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What factors must a firm consider when deciding to raise or lower its price?
One of the factors that a firm must consider when deciding to raise or lower the costs of its products is price elasticity. This is attributable to the fact that the price elasticity of demand of products enables the organization to assess the effect of the variation of costs on the sales proceeds. The price elasticity of demand for products signifies the receptiveness or sensitiveness of customers to the changing prices of goods and services (Keat, Young, & Erfle, 2017).
The elasticity of the demand for a given product is high when customers are receptive to the varying prices of commodities. Some goods and services have inelastic demand while others have an elastic one. The most significant aspect that establishes the demand elasticity of goods or services is the accessibility of substitutes. Other factors encompass time as well as the product’s proportion of the customer’s full budget. In the long term, the demand for goods and services is likely to be more elastic and the price lower because of the availability of substitutes and customers’ alteration of purchase behavior.
Concerning the varying elasticity of demand, the change in prices of Toyota vehicles has a significant influence on entire revenue. Marketing managers in Toyota Company seek to first understand the demand elasticity of their products before adjusting their prices accordingly (Leard, Linn, & McConnell, 2017). Another factor that the company considers before raising or lowering the cost of its products is the prices of related items.
This may necessitate the firm to carry out competitor snooping. Understanding the prices of related products gives the firm a benchmark for its pricing (Miller & Alberini, 2016). Additionally, the firm must adhere to profit maximization while being mindful of attaining competitive benefits and enhancing its success. Looking at the prices set by competitors and just pulling a figure from nowhere to attain a competitive edge may result in the firm’s failure and even collapse due to minimal profits or losses.
References
Keat, P., Young, P., & Erfle, S. (2017). Managerial economics: Economic tools for today’s decision maker (7th ed.). Noida, India: Pearson Education.
Leard, B., Linn, J., & McConnell, V. (2017). Fuel prices, new vehicle fuel economy, and implications for attribute-based standards. Journal of the Association of Environmental and Resource Economists, 4(3), 659-700.
Miller, M., & Alberini, A. (2016). Sensitivity of price elasticity of demand to aggregation, unobserved heterogeneity, price trends, and price endogeneity: Evidence from US data. Energy Policy, 97, 235-249.
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