Page 160 - DMGT550_RETAIL_MANAGEMENT

Unit 9: Merchandise Management

What cost determines is not the price but whether the product in question can be profitably Notes
produced or not.

For pricing decisions, relevant costs are those costs that are directly traceable to an individual
product. In the long run the aggregate revenues from all products must cover not only direct
costs but also contribute towards common costs. Ideally, each product should make significant
contribution to common costs; but it is not possible to state any general rule for determining
satisfactory or unsatisfactory contribution. If factors of demand and/or competition prevent a
firm from setting a price for one of its products that will cover direct costs, there may be no
alternative but to discontinue the product.

Did u know? At times, the government sets the price of commodities to protect the public
from sudden change in the market.

9.6.5 Demand Factors in Pricing

Where cost factors are internal in nature, demand based factors are external factors and emerge
out of marketing factors. The pricing policy of a firm would depend upon the elasticity of
demand as well. If the demand is inelastic, it would not be profitable for the firm to reduce its
prices. On the other hand, a policy of price increase would prove profitable if the demand is
inelastic. Conversely, if the demand is elastic, it is a policy of price reduction rather than a policy
of price increase, which would be profitable for a firm to adopt.

Task Prepare a report on Factors affecting Prices: Indian Subcontinent vs. Europe.

9.6.6 Price Sensitivity

We have already discussed the demand factor that affects pricing. Demand is based on the
consumption patterns of the consumers.

Sensitivity to price change will vary from consumer to consumer. In a particular situation, the
behavior of one individual may not be the same as that of the other, and may not follow the ‘law
of demand’. In fact, the pricing decision ought to rest on a more incisive rationale than simple
elasticity. Some important characteristics of consumer behavior are detailed below:

1. From the point of view of consumers, prices are quantitative and unambiguous, whereas
product quality, brand image, customer service, promotion and similar factors are
qualitative and ambiguous.

2. Price constitutes a barrier to demand when it is too low just as much as when it is too high.
Above a particular price, the product is regarded as too expensive and, below another
price, as constituting a risk of not giving adequate value or being perceived as a low
quality product. If the price is too low, consumers will tend to think that a product of
inferior quality is being offered.
3. Price inevitably enters into the consumer’s assessment of quality. There are two reasons
for this. First, it needs expert knowledge and appropriate equipment to test the quality or
durability of some particular products (to say nothing of the time and cost involved in
carrying out a proper test), and second, customers tend to look upon price itself as a
reasonably reliable indicator of quality. What is costly is thought to be of a high quality.
A higher price is ordinarily taken to be a symbol of extra quality, or extra value or extra
prestige.

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