Price
Business: Cambridge International GCSE (2027 Exams), topic 3.3.6
Price
There are 4 key factors that influence a firm’s pricing decisions. Costs and product life cycle are internal factors. The nature of a product and the degree of competition are external factors.
Costs
- Costs influence firm’s pricing decisions because firms usually aim to make profit.
- A firm’s price and costs determines how much profit the firm will make. Businesses cannot afford to set a price lower than their costs forever.
Product life cycle
- Where a product is in the product life cycle determines whether the firm will charge a high or low price for the product.
- When a new product is launched, firms may charge higher prices to take advantage of exclusivity.
- When Apple launches new iPhones (like the iPhone X), they charge higher prices. The iPhone X cost $1,000 in Autumn 2017, but this price fell to $850 by February 2018.
Nature of product
- The nature of a product affects pricing in 2 key ways:
- Whether a good is a luxury good will affect how much a business charges.
- Whether the product is hard to differentiate from competitors affects how much a business can charge. If it is similar (homogenous), then businesses usually price at a similar level to competitors.
- For example, in the crude oil market, oil is the same no matter who produces it. This means that there is a uniform price (same price for all businesses and customers) in the market.
Degree of competition
- The degree of competition affects the pricing decision of firms because the more competition a firm faces, the more options customers have.
- When customers have lots of options for similar products, businesses must compete to attract customers using a lower price.
Test yourself on Price
Which of these things affect a firm's pricing decisions?
A company produces luxury handbags that are highly differentiated from competitors.
Which pricing strategy is the firm most likely able to use?In a market with many competitors offering nearly identical products, such as crude oil, which factor is most likely to determine a firm’s pricing decision?