Factors affecting price of a product:
1. Product Cost: One of the most important factors affecting the price of a product or service is its cost. This includes the cost of producing, distributing and selling the product. The cost sets the minimum level or the floor price at which the product may be sold.In the long run, a firm cannot survive unless at least all its costs are covered. There are broadly three types of costs: viz Fixed Costs, Variable Costs and Semi Variable Costs.
2. The utility and demand: While the product costs set the lower limits of the price, the utility provided by the product and the intensity of demand of the buyer sets the upper limit of price, which a buyer would be prepared to pay. The buyer may be ready to pay up to the point where the utility from the product is at least equal to the sacrifice made in terms of the price paid.
3. Extent of competition in the market: The price will tend to reach the upper limit in case there is lesser degree of competition while under conditions of free competition, the price will tend to be set at the lowest level.
4. Government and legal regulations: In order to protect the interest of public against unfair practices in the field of price fixing, Government can intervene and declare a product as essential product and regulate it’s price. In such a case, the Government does not allow the firms to charge such a high price and intervene to regulate the price of the product.
5. Pricing objectives: Apart from profit maximisation, the pricing objectives of a firm may include: (a) Obtaining Market Share Leadership: If a firm's objective is to obtain larger share of the market; it will keep the price of its products at lower levels so that greater number of people are attracted to purchase the products; (b) Surviving in a Competitive Market: If a firm is facing difficulties in surviving in the market because of intense competition or introduction of a more efficient substitute by a competitor, it may resort to discounting its products or running a promotion campaign to liquidate its stock; and (c) Attaining Product Quality Leadership: In this case, normally higher prices are charged to cover high quality and high cost of research and Development.
6. Marketing Methods Used: Price fixation process is also affected by other elements of marketing such as distribution system, quality of salesmen employed, quality and amount of advertising, sales promotion efforts, the type of packaging, product differentiation, credit facility and customer services provided.