7 Important Factors that Determine the Fixation of Price (2024)

7 important factors that determine the fixation of price are:

(i) Cost of Production:

Cost of production is the main component of price. No company can sell its product or services at less than the cost of production. Thus, before price fixation, it is necessary to compile data relating to the cost of production and keep that in mind.

There are two types of cost: (i) Fixed Cost (e.g., Rent of building, Salary of permanent staff, etc.) (ii) Variable Cost (e.g., Material, Labour, etc.). At least the price should be able to recover the variable cost as the fixed cost is incurred whether the production takes place or not.

(ii) Demand for Product:

Intensive study of demand for product and services in the market be undertaken before price fixation. If demand is relatively more than supply, higher price can be fixed.

(iii) Price of Competing Firms:

It is necessary to take into consideration prices of the products of the competing firms prior to fixing the price. In case of cut-throat competition it is desirable to keep prices low.

(iv) Purchasing Power of Customers:

What are the purchasing power of the customers and at what price and how much they can purchase? It should also be taken into consideration.

(v) Government Regulation:

If the price of the commodity and services is to be fixed as per the regulation of the government, it should also be borne in mind.

(vi) Objective:

Usually, at the time of price fixation a certain amount of profit is added to the cost of production. If company’s objective is to earn higher profit it may add higher amount of it.

(vii) Marketing Method Used:

Price is also influenced by the marketing method used by the company, e.g., commission which is to be paid to the middlemen for sale of the goods is also added to the price. Similarly, if the customers are to be provided “after sale service” facility, then those expenses are also added to the price.