Before making policy, strategy and technique of determining price of goods or services, a marketer should consider both internal and external environmental factors of the firm that affect the pricing. All the elements of marketing mix have close relationship with environmental factors. Among them, pricing is perhaps a very sensitive as well as explosive power. Business firm itself, consumers or customers , channel members, competitors, government and economy are the major factors that play significant role at different stages in the process of pricing. These factors can be discussed as follows:
1. Internal or controllable pricing factors
Under the internal organization factors include the objective of the business firm, production and distribution cost, marketing mix, nature of products, firm's expectations and reputation, etc. They are called internal pricing determinants and can be controlled by marketer.
a. Organization's objectives
The objectives of a marketing organization greatly influence pricing. A manufacturing company, at the introductory stage of its new product, determines low price to bring them to markets. But some other firms may determine high introductory price of their products to recover their investment or to get expected return from the investment. Whatever the objective of the company may be, it affects price determination.
b. Cost of manufacturing and marketing
The manufacturing and distribution cost greatly as well as directly affects pricing. If the cost for production and distribution is high, it becomes impossible to determine low price.
c. Other marketing mix components
The other components of marketing mix i.e. product, place and promotion prepared by a business organization all affect pricing. The nature of products does not only make it possible bust also make it is essential to determine price of the product. Similarly, reputation or goodwill of organization also affect price determination. Likewise promotion cost also affects pricing decision.
2. External or independent pricing factors
The external factors include customers, channel members, competitors, government, economic condition of country etc. These are independent factors and cannot be controlled by marketer.
a. Consumers and market
Consumers and target markets also affect pricing of products. Those who determine price should pay careful attention to the elements of buying behavior and methods. More attention should be given to the characteristics of target market, condition of the products, consumers' perception, thought and attitudes towards the price and quality of the products etc.
b. Channel members
Pricing is also affected by the members of distribution channel. The necessity and objective of channel members matching with pricing policy of the marketer can make distribution possible. The discount given to wholesalers or retailers is the important component in the profit to middlemen. So, the price determiner should get knowledge about the distributors' attitude towards the price and what price will they sell the products to consumers. Without written agreement, manufacturers cannot provide authority or direct the middlemen to fix final price, but can give suggestions.
Price of most of products is determine by considering the competition in market price. The company with having large market share becomes the price leader. When it increases or decreases price of its products, other company also do the same or adopt the same policy. But if there is no domination or influence of any single company in the market, the marketer analyses and evaluates the prices of all main competitor companies, collects reactions and draws conclusion. In this way, competition among manufacturers affects price determination.
Government policy and decisions also affect pricing. The government of each country have their own policy, decisions, rules and regulations. Price should be determined considering price control policy of government, sale tax, income tax policy etc. Prices of some products are controlled by government direction and the government itself determines prices of some products.