Deciding the Price (SQA National 5 Business Management): Revision Note

When setting the price of a product or service, a business must consider many different factors

• Internal factors come from inside the business

  • Examples include costs, quality, desire brand image and a business's objectives

• External factors come from outside

  • Examples include competition, customer expectations, demand and the economy

Getting the price right is essential because it affects sales, profit, brand image, and customer perception of value

Cost of production

• The total cost of making or providing the product, including materials, labour and overheads, must be covered by the selling price

• If costs rise, prices may need to increase to maintain profit margins

Desired profit margin

• Businesses must decide how much profit they want to make per unit

• A higher margin may mean a higher price, but this could reduce demand if customers see it as too expensive

Business objectives

• The price may depend on what the business is trying to achieve, for example, maximising profit, increasing market share or clearing stock

Product quality

• Higher-quality products often justify higher prices because customers expect to pay more for superior materials or craftsmanship

Brand image and positioning

• A premium brand will set a higher price to match its reputation

• A value brand may keep prices lower to attract price-sensitive customers

Marketing mix decisions

• Pricing must fit with other elements such as promotion and place

• For example, luxury goods need premium pricing, high-end advertising and exclusive retail locations to match

Stage in the product life cycle

• Prices may change over time, starting high at launch and dropping later to attract new buyers as the product matures

External factors come from outside the business and are often beyond its control, but they strongly affect pricing decisions

Competition

• Businesses must consider competitor prices

• They may choose to match, undercut, or charge more depending on their strategy and brand strength

• Highly competitive markets often force prices down

Customer expectations

• Customers will only pay what they believe a product is worth

• Businesses must understand what their target market considers “good value” through market research

Market demand

• If demand is high and supply is limited, prices can rise

• If demand is low, discounts or price reductions may be necessary to encourage sales

Economic conditions

• Inflation, interest rates and changes in disposable income can influence how much customers can afford to spend

• During economic downturns, customers tend to favour cheaper options

Legal and ethical factors

• Some industries are subject to price regulations, and businesses must avoid unfair practices such as price fixing or misleading pricing

Supplier costs

• If suppliers increase prices for materials, businesses may have to raise their own prices to maintain profits

Location and convenience

• Products sold in convenient or premium locations, such as airports or city centres, often carry higher prices because customers pay for accessibility and speed

Trends and external events

• Changing fashions, new technologies, or global events like supply shortages can affect what customers are willing to pay