Price and Price Mix

Introduction: What is Price Mix?

Price mix is the price or value of a product that is determined by the producer. Generally, prices of products are fixed in a way so that the producer can save a portion of the profit from the sale of the product. However, sometimes, the price of the product may be kept low to grab market share or to promote the product in the market.

There are various factors that affect the price mix of a product. However, it may be noted that the price mix for different products is different. Therefore, the price mix of a product is based on multiple factors. The following are the major factors that are considered while fixing the price of a product.

Factors Influencing the Determination of Price

Product Cost

Product cost is the most important factor that affects the price of a product. The manufacturer usually uses raw materials to produce a finished product the cost of which is considered product cost. No producer can sell a product at a cost that is less than the cost of the product. Moreover, as some profits must be earned by the producer, the addition of profit is included in the price mix of a product. There are three types of product costs - fixed, variable, and semi-variable costs.

Fixed costs are costs that remain the same irrespective of whether one or more units of a product are produced. The wages of employees are a fixed cost. Variable costs change with the change in production units. The cost of raw materials is a variable cost. Semi- variable costs increase with activity but not with production. A salesman’s bonuses on the volume of sales are an example of semi-variable cost.

Utility and Demand of a product

The price of a product also depends on the utility and demand of the product in the market. Usually, as more units of a product are consumed, the utility of the product comes down. This means that the price of a product will decrease with increased consumption. However, as enough consumption of only one product is not made in the market by consumers, the utility factor usually does not impact the price of products too much.

The demand for a product however has a direct impact on the price of a product. The producers can sell a product at higher prices if the demand for the product is high in the market. However, if the demand is low, the price must be reduced to increase the sales.

There is a theory called price elasticity of demand that indicates the relationship between price and demand in a market. A product is said to have price elasticity if its demand goes down when its price goes up. On the other hand, the product is said to be inelastic to demand when the demand goes up with an increasing price. Therefore, producers can have their say when the product has price inelasticity of demand.

Market competition

The competition prevailing in the market is another factor that affects the price of a product. Competition determines whether a product should be priced at a higher level or at a lower level. When the competition in the market is too high, the prices of products cannot be fixed at an upper limit. However, when the competition is low, producers can set a higher price for the product. Competitors’ prices and their anticipated reactions must be judged before pricing a new product.

Companies usually do enough market research to know the average price of a product they want to sell in a market depending on competitors’ prices. Therefore, these factors must be considered while considering the price of a new product. The quality and features of a product must also be compared with those of the competitors before introducing a price for a new product to sell it sufficiently in a market.

Political and legal environment

The price of products may also be governed by the political and legal framework. In the case the product is an absolute essential, the governments intervene and regulate the prices of the products. The same applies to the legal framework. When the product interferes with legal restrictions, the government or legal authorities may interfere with the prices of the products.

Usually, the manufacturers of a product will tend to charge the maximum possible price of a product from consumers when the product is essential. But, looking at the need of the citizens and the nature of the product, governments may intervene to lower the price. Such practices are common in the case of drugs, foods, and energy items.

For example, the government may set an upper limit on the prices of wheat and rice because it is absolutely essential, and too high a price may make them unavailable for the needy and unprivileged ones. The same rule applies to drugs that may be necessary. Sometimes, governments may set a lower limit as well for the well-being of manufacturers. This is common in the case of agricultural products in India. The prices paid to farmers have a lower limit so that farmers can get a fair price for their products.

Pricing Objectives

Pricing objectives of the producers also play an important role in fixing the prices of the product. It depends on whether the producer wants to earn profits in the short term or in the long term. If the producers tend to earn maximum profit in the short term, they will price the product at the maximum level while if they want to earn the profits in the longer term, they will price the products at a lower rate.

Marketing Methods Used

The price of a product also depends on the marketing methods used by the producer. The costs of sales campaigns, wages of salesmen, advertising costs, marketing media channels chosen, etc. all must be considered while fixing the price of a product. The top brands that spend a considerable amount in marketing, therefore, need to price their products higher.

Conclusion

Pricing of products is one of the most essential aspects of operations of all organizations. As the price of the product determines whether it would sell and be profitable, the producers need to know about all aspects that affect the pricing of the products. That is why price mixing is provided with so much importance in marketing, branding, and finance in corporate economies.

FAQs

Qns 1. What is meant by price mixing?

Ans. Price mix is the price or value of a product that is determined by the producer. Generally, prices of products are fixed in a way so that the producer can save a portion of the profit from the sale of the product.

Qns 2. List three factors that affect the pricing of a product.

Ans. Product cost, utility and demand, and market competition are the three factors that impact the pricing of products.

Qns 3. How many types of product costs are there?

Ans. There are three types of product costs - fixed costs, variable costs, and semi- variable costs.