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Explain 'Price' as an Element of Marketing-mix. Also, Explain Any Four that Affect the Fixation of Price of a Product. - CBSE (Commerce) Class 12 - Business Studies

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Question

Explain 'Price' as an element of marketing-mix. Also, explain any four that affect the fixation of price of a product.

Solution

Price refers to the amount of money which is paid by a consumer to obtain a product. Price is the most important factor determining the demand for a product. Demand for a product shares a negative relation with its price. The price charged by a firm affects its revenue and profits. Moreover, pricing is used as a competitive tool by firms which produce substitutable products. Marketers must analyse properly the various factors which determine the price and decide a suitable price for the product. Thus, it is important for the firm to carefully decide the price of the product:

Factors affecting the price of a product or service:

1)

Cost of product: Cost of the product is the most important factor determining the price. The cost of a product can be of the following three types:

Fixed cost: These are costs which remain fixed irrespective of the level of output. For example, cost of machinery and land.

Variable cost: These are costs which vary in direct proportion with the level of output. As the level of output increases, the variable costs also increase and vice versa. For example, cost of labour and raw material

Semi-variable cost: Similar to variable costs, these are costs which vary with the level of output but not in direct proportion. For example, commission paid to intermediaries

Generally, a firm decides such a price for its product so that it can cover the various costs and earn a profit over and above it.

2) 

Demand for product: Another important factor determining the price of a product is the elasticity of demand for the product. Price elasticity of demand implies how responsive the demand is to the changes in price.

Elastic demand: The demand is said to be price elastic if a given proportionate change in price leads to a more than proportionate change in demand. In such a case, charging a higher price by the firm would lead to a large fall in demand

Inelastic demand: The demand is said to be price inelastic if a given proportionate change in price does not bring about any significant change in demand. In such a case, it is possible for a firm to charge a higher price. This is because even at the higher price, the demand will not fall much.

So, goods generally having an elastic demand have a comparatively lower price than those which have an inelastic demand

3) A degree of Competition in the Market: In case there is high competition in the market, it is not possible for a firm to charge a higher price. This is because if the firm charges a higher price, consumers would shift the demand to its competitors.

4) Government Regulations: At times, the government regulates the prices of certain commodities. For example, in the market for agricultural products such as wheat and rice, the government intervenes in price determination.

5) Objectives of Pricing: There are various objectives which a firm considers while deciding the price of its product. Some important objectives of pricing:

  • Profit Maximisation: Profit maximisation is one of the basic objectives of every firm. If the firm aims at profit maximisation only in the short run, then it may decide a higher price for the product. In contrast, if the firm wishes to maximise profits in the long run, then it would charge a lower price at present so that it can acquire a greater share of the market and build up consumer loyalty
  • Acquiring Market Share: If a firm aims at acquiring a greater market share, then it would charge a lower price so that it can attract a greater number of customers towards its product
  • Surviving Competition: If the firm has to survive in high competition, then it must keep the price of the product low, else it will lose customers to competitors.
  • Focus on Quality: If the firm aims at improving the quality of the product, it may even charge a higher price so as to cover the additional costs.

6) Method of Marketing: Another important factor determining the price of a product is the methods of marketing used by the firm. For example, if the firm decides to use intense advertising, then it may charge a higher price so as to cover the costs.

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Solution Explain 'Price' as an Element of Marketing-mix. Also, Explain Any Four that Affect the Fixation of Price of a Product. Concept: Concept of Price (Marketing).
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