Factors Affecting Pricing Policy

By Thomas Bennett Financial expert at Priceva
Published on July 27, 2023
Pricing policy is a crucial aspect of a company's overall strategy. The company's success in achieving its set objectives largely hinges on accurately calculated prices.

Determining the optimal price is not a simple task. There are no universal rules for price management. Price is a relative parameter that fluctuates based on the product, market, consumer, economic conditions, company/product lifecycle, government regulation, and other factors.

Factors Influencing Pricing Policy

A company's pricing policy is determined by a combination of external and internal influencing factors, and it must take each into account in equal measure.

Internal pricing influences are factors over which the company can exercise direct control:

1. Company objectives
2. Distribution channels
3. Product cost
4. Product differentiation
5. Product lifecycle
6. Geographic factors
7. Customer types
8. Ethical considerations

External factors are elements of the environment that cannot be controlled but must be taken into consideration. The external influences on pricing include:

1. Demand
2. Price sensitivity
3. Level of competition
4. Economic climate
5. Consumer behavior
6. Government policies
7. Supplier influence

Exploring Internal Pricing Influences

Let's delve deeper into the key internal factors influencing pricing:

1) Company Objectives

The company's objectives play a pivotal role in its pricing policy.

Even within the same organization, prices for products may vary based on the company's primary objective at any given time:

1. Maintaining return on investment (ROI).
2. Sustaining or expanding market share.
3. Competing against rivals.
4. Maximizing profit.

If a company aims to quickly recover its investment or maximize profit, prices may hover around or exceed the median market price. However, if the goal is to conquer the market and outperform competitors, a loss-leader or predatory pricing strategy might be adopted. In this case, prices will be oriented towards the lower price segment relative to the market.

2) Distribution Channels

Prices can vary across different distribution channels. Prices in an online store might be lower than in a physical store, since comparing prices online is much easier. This forces the company to keep prices at the level of key competitors to ensure good sales.

Prices can also differ across various types of stores. Discount stores may have one price level, while supermarkets and hypermarkets have another, and neighborhood stores yet another. In remote areas with low competition, prices can be higher because customers, once in the store, are willing to pay a little extra rather than spend time changing locations.

3) Cost of Goods

The cost of a product plays a crucial role in an organization's pricing policy. It forms the basis for making pricing decisions. Knowing the cost of goods and the costs of distribution, as well as market prices, marketers can pre-assess the potential profitability of all products. Based on the company's resources, they can carry out activities aimed at stimulating sales of those products that will provide maximum added value.

4) Product Differentiation

Differentiation is the process of distinguishing a product or service from others with the goal of making them more appealing to a specific target market. It involves setting a product apart from competitors' products, as well as the company's own products from different lines or brands. It's no secret that the same product, packaged under different brands, can vary significantly in price.

5) Product Lifecycle

Every product introduced to the market has a certain lifespan. After the introduction stage, when it's a novelty that few people know about, there are stages of growth and saturation, where the company can reap the benefits of high demand. However, at some point, the product becomes obsolete and is replaced by a more modern equivalent. This process is known as the product lifecycle.

The price is also affected by the product lifecycle. At the start, the company might significantly lower prices to capture the market, profit well during the growth and saturation stages, and again decrease prices at the end of the lifecycle.

6) Geographic Factor

Price variation depending on the country or region where the product is sold is a standard practice in retail.

Pricing can be uniform or zonal. Prices in different localities can be determined not only by the company's pricing policy and logistical costs but also by the local market environment. No merchant will refuse additional profit if it is provided by regional specifics.

7) Types of Buyers

The company's pricing strategy largely depends on the types of consumers. Different buyers may have different motives and values. Benefit, quality, safety, status – these are four different factors that a buyer may pay attention to.
The company is able to independently determine with which groups of clients it is more interested to work with. It could be a segment of customers who are more focused on savings, or the emphasis will be placed on those who value quality and brand, for which they are willing to overpay. The choice will determine in which price segment relative to competitors the company will operate.

Thus, the company's pricing decision should take into account the main perceived value of its key types of customers.

8) Ethical Considerations

When setting a price for a product, the company can be guided by ethical considerations. It can sell certain products not for profit, but as a measure to support public welfare or fulfill a humanitarian mission. For example, the company can sell certain life-saving medicines or vaccines at a price that only covers the cost of production.

External Pricing Influences

1) Demand and Price Sensitivity

One of the most important factors in making a pricing decision is the overall demand for the product. Marketers use the demand curve to estimate changes in overall demand for a product based on price differences. In this paradigm, the price is determined by the type of elasticity.

Some markets are more sensitive to price increases than others. When the price significantly influences demand, the product is price elastic. When the price has little impact on demand, the product is price inelastic. Price sensitivity can change over time due to a number of factors, including changes in the economic environment, competition, or demand.

We have discussed what price sensitivity and demand elasticity are in detail in these articles.

2) Level of Competition

The existing and potential competition significantly influences the determination of the price. The less competition, the more demand for your product. The price of a new product is free from market influence only for a short period, only until strong competitors appear.

Players in a highly competitive market need to carefully study their competitors' prices and consumer responses to each competitor's offering. Therefore, prices should be adapted to the type of competitive position the company plans to take.

3) Economic Climate

The economic conditions prevailing in the country and the world also influence price setting. Prices usually rise during inflation due to increased costs and rising risks. In times of stagnation, prices decrease, as purchasing power falls, and competition becomes fiercer.

4) Government Policy

Government intervention, such as price controls on certain types of products and tax imposition, will also affect the company's pricing policy. If the government increases the tax or introduces an excise duty, the final consumer will have to pay more for the product due to the increased tax component added to the price.

5) Supplier Influence

Manufacturing companies are significantly dependent on suppliers of raw materials and components, logistical partners, and labor for their production purposes. If raw material suppliers stop supplying or sharply raise prices, the company has to switch to other suppliers. And if it does not find a cheap alternative to offset the losses, it is forced to increase the price in turn.


A reasonable pricing policy is one that takes into account all major influencing factors. And if internal factors are entirely under the company's control, it must know and monitor external factors in order to be able to react quickly to any changes, both positive and negative.

Whether these changes are in the geopolitical situation or the behavior of a single player changing the rules of the game, or perhaps the preferences of your key buyers will change, any of these processes triggers a chain reaction of changes that affect the price. This is a dynamic process that will never stop. Your task is always to be on alert and respond quickly and accurately.

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