Factors Affecting Pricing Decisions | Internal and External Factors (2023)

Before going into the detail of factors affecting pricing decisions, let’s discuss some of the basic concepts of pricing, which are also important to know.


The money claimed against the offered product or service in the market is called price. In other words the value exchanged for use of the benefits of a certain product or service. The customer is called the price of that product or service. Price may take the following forms.

  • Interest
  • Rent
  • Fee
  • Tool
  • Premium
  • Fare etc.

Price is an important element that serves as the basis for the choice of the customers in the purchase in the old days. However, now many other elements are considered as more determining than price alone in Consumer Behavior. Price is set by the negotiation between customers and the sellers. There are two main types of pricing which are as follows:

Fixed Price, in which single price is set for all customers.

Dynamic Price that contains different prices for different customers on the basis of the situation.

Factors Affecting Pricing Decisions

There are a number of factors affecting the pricing decisions and price is not determined simply. Moreover, there are many factors affecting pricing decisions. The reason is that the price is a very sensitive issue for the customers in their purchasing behavior. Following are the two main factors affecting pricing decisions:

1– Internal Factors

2- External Factors

Internal Factors

Internal factors are those factors that are related to the internal environment of the business. This means that the issues that prevail within the business organization and upon which the organization has control are included in this category. Internal factors further include the following:

Price Adjustment Strategies For Small Business
  • Marketing Objectives and Marketing Mix Strategies
  • Costs
  • Organizational Considerations

Each of these is discussed one by one.

(Video) Internal & External factors that impact Pricing Decisions (PRICE)

Marketing Objectives & Marketing Mix Strategies

The objectives of the business serve as a basis for the development of proper marketing mix strategy. Also, that includes in the price determination process. Those businesses that have kept clear objectives feel comfortable in setting an effective price for their products or services. Since, their prices are built on the ground of stated objectives. Following are some of the important objectives that are covered by most businesses.

  • Survival

In this objective the main purpose of the business is survival in the market. The profit maximization purpose becomes a secondary importance for such a business. Because its survival is at stake due to unfavorable market conditions like tough competition, changes in tastes of customers etc. In this case the business tries to keep its price low. So, that a sufficient proportion of its product or service should be sold.

  • Profit Maximization

Another important objective is the profit maximization that is employed by many businesses. Such businesses count the costs and demand of their products or services and set different prices. From these price combinations, a business chooses the price that can give maximum profit, return on investment or cash flow. This objective is beneficial for the short run and it neglects the long term future of the business. Some businesses try to increase their market share for the purpose of getting the highest profit. Because their management believed that higher market share leads to lower cost and hence higher profits. Businesses adopting such a strategy also keep their prices low.

  • Product Quality Leadership

A business can set its basic objective as the product quality leadership in the market. For this purpose, such a business keeps its price higher. To cover the higher performance of its product along with the costs incurred on research and development.

Price can be used to accomplish other objectives for a business. Examples include lowering of price to avoid increasing competition, keep prices competitive. To make the market stable and avoid government intervention. Also, to increase demand by lowering prices etc. In short, the decisions taken in respect of price affect other marketing mix variable decisions. So, all of these decisions should be consistent with one another to make a marketing program effective. The business should also keep its product as differentiated and set a relatively high price for the uniqueness of its product. In this way price is based on many non-pricing factors.


Cost is the fundamental element in setting prices for a product or service. There is simple rule of the business charges. Such prices that should not only cover all of the costs incurred in manufacturing, distribution and promotion of the product or service. However, also provide a fair return on the invested money. If a business has low costs, then it can increase its sales and profit by lowering the price of its product.

Kinds of Costs

Generally there are two major types of costs which are as follows:

a) Fixed Cost

b) Variable Cost

  • Fixed Cost

The fixed cost is such a cost that remains fixed and does not change with the changing level of production or sales. Since, the total fixed cost remains the same but fixed cost per unit may change. The example includes rent paid for the building, interest paid on loan, salaries to employee staff etc.

(Video) Factors affecting pricing decision Marketing management BBA Bcom 3rd ppt

  • Variable Cost

The variable cost is that kind of cost which changes with the change in the level of production and sales. Although the total variable cost changes but the unit variable cost remains the same. For example, each car produced includes the variable cost of tires, metal sheets, Misc. items etc. The change with the increase or decrease in the quantity of production and sales.

Management of the business should ascertain different levels of costs with respect to different levels of production and sales. So, that the lowest cost can be obtained for the determination of effective prices for the manufactured products or services.

Organizational Considerations

This factor includes the fact that who should be given the responsibility to set the price within the organization. There are many ways to deal with such an issue. In smaller businesses, top management is responsible for setting the price of the product. On the other hand, in large organizations product line managers or divisional managers have the authority to set prices for the product or service. In case of industrial markets, salespersons handle the pricing of products by negotiating with the customers. If certain price sensitive industries have a separate pricing department that can either directly determine the best prices. In some firms, top management like the proposed prices of the lower level employees like salespersons etc.

  • External Factors

External Factors include factors that are related to the external environment of the business. The business has less control over these variables of the external environment. Following are included in this category:

1) The Market and Demand

2) Costs, Prices and Offering of Competitors

  • The Market and Demand

We have already discussed that the lower limits of price are determined by the costs incurred. On the other hand the upper limits are determined by the demand and market elements. Price is balanced by the benefits of owning the relative product or service by consumer and industrial customers. For this purpose the price and demand relationship for a product is essential to be understood before setting its price.

  • Pricing in different Markets

Different market conditions require different sets of pricing strategies. Generally there are following four types of markets:

1) Pure Competition

2) Monopolistic Competition

(Video) Internal and External Factors Related to Pricing - Marketing - Organization of Commerce & Management

3) Oligopolistic Competition

4) Monopoly

5) Consumer perception about value and price

6) Price Demand Relationship

  • Pure Competition

In case of pure competition in the market, there are many buyers and sellers in the markets dealing with uniform commodities like wheat etc. There is one ongoing price in the whole market and no single buyer or seller can affect this price. Because the customers can easily obtain their required quantity at the ongoing price of the market. So, no seller can charge higher prices. Similarly, no seller can charge a lower price because he can sell all his offered quantity in the market. In case of the rise of the price or profit in the market, new sellers are attracted to enter the market. In pure competition, pricing, sales promotion, new product development and marketing research are not supported. Specifically, the sellers on the market do involve in preparation of marketing strategies.

  • Monopolistic Competition

In case of monopolistic competition there are many sellers and buyers who offer their products not at a single price but at a range of prices. The difference in the price range is due to the differentiated product or service offering by the sellers. Customers can feel the difference between the products and hence pay different prices for them. These differences can be in shape of features, quality or style etc. So in this kind of market businesses spend more time. Also, money on differentiating their product or services in the shape of sales promotion, advertising etc. A single business is not affected by the marketing strategies of its competitors because there are many competitors in the market.

  • Oligopolistic Competition

Another factor affecting pricing decisions is oligopolistic. In an oligopolistic market, there are few sellers and buyers which are conscious about the pricing and other marketing strategies of competitors. The offered products are either uniform or differentiated. It is difficult for new sellers to enter the market. A certain change in the price of a single firm affects its own soil in a negative way. Even if a seller lowers its price; its competitors also decrease their price. This means that the benefits are only for a short while.

  • Monopoly

Another market condition is monopoly in which there is only a single seller who can offer its products or services at different rates. As the seller is single and the buyers are much more, therefore the seller charges a relatively higher price. Because there is no fear of competition. In case of regulated monopoly, the seller can charge only a fair price. However, in case of unregulated monopoly the seller has freedom to charge extra for its offering. Mostly the monopoly firm keeps its price low for a number of reasons like quick penetration in the market, government intervention etc.

  • Consumer Perception about Value and Price

The bottom reality in the pricing decision is that the customers are the final authority who determines the price of a product or service. It is obvious that the consumers pay the price for the exchange of the benefits that they avail by using the relative product. So businesses should focus on the pricing that is consumer oriented. While they try to determine how much the consumer would be willing to pay for how much benefit of a certain product.

  • Price Demand Relationship

Businesses should also consider the important relationship between the price of a product or service and its demand. Generally price and demand is inversely related. That means, the increase in the price would lead to the decrease in the demand for that product and vice versa. The reason behind this inverse relationship is that the customers have limited resources for the fulfillment of their demands.

(Video) Marketing Management - Factors Affecting Pricing Decisions - Internal and External Factors

In some cases the price and demand show the direct relationship. The increase in the price would lead to the increase in the demand of that product in the market. However, this only happens with the prestigious products where increased price means increased quality.

The business management should also consider the elasticity of the demand of their offering product while setting its price.

Costs, Prices & Offering of Competitors

There are some external factors affecting pricing decisions of the business. Such as the costs, price and offering of the competitors as compared to its own cost, price & offering. This means that the management of the business should take into account the change in the price. Although, offering of the competitors and take steps accordingly.

Other external factors affecting pricing decisions are also important to be considered. While determining a price for a product or service, like economic conditions of the country, government rules and regulations etc.

Factors Affecting Pricing Decisions | Internal and External Factors (1)

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(Video) Analyze internal and external factors that impact upon pricing decisions

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What are the internal and external factors that affect pricing decisions? ›

Internal factors that pricing are organisational factors, marketing mix, product differentiation, cost of the product and objectives of the firm. External factors that influence pricing decisions are demand, competition, suppliers, economic conditions, buyers and government.

What are the external factors affecting pricing decision? ›

The main determinants that affect the price are:
  • Product Cost.
  • The Utility and Demand.
  • The extent of Competition in the market.
  • Government and Legal Regulations.
  • Pricing Objectives.
  • Marketing Methods used.

What are the internal and external factors that affect? ›

External factors include political, economic, sociocultural, technological, environmental, and legal factors. Internal factors include things like values, management styles, Human Resources, technological and physical resources, and organizational structure.

What is an internal and external factor? ›

What are external business factors? They are the uncontrollable environmental factors taking place outside your business that influence your performance. These are in contrast to internal business factors—the controllable forces happening within your organization.

What are the 5 internal factors? ›

The main internal factors are:
  • corporate culture.
  • staffing.
  • finance.
  • current technology.

What are examples of internal factors? ›

Some examples of areas which are typically considered internal factors are: Financial resources like funding, investment opportunities and sources of income. Physical resources like company's location, equipment, and facilities. Human resources like employees, target audiences, and volunteers.

What are the 3 internal factors? ›

The three main internal factors are:
  • human resources.
  • finance.
  • current technology.

What are the 4 types of external factors? ›

External factors
  • political - For example, new legislation.
  • economic - For example, inflation and unemployment.
  • social - Changes in taste and fashion or the increase in spending power of one group, for example, older people.
  • technological - For example, being able to sell goods online or using automation in factories.

What are the 5 external factors? ›

There are five main types of external factors affecting business:
  • Political factors.
  • Economic factors.
  • Social factors.
  • Technological factors.
  • Environmental factors.
  • Competitive factors.

What are the 7 external factors? ›

The common external environment factors that businesses should consider are political, economic, social and cultural, legal, technological, and environmental/natural. The external environmental factors affect the organization at multiple levels: local, regional, provincial, federal, regional (global), and global.

Why are internal and external factors important? ›

Once they know about both positive and negative effects within and outside the company, they can produce suitable strategies to handle any predicted situation. Therefore, examining internal and external factors is considered the most important task for an enterprise before launch any strategic marketing plan.

What are internal factors affecting? ›

Internal factors are those that you control, they come from within you. Internal factors are influenced by your feelings and thoughts. These can be positive or negative. Positive thoughts will help you with decision making, while negative thoughts will most likely hinder you.

What is the difference between internal and external marketing? ›

Internal marketing focuses on “selling” your products or services to your internal customer, while external marketing focuses on selling to your external customer.

What are the 7 internal factors? ›

The factors are: (1) Value System, (2) Mission and Objectives, (3) Organisation Structure, (4) Corporate Culture and Style of Functioning of Top Management, (5) Quality of Human Resources, (6) Labour Unions, and (7) Physical Resources and Technological Capabilities.

What are internal factors of decision making? ›

Internal factors that affect decision making include attitude, emotions, and ethics. Attitude is how you react when faced with making a decision. It is best to have a positive attitude because it often helps one see more options as well as make decision making easier.

What are external factors? ›

External factors are aspects outside the company that affect its operations, strategy, and success. The dynamics within which businesses operate are constantly changing. This means that external factors can positively or negatively affect the company. Notably, businesses cannot control these external factors.

What are the 6 internal and external factors that influence what consumers buy? ›

Internal factors include a consumer's perception, learning and personality, while external factors include a consumer's culture, social status, family and marketing activities.

What are the 5 internal factors that affect marketing? ›

Other internal factors you need to consider include the following:
  • Corporate objectives.
  • Human resources.
  • Communication tactics.
  • Operational issues.
  • Business culture.
Jan 19, 2022

How many internal factors are there? ›

The three main types of internal factors refer to how a company raises capital, the atmosphere within the workplace and the technology they're operating with. Such factors are important in recognising how a company functions profitably.

What are internal factors in marketing? ›

A marketing environment includes both the internal and external variables of a business' marketing operations. Internal variables include things like your team's makeup, your customers, your stakeholders, as well as your distributors and partners.

What are internal factors also known as? ›

Dispositional Factors (also known as Internal Factors) are individual characteristics that influence behavior and actions in a person.

What is an example of an internal factor that affects purchasing? ›

Internal influences: Internal influences are also known as personal influences and it includes perceptions, attitude, motivation, lifestyle, learning and roles. These internal influences affect all our purchase decisions (Dawson & Kim, 2009).

What are the 10 external factors? ›

The top 10 external factors that impact forecast quality
  • Consumer Sentiment. ...
  • Real Disposable Personal Income. ...
  • Residential Real Estate Market. ...
  • Oil / Gas Prices. ...
  • Labor Market and Wages. ...
  • Weather Data. ...
  • The Strength of the Dollar. ...
  • Raw Material Costs.
Dec 14, 2022

What are the two types of external factors? ›

External factors can fall broadly into two categories, those which are environmental and those which are specific to your own market. Both are key.

What are external factors in strategy? ›

Here are the nine types of external environment factors that affect businesses:
  • Technological factors. ...
  • Economic factors. ...
  • Political and legal factors. ...
  • Demographic factors. ...
  • Social factors. ...
  • Competitive factors. ...
  • Global factors. ...
  • Ethical factors.
Jul 13, 2021

What are the 6 external factors of marketing? ›

The external factors include government, technological, economical, social, and competitive forces; whereas, organization's strengths, weaknesses, and competencies form the part of internal factors. Marketers try to predict the changes, which might take place in future, by monitoring the marketing environment.

What are the main types of factors? ›

Summary. Classifies factors into three main types: direct, distributed, and augmentative. Illustrates how each of these classes of factors works.

What are the external and internal factors that affect pricing decisions for pharmaceutical products? ›

Internal factors affecting pricing include the company's marketing objectives, marketing mix strategy, costs, and organizational considerations. External factors that affect pricing decisions include the nature of the market and demand, competition, and other environmental elements.

What is the difference between internal and external pricing? ›

Definition – Internal costs refer to the direct monetised costs (planning, construction, management, maintenance, disposal) for a person or organisation undertaking an activity. External costs (also known as externalities) refer to the economic concept of uncompensated social or environmental effects.

Which is an internal factor which affects to the pricing of a product? ›

Cost is an internal factor. Option 'D' hence is the correct answer.

What are external factors examples? ›

External factors
  • political - For example, new legislation.
  • economic - For example, inflation and unemployment.
  • social - Changes in taste and fashion or the increase in spending power of one group, for example, older people.
  • technological - For example, being able to sell goods online or using automation in factories.

What are the 5 external factors that affect marketing? ›

The external factors include government, technological, economical, social, and competitive forces; whereas, organization's strengths, weaknesses, and competencies form the part of internal factors. Marketers try to predict the changes, which might take place in future, by monitoring the marketing environment.

What are the 6 external factors? ›

Important terms and concepts: The common external environment factors that businesses should consider are political, economic, social and cultural, legal, technological, and environmental/natural.

What are internal factors? ›

Internal factors are those that you control, they come from within you. Internal factors are influenced by your feelings and thoughts. These can be positive or negative. Positive thoughts will help you with decision making, while negative thoughts will most likely hinder you.

What is the difference between internal and external factors in marketing? ›

As we mentioned above, a marketing environment is typically broken into internal and external factors. Internal factors are in-house aspects under an organization's control. External environmental factors are outside of a business's control but can and do affect how a business functions.

What is the main difference between an internal and an external market? ›

One of the most pronounced differences of internal vs. external marketing is that your internal marketing audience comprises people with whom you already have relationships. Internal marketing builds from a position of strength and aims to deepen those relationships, rather than casting a net to make new relationships.


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