, competition and perceived value of products. Taking into account the various factors, the steps generally followed in setting the price of a product are :-
Setting the Pricing Objective of the Firm
It is the most important step as it varies from firm to firm. Setting a lower price may attract more customers and thus fetch a larger market share for the firm's product. But charging a higher price might reflect a high quality and prestige product.
Determining the Demand for the Product
Demand for the product sets a ceiling price. Penetration pricing is used when the product has a highly elastic demand and there is strong competition in the market. Under this policy, prices are fixed below the competitive level in order to obtain a larger share of the market. Once your product is in demand or is accepted in the market, the price of your product is increased. But when the demand for the product with respect to price is more inelastic, higher prices are charged for the product. This policy is generally followed during the initial stages of introduction of the new product.
Estimating the Costs and Profits
Costs set a floor price. Amount spent and return expected is the key factor in deciding the price. The various costs involved in producing the product must be covered in pricing the product. On a long term basis also the price must take into consideration the costs of doing business. This also includes sales forecast and profit margin.
Determining the Competition for the Product
Competitors prices and the price of substitutes provide an orientation point. The number of competitors for the product in the market as well as the policy followed by them is also an important factor. Competitive pricing is used if the market is highly competitive and the product is not differentiated from that of the competitor's.
Considering the Governmental Regulations
Government policies and incentives are also taken into account. Prices are also affected by various tax liabilities which a company and the product is subjected to. It includes, excise duty, sales tax and local taxes like octroi.
Sales tax is levied on the sale of moveable goods in India at the rates which vary depending upon the type and nature of goods and the State in which sale has taken place. The Central and State Government are both empowered to impose sales tax. The Central Sales tax deals with transactions in the nature of inter-state sales. While the State sales tax deals with intra-state sales.
Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Goods in transit are exempted from it.
Selecting a Suitable Pricing Method/Policy
Right price for the product can be determined through pricing research and by adopting test-marketing techniques. The various pricing methods are:-
- Perceived value pricing:- in which a firm sets its price in relation to the value delivered and perceived by the customer. Perceived value is made up of several elements like buyer's image of the product performance, warranty, trustworthiness, esteem, etc. Each customer gives different weightage to these elements. Some may be price buyers, others may be value buyers and still others may be loyal buyers. If either the price is higher than the value perceived or the price is lower than the value perceived, the company will not be able to make potential profits.
- Value pricing:- in which companies develop brand loyalty for their product by charging a fairly low price for a high quality offering.
- Going rate pricing:- is followed if it is difficult to ascertain the exact costs involved and the competitive response. Hence, firms base their price on competitor's price by charging the same, more or less than the major competitor.
- Introducing a product at a premium price:- When a product is innovative and competition is low or non-existent, this policy can be applied. Thus profits are optimised. But when competition arises prices are lowered.
- Ethical pricing: - Price is fixed keeping the welfare of the society in mind. For many life saving drugs, this particular policy is used. The product is sold at the lowest possible price with either a very reasonable margin or no profit at all. Profit may be earned from other products.
- Full Line pricing:- If you are selling a range of particular product for example pickles, then you price the product in a particular range, this way you may earn more profit in one flavour and less on the other. But, you cannot sell only the one that gives you maximum profit, or else a customer may switch over to another brand where he would be able to exercise an option for other flavours.
The Central and State Governments have passed certain legislations in order to control production, supply, distribution as well as price of a number of commodities. The Essential Commodities Act,1955 is one such important legislation. Under the Act, the State Governments/UT Administrations have issued various control orders to regulate various aspects of trading in essential commodities such as foodgrains, edible oils, pulses, kerosene and sugar etc. The Central Government regularly monitors the action taken by State Governments/UT Administrations to implement the provisions of the Act.
The Government is empowered to enlist any class of commodity as essential commodity as well as regulate or prohibit the production, supply, distribution, price and trade in any of these commodities for the following purposes :-
- Maintaining or increasing their supplies.
- Equitable distribution and availability at fair prices of the commodities concerned.
- Securing any essential commodity for the defence of India or the efficient conduct of military operations.
The list of commodities declared as “essential” under the Essential Commodities Act, 1955 is reviewed from time to time in the light of changes in the economic situation and particularly with regard to their production and supply. For example, keeping in view production and demand of some of the commodities, it was felt that these could be removed from the list of essential commodities. Hence, with effect from 15.2.2002, Government removed 11 classes of commodities in full and one in part from the list of commodities declared as essential under the Essential Commodities Act, 1955. Similar efforts are underway to delete more commodities from the purview of the Act in order to facilitate free trade and commerce, for which alternative legal mechanism is being worked out for protection of consumers interest etc.
The list of commodities declared essential under the Essential Commodities Act, 1955 (As on 15.12.2004):-
A. Declared under Clause (a) of Section 2 of the Act
1. Cattle fodder, including oil cakes and other concentrates.
2. Coal, including coke and other derivatives.
3. Component parts and accessories of automobiles.
4. Cotton and woollen textiles.
6. Foodstuffs, including edible oilseeds and oils.
7. Iron and Steel, including manufactured products of Iron & Steel.
8. Paper, including newsprint, paperboard and strawboard.
9 Petroleum and Petroleum products.
10 Raw Cotton, either ginned or unginned and cotton seed.
11. Raw Jute.
B. Declared as essential through notifications under sub-clause (xi) of clause (a) of Section 2 of the Act
12. Jute textiles.
13. Fertilizer, whether inorganic, organic or mixed.
14. Yarn made wholly from cotton.
15. (i) seeds of food crops and seeds of fruits and vegetables, (ii) seeds of cattle fodder and (iii) jute seeds
The Act has been amended from time to time. The Essential Commodities (Special Provisions) Act, 1981, makes certain special provisions by way of amendments to the Essential Commodities Act,1955, for a temporary period for dealing more effectively with persons indulging in hoarding and black marketing of, and profiteering in, essential commodities and with the evil of vicious inflationary prices and for matters connected therewith or incidental thereto.
Also, the Government has set up a Price Monitoring Cell (PMC) in the Department of Consumer Affairs to monitor and analyse price data and trends of availability of essential commodities. The Economic Adviser in the Department of Consumer Affairs heads the cell and a Deputy Economic Adviser assisted by Assistant Economic Advisers and Deputy Directors looks after the work of the cell. The fifteen essential commodities for which the cell monitors the prices are Rice, Wheat, Atta, Gram Dal, Tur ( Arhar ) Dal, Sugar, Gur, Groundnut Oil, Mustard Oil, Vanaspati,Tea, Milk, Potato,Onion and Salt.
Information on retail prices is received on daily basis from 18 centres of the country. Similarly, information on wholesale prices is received from 37 centres of the country on weekly basis. Accordingly, the price monitoring cell issues the following reports on daily and weekly basis:-
The objective of such price and distribution controls is:- promotion of equity or distributive justice; ensuring the quality of goods and services; prevention of monopolistic, restrictive and unfair trade practices that are hindering public interest; augmentation of the supply; ensuring availability of essential goods at reasonable prices to the vulnerable sections in all areas; control of inflation and deflation; etc.