Price can be defined as the value of a commodity or service measured in terms of the standard monetary unit. In comparing two or more quotations, price enables us to appreciate the relative value offered by each supplier.
Pricing in nearly all types of business is affected by what economists call price mechanism that is the theory of supply and demand. Economic theory shows that demand and supply are balanced by the influence of price, the equilibrium price indicating the point at which demand and supply are equal.
At a particular moment in time, the market price may differ from the equilibrium price because the effect of temporal influences may not have had the chance to work themselves out but when these factors have stabilized at normal, that is, equilibrium price will apply. The shape of the demand and supply curve will be influenced by ‘elasticity’ (degree of responsiveness) of a demand or supply to changes in price where a slight change in price will cause a substantial change in demand, the demand is said to be elastic and demand is inelastic where a substantial change in price makes little difference to the amount demanded.
OTHER FACTORS AFFECTING PRICING DECISIONS WOULD INCLUDE:
- Price and cost of production; cost-based pricing is widely used. Buyers may be able to insist that processes are justified by cost evidence when goods are produced specifically to their requirements.
- Product life cycle and pricing; All products tend to go through a life-base cycle of development . Introduction, growth, development, saturation and eventual decline. Pricing policy can vary dramatically depending on where in the product life cycle a product has reached.
- Price and perceived value; This method considers how customers value the offering. A suppliers market offering may include in addition to the production itself, such things as reliability, durability, good service and prompt delivery. Perceived value pricing is based on customers perception of relative value rather than cost.
- Competition and other market considerations
- Organisations sell their products or services in a wide variety of market conditions ranging from perfect competition to monopoly. The extent of competition can range from a one supplier in the case of perfect competition.
Purchasing staff may obtain pricing information from various sources. A part from commodity process which are, reported daily in the newspapers, other sources would include;
- Price lists
- Trade journals databases
- Soliciting quotation
- Tendering among others.