Respond Marketing

Three internal factors that affect price setting include: cost, image of the firm, and product-life cycle (Factors affecting pricing product: Internal and external factors, 2014). Three external factors include: competition, consumers, and economic conditions. 

Cost-oriented price setting is known as the cost-plus method or gross margin pricing. In this method, the manufacturer sets a goal of a particular gross profit margin based on the cost of the project so that no matter the cost, there is a set standard gross profit margin (Mariadoss, n.d.). The downside to this pricing method is that manufacturers must be extra conscientious of their cost of the product because if it is too high, it will be hard to keep the standard gross profit margin and keep the product at a price that is appealing to consumers. 

Image of the firm or manufacturer is another internal factor that affects price setting. To explain what this means, I will use a real-world example. Chick-Fil-A and McDonalds are both popular fast-food chains. However, Chick-Fil-A is praised for the quality of its service and food, and McDonalds is known for its large value menu and cheap prices for the quantity of food. Because of these two very different images, Chick-Fil-A can get away with higher prices on their food than McDonalds can.

The product life cycle consists of four stages: 1) market introduction, 2) market growth, 3) market maturity, and 4) sales decline (Perreault, Cannon, & McCarthy, 2020). This factor could be viewed as both internal and external. The stages are dependent on external factors, but it is widely accepted as an internal factor because every product has a cycle, and it is up to the manufacturer to analyze each of the four categories and prepare accordingly when making a pricing decision. Another reason that this factor is considered internal is because each phase is largely dependent on the product itself (internal) rather than being solely dependent on the environment (external). In the market introduction stage, sales are slow as the product gains market traction and thus pricing may need to be lower to encourage sales. During the market growth stage, sales grow fast but then eventually fall again. The market maturity phase is when sales plateau, and then the fourth stage is when sales decline for good. Pricing must accommodate all stages appropriately.

Competition is a major external factor that affects price setting. If one were to monopolize a market, then they have more room to decide what price they want to set. An example of a historical monopoly was AT&T who was once the sole provider of telephone services in the United States (Kramer, 2021). However, since Verizon, Alltel, Sprint, and many more have entered the market, AT&T has had to offer more reasonable prices to their consumers because they now have a choice in the telephone market. 

Consumers are another major external factor when it comes to choosing an appropriate price for a product. As with any product or business, one must know their market.  For example, the younger generation of consumers tend to spend more, especially on necessities, than the older generation (Yancey-Bragg, 2017).  Knowing this and knowing which generation your product appeals to is important to consider when choosing a price. One might get away with a higher price on a product if the target market is the younger generation of consumers. 

The last external factor we will investigate is economic conditions. This one is a bit more self-explanatory than some of the other factors. If the economy is booming or doing well, a company can raise prices, but if the economy is suffering, a company must be considerate of that and may lower prices of their products.