Pricing Product, External and Internal Factors Affecting Pricing Decisions

Sun, 07/31/2011 - 03:03 -- Umar Farooq

Factors Affect Price Decision

Pricing is all around us. We pay for house rent, we pay for taxi, if need a laptop we must pay to buy it. Everything has a price. Who determine the price structure of a product, top management, CEO, the entrepreneur, answer is no. Basically two factors, which affect the company price decision and strategy.

1. Internal Factors Affecting Price

  • Marketing Objectives
  • Marketing Mix Strategy
  • Cost
  • Organization

2. External Factors Affecting Price

  • The Market and Demand
  • Competition
  • Other External Factors

Also Read:    Stages of New Product Development     Product Life Cycle    Macroeconomics Articles

Internal Factors Affecting Price

Internal factors affecting pricing include:

Marketing Objectives

Before setting prices, the company must decide on its strategy for the product. The company must select its market clearly and then marketing mix strategy. On the other hand the company must be clear about its objectives. If the company objectives are clear, it will be easy to decide the price. Common objectives of the company are survival in the market, profit maximization, market share leadership and product quality leadership.

Survival in the Market

  • Over-capacity
  • Intense competition
  • Changing consumer want
  • And set low price

Maximizing Profit Strategy

Some companies believe in maximizing profit.  They select the high prices because they want financial results not long run performance.

Market Share Leadership (Market Penetration Prices)

Conditions are

  • Highly price sensitive market
  • Low price affect potential buyers
  • Economics of scale

Product Quality Leadership

The company set high prices and provide high quality products in the market.

Marketing Strategy Mix

A company achieves the objective by price, which is one of the tools of marketing mix.  The price, which is selected, must be related with product design, distribution and promotion decision.


Cost is related closely with price because to select the price it will include cost of distribution, production and all the other costs on product. If the company cost of production is high, it cannot set suitable price.  But if the cost of production is not high, can set suitable prices.


It is the duty of management that who will set the price within the organization. In large organizations price setting authority is given to product line manager.  In industrial organizations it is allowed to salespersons to interact with customers to set the price in specific range.  In small organization the top management decides the pricing structure.

External Factors Affecting Price

External factors that affect pricing include:

  • The Market and Demand
  • Competition
  • Other External Factors

The Market and Demand

To set the price the marketers should have complete knowledge about the relationship between market and demand. 

Types of market

Perfect Competition

Perfect Competitive market is one in which every firm is to small to affect mark price.

Features of perfect competition

  1. Large no of sellers & buyers number
  2. Homogeneous products perfectly
  3. Free entry and exit
  4. Perfect knowledge of price cost (no control over price)
  5. Perfectly price elastic demand imperfect competition

Monopolistic Competition

Monopolistic competition is a market situation in which there are relatively large numbers of small firms, which produce or sell similar but not identical commodities.

Features of Perfect Competition

  1. Large no of sellers and buyers
  2. Differentiated products which are close substitute
  3. Free entry but firms can produce only close substitutes
  4. Some control our price
  5. Less than perfectly price elastic demand


Where there is a single seller for a product and there is no close substitute of the commodity that it often by the sole supplier to the buyers.

Features of Monopoly

  1. Single firm
  2. Perfectly differentiated product without close substitute
  3. Very strong barriers to entry
  4. Extreme control over price
  5. Near to in elastic price elasticity of demand

Competitors' Cost, Price and Offers

Another factor affecting the company's pricing structure is competitors' cost and pricing.

Other External Factors

Some other external factors can affect setting the price such as: Economic factors like Inflation Deflation and interest rate affect selling price because they affect cost of production and consumer perceptions related product price. Government policies can also affect the price taking decision.