Evolutionary Changes in Market

Research Technology
June 05, 2013
Technology is a beautiful thing, especially when it makes our lives easier. Technology helps us to be more informed,
productive, and connected. When technology disrupts our life, thats when we know that our world will be forever
changed. Take the cellphone, the laptop or the tablet. All are technological innovations that have helped to transform
the way that we communicate.
In the market research world, were experiencing a transformational shift as well, and technology is leading the
charge. In the last several years, there has been phenomenal growth and change in terms of how research is
conducted. In the past, paper and pencil ruled, focus groups were the norm, and the research process was long and
laborious.

A Disruptive Shift in Market Research

Now, with todays online survey products, people are enabled like never before to collect data about all sorts of things.
They can do it faster, better and cheaper than ever. This shift to online data collection has given birth to the DIY
research movement.
But theres more. In todays culture of immediate gratification, market researchers are feeling the pressure to quickly
get their hands on accurate, actionable insights to make informed decisions. Not just any decisionsthe RIGHT
decisions. Decisions that will help take them and their organizations to the next level.
In todays era of data democratization, everyone in an organization requires access to insights that will help them
make the right decisionsdecisions based on fact rather than gut. This means that employees at all levels need to
quickly obtain data, translate that data into insights, and then share and act on those insights across the team or
organization.
But why? Because at the end of the day, people and organizations just want to be right. In fact, they need to be right
to be more competitive, efficient, and profitable. With faster insights come better, timelier decisionsand better
decisions mean better business results in the form of improved customer satisfaction, increased revenue, enhanced
employee retention and higher profitability.

The Evolution Continues

Technology has made market research easier by moving data collection capabilities online. But the market is
changing again. The latest disruption wave is being driven by a growing mandate for technology standardizationa
single data collection platform.
The reason? Researchers and those collecting data across businesses and academia have been utilizing numerous,
unique online survey products independently to gather data and analyze results.

The problem? Data ends up siloed within and across departments, all in varying formats. Feedback from one
customer could be in 10 or more different places. Unless this information can be readily accessed, shared, and
assessed, it loses much of its strategic punch.
To fully optimize the impact that data and insights can have on an organization, a single enterprise-wide survey/data
collection platform is critical. Technology is supposed to make our lives easier. Standardizing on a single insight
repository allows market researchers to focus on data analysis and making strategic recommendations to their
stakeholders, instead of focusing on how to collect the insights and wondering where all the data is hiding.

Conclusion
With one enterprise-wide technology platform, its easier to get everybody on the same team, working toward the
same goal and making decisions based on insights from the same data sets. And that is a truly beautiful thing.
When businesses construct their marketing strategies they will usually engage in a
number of different activities. These include:
- Analysing the markets in which they operate
- Setting marketing objectives
- Selecting marketing tactics and strategies

Marketing objectives...
- These are the goals that a business is trying to achieve through its marketing.
- Marketing objectives are often more effective if they have a target and a time limit.
For example, a marketing objective might be to increase market share by 10% in the
next three years.

Business marketing objectives commonly focus upon the following areas...

- Growth and profitability
- Gaining and maintaining sales and market share
- Product differentiation
- Product introduction
- Product innovation
- Consumer knowledge
- Consumer satisfaction

Growth and profitablity...

- A business might want to increase sales, revenue and profit through marketing.
- It might be able to increase its revenue by selling more products, charging a higher
price or launching new products. All should lead to higher profits.
- Businesses aiming to grow often attempt to create a competitive advantage over their
rivals. Marketing can help a business do this.
- Examples of businesses that have grown rapidly as a result of marketing include the
low-cost flight companies EasyJet and Ryanair.

A business may attempt to prevent losses and declining sales and maintain market
share through its marketing..

There are reasons why a business might do this:

- When a new product is launched. New products often require marketing and
promotion to break into the market and for sales to take off.
- To develop over the long term. Some products have very long life cycles such as the
Mini motor car and Heinz Beans. They have sold continuously over many years as a
result of marketing extension strategies designed to maintain sales.

Product differentiation...
- It is possible to differentiate products from those of competitors by changing the
marketing mix, such as:
- Charging a lower or higher price
- Changing the packaging
- Changing the design and ingredients of the product
- Advertising and other forms of promotion
- Selling the products in different types of retailer
Examples might be the change in name and advertising of the sweets Opal Fruits to
Starburst or the setting up of a website by BA to sell flights through the Internet.

Product introduction...
- The marketing objective of a business might be to launch new products onto the
market. Market research could have indicated that this product would be successful.
- Some businesses introduce products regularly, such as new versions of computer
software and games. Car producers might regularly introduce newer versions of cars to
replace older models. For example, the Ford Mondeo replaced the Sierra and the Ford
Focus replaced the Escort.

Product innovation....
- Some products are genuinely new and innovative. It might be that new technology
has created a new product or research has found a new medicine. for example.

Consumer knowledge...
- Consumers need to know what products are available from businesses. Without
awareness they may not buy products.
- Raising the awareness of products, for example, through a variety of promotion
measures, can therefore be an important objective.

Consumer satisfaction...
- Consumers also need to be happy about the products they buy. Businesses which
have satisfied customers are more likely to gain brand loyalty.

There is a relationship between the different marketing objectives...

- For example, in the early 1990s Adidas found its market share under threat, due to a
successful promotional campaign by Nike.
- Adidas attempted to regain market share by its own marketing campaign, with the
objective of differentiating the product. It promoted its trainers as having 'street
credibility.' After the year 2000, Adidas launched a number of product ranges with a
'retro look in attempt to increase sales and win market share.

There is also a relationship between the marketing objectives of a business and its
marketing tactics...

- Marketing tactics are short-term, small-scale methods a business might use to

achieve its marketing objectives.
- For example, a furniture business with the objective of increasing sales revenue after
Christmas might have a 30 day offer where customers can choose a free chair with any
three seater sofa they buy.

It is argued that the marketing objectives a business sets should be SMART in the
same way as the overall objectives set by the business...
- They should be specific, stating exactly what is trying to be achieved.
- Able to be measured, to decide if they have been achieved, which usually involves
setting targets, agreed by everyone involved.
- Realistic and able to be achieved within the constraints of the business
- And time specific, stating exactly when they should be achieved.

There are a number of internal factors that affect the marketing objectives set by a
business...
- Corporate aims and objectives
- Finance
- Operational and organisational issues
- Human resources

How corporate aims and objectives affect the marketing objectives set by a
business...
- A company's marketing objectives will be influenced by the corporate aims and
objectives of the business.
- For example, the aim of a DVD and video rental chain might be to become the most
well known name in the UK. Its objective might be to increase sales turnover by 20%
over two years to achieve this.
- So its marketing objectives could be to spend an extra 1 million on promotion to
teenagers in magazines and product 'tie-ins' to make them more aware of the service.

How finance affects the marketing objectives set by a business...

- The availability of finance will influence what it is that a business aims to achieve.
- It may be difficult to launch new products, for example, if a business lacks funds.
- Similarly, a business with limited finances and access to only small pools of additional
finance may find that some marketing objectives are beyond its realisable ambitions.

How operational and organisational issues affect the marketing objectives set by a
business...
- The operation and organisation of a business may influence its marketing.
- A business which does not, for example, have a specialised marketing department
might have a different marketing strategy from one that does. A business operating in
many countries might market differently from one in a local or national market.

How human resources affect the marketing objectives set by a business...

- To some extent the nature of a business's marketing objectives will reflect the human
resources of that business.
- For example, a new business staffed by recent graduates may well opt for marketing
methods different to a more established business with a wider range of employees.

There are a number of external factors that affect the marketing objectives set by a
business...
- Competitors' actions
- Technological change
- Market factors

How competitors' actions affect the marketing objectives set by a business...

- The actions of competitor businesses may well affect the marketing objectives of a
business.
- Take the example of a large and dominant business operating in a market where it is
seeking to gain market share. In such conditions a less dominant business may seek to
defend and maintain its market share.

How technological change affects the marketing objectives set by a business...

- Businesses operating in markets characterised by fast-changing technologies are
likely to set themselves ambitious marketing objectives possible with large increases in
sales volume.
- This is because such markets are often relatively open with new businesses able to
gain large slices of market share quickly. Many web-based networking businesses such
as Facebook have been able to realise ambitious marketing objectives in this way.
- By way of contrast businesses operating in relatively slow changing markets with few
technological changes are more likely to set modest marketing objectives reflecting
their belief that future circumstances may be likely to resemble in many ways those
already experienced.

How market factors affect marketing objectives...

- One of the main market factors influencing a business's marketing objectives is the
degree of competition faced by a business.
- In a mature market with little or no room for entrants, businesses are likely to set
modest marketing objectives given that they are constrained by the intensity of
competition and the relatively few opportunities to grow significantly.
- The global market for cars, for example, is saturated with many producers competing.
This means that car businesses cannot expect to see the kind of growth experienced by
Google when they entered a new market, for Internet searches, with a few competitors.

External factors influencing marketing objectives also include a range of factors

known as PESTLE factors...
- Political factors: This may include political pressure from the government, or at local
level, town councils.
- Economic factors: Increases in consumer spending, falls in interest rates and low
inflation can all improve the chances of a business increasing its sales and profit. An
increase in the number of new businesses may reduce the market share of a company
that is dominant.
- Social factors: Changes in tastes can affect spending by consumers. Fashionable
products can often increase sales rapidly.
- Technological factors: New products may be created as technology develops. The
internet has also helped to increase consumer awareness of products.
- Legal factors: This can include legislation from the government. For example laws
might restrict the type of advertising used for a product in an attempt to differentiate it
from those of rivals

- Environmental factors: These can often influence the type of product that a business
produces, such as the development of businesses selling managed wood as an
alternative to other wood or plastic products.

These factors are often found by carrying out a marketing audit...

- This is an analysis of the internal organisation and procedures of the business and the
external factors which affect its marketing decisions.
- It will also help to identify the strengths, weaknesses, opportunities and threats faced
by the business, called SWOT analysis

Internal and External Influences on Marketing Objectives

Jim Riley
16th April 2015
Share on FacebookShare on TwitterShare on LinkedInShare on GoogleEmail thisPrint this
Type:
Study notes
Levels:
AS, A Level
Exam boards:
AQA, Edexcel, OCR, IB, Other, Pre-U
There are many potential internal and external influences which shape and influence the marketing objectives of a
business.
Internal Influences on Marketing Objectives
Corporate objectives
As with all the functional areas, corporate objectives are the most important internal influence. A marketing objective
should not conflict with a corporate objective
Finance
The financial position of the business (profitability, cash flow, liquidity) directly affects the scope and scale or
marketing activities.

Human resources
For a services business in particular, the quality and capacity of the workforce is a key factor in affecting marketing
objectives. A motivated and well-trained workforce can deliver market-leading customer service and productivity to
create a competitive marketing advantage
Operational issues
Operations has a key role to play in enabling the business to compete on cost (efficiency / productivity) and quality.
Effective capacity management also plays a part in determining whether a business can achieve its revenue
objectives
Business culture
E.g. a marketing-orientated business is constantly looking for ways to meet customer needs. A production-orientated
culture may result in management setting unrealistic or irrelevant marketing objectives.
External Influences on Marketing Objectives
Economic environment
The key factor in determining demand. E.g. many marketing objectives have been thwarted or changed as a result of
the recession. Factors such as exchange rates would also impact objectives concerned with international marketing.
Competitor actions
Marketing objectives have to take account of likely / possible competitor response. E.g. an objective of increasing
market share by definition means that competitor response will not be effective
Market dynamics
The key market dynamics are market size, growth and segmentation. Changes in any of these undoubtedly influence
marketing objectives. A market whose growth slows is less likely to support an objective of significant revenue growth
or new product development
Technological change
Consumer and other markets are now affected by rapid technological change, shortening product life cycles and
creating great opportunities for innovation. These have to be taken into account when setting marketing objectives.
Social & political change
Changes to legislation may create or prevent marketing opportunities. Change in the structure and attitudes of society
also have major implications for many markets.
What influences how a business sells its products - and itself? In this lesson you will learn more about external influences that affect
the marketing strategy of a business.

What is a Marketing Strategy?

A marketing strategy is a plan developed by an organization that describes how a company's productsand/or services will be
offered to customers. Products are tangible items produced by labor to satisfy a need. A service is a valuable action or deed
performed to fulfill a demand or need.
The marketing strategy is shaped by the ultimate goals of the company and is the foundation of themarketing plan. All businesses
are exposed to the outside world, which means decision-making by the company is influenced frequently. Any force outside of
company employees, leadership, and business strategy that can affect an organization's performance can be considered an external
influence. From fast-food restaurants to car dealerships, there are decisions that must be made by business owners, and the
decisions are usually influences by an external force.
There are six main external factors that influence the marketing strategy of a business or organization. Some organizations may
perform a SLEPT (social, legal, economical, political, and technological) analysis to obtain information on major external influences
on their business. Another external factor that can influence a business is competition.

Social Influences
Demographic

Legal Influences
Federal and state regulations on a specific industry can also influence how a company performs. For instance, in the alcoholic
beverage industry, would it be sensible to have children under the age of 18 in advertisements selling alcoholic beverages if it is
against the law for minors to consume alcohol?

Economical Influences
The state of the economy and our environment has a major influence on consumer buying power. If the economy is experiencing a
recession, consumers may not be able to buy what they normally buy due to lack of employment. If a person is laid off and is in
danger of depleting their savings, they may rethink buying the large cup of coffee they purchase at Starbucks on the way to work
every day. Instead, they may start making their coffee at home. This change will eventually affect Starbucks' bottom line.

Political Influences
Political influences can affect how consumers purchase their products. If a company seems to support one specific political party
over another, the company may alienate potential customers. For instance, if a company publically supports a Republican or
Democratic official, they may unknowingly persuade their customers into or out of buying their products.
To unlock this lesson you must be a Study.com Member. Create your a

TERM[ EDIT ]

analysis
The process of breaking down a substance into its constituent parts, or the result of this process.

Give us feedback on this content:

Register for FREE to remove ads and unlock more features! Learn more
FULL TEXT[ EDIT ]

Strategic management is the managerial responsibility to achieve competitive advantage through

optimizing internal resources while capturing external opportunities and avoiding external threats. This
requires carefully crafting a structure, series of objectives, mission, vision, and operational plan.
Recognizing the way in which internally developed organizational attributes will interact with the external
competitive environment is central to successfully implementing a given strategyand thus
creating profitability.

Internal Conditions
The internal conditions are many and varied depending on the organization (just as the
external factors in any given industry will be). However, management has some strategic control over
how these various internal conditions interact. The achievementof synergy in this process derives
competitive advantage. While different businesses have different internal conditions, it is easiest to view
these potential attributes as generalized categories.

A value chain is a common tool used to identify each moving part. It is a useful mind map for
management to fill in during the derivation of internal strengths and weakness. A value chain includes
supports activities and primary activities, each with its own components.

Supports Activities

Firm infrastructure: the organizational structure, mission, hierarchy and upper management

Human resource management: the skills embedded in the organization through human
resources

Technology: the technological strengths and weaknesses (such as patents, machinery, IT, etc.)

Procurement: a measure of assets, inventory, and sourcing

Primary Activities

Inbound logistics: deriving inputs for operational process

Operations: running inputs through organizational operations

Outbound logistics: shipping, warehousing, and inventorying final products

Marketing and sales: building a brand, selling products, and identifying retail strategies and
opportunities

Service: following up with customers to ensure satisfaction, provide and fulfill warranties, etc.

Michael Porter's value chain

This model, created by Michael Porter, demonstrates how support and primary activities add up to potential margins (and
potential competitive advantage).

External Opportunities and Threats

The external environment is even more diverse and complex than the internal environment. There are
many effective models to discuss, measure, and analyze the external environment (such as Porter's Five
Force, SWOT Analysis, PESTEL framework, etc.). For the sake of this discussion, we will focus on the
following general strategic concerns as they pertain to opportunities and threats:

Markets (customers): Demographic and socio-cultural considerations, such as who the

customers are and what they believe, are critical to capturing market share. Understanding the needs
and preferences of the markets is essential to providing something that will have a demand.

Competition: Knowing who else is competing and how they are strategically poised is also key to
success. Consider the size, market share, branding strategy, quality, and strategy of all competitors to
ensure a given organization can feasibly enter the market.

Technology: Technological trajectories are also highly relevant to success. Does the
manufacturing process of the product have new technologies which are more efficient? Has a disruptive
technology filled the need that was currently being filled?

Supplier markets: Suppliers have great power as they control the necessary inputs to an
organization's operational process. For example, smartphones require rare earth materials; if these
materials are increasingly scarce, the price points will rise.

Labor markets: Acquiring key talent and satisfying employees (relative to the competition) is
critical to success. This requires an understanding of unions and labor laws in regions of operation.

The economy: Economic recessions and booms can change spending habits drastically, though
not always as one might expect. While most industries suffer during recession, some industries thrive. It
is important to know which economic factors are opportunities and which are threats.

The regulatory environment: Environmental regulations, import/export tariffs, corporate

taxes, and other regulatory concerns can poise high costs on an organization. Integrating this into a
strategy ensures feasibility.

While there are many other external considerations one could take into account during
the strategic planning process, this list gives a good outline of what must be considered in order to
minimize unexpected threats or missed opportunities.

Strategic Analysis

Competitive Forces
This image provides an example of external factors that would be important to consider when analyzing a firm's strategy.

With both the internal value chain and external environment in mind, upper management can reasonably
derive a set of strategic principles that internally leverage strengths while externally capturing
opportunities to create profitsand hopefully advantages over the competition.

Source: Boundless. The Impact of External and Internal Factors on Strategy. Boundless Management. Boundless, 21 Jul. 2015. Retrieved
28 Sep. 2015 from https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/strategicmanagement-86/the-impact-of-external-and-internal-factors-on-strategy-419-1549/

Factor Influencing Pricing Decisions (With

Diagram)
by S. Jaideep Pricing

Advertisements:

An enormous number of factors affect pricing decisions. A marketing manager should identify and study
the relevant factors affecting the pricing. Some factors are internal to organisation and, hence,
controllable while other factors are external or environmental and are uncontrollable.
Factors are also classified in terms of competition-related factors, market-related factors, product- related
factors, and so forth. However, we will consider internal and external factors affecting pricing decisions.
Due to these factors, price is set high or low, fixed or variable, and equal or discriminative. Figure 2 shows
a list of internal and external factors. Let us analyze some of the main factors influencing pricing
decisions.

(A) Internal Factors:

Internal factors are internal to organisation and, hence, are controllable. These factors play vital role in
pricing decisions. They are also known as organisational factors. Manager, who is responsible to set price
and formulae pricing policies and strategies, is required to know adequately about these factors.
Important internal factors have been discussed here:

1. Top Level Management:

Top-level management has a full authority over the issues related to pricing. Marketing managers role is
administrative. The philosophy of top-level management is reflected in forms of pricing also. How does
top management perceive the price?
How far is pricing considered as a tool for earning profits, and what is importance of price for overall
performance? In short, overall management philosophy and practice have a direct impact on pricing
decision. Price of the product may be high or low; may be fixed or variable; or may be equal or
discriminative depends on top-level management.

2. Elements of Marketing Mix:

Price is one of the important elements of marketing mix. Therefore, it must be integrated to other
elements (promotion, product, and distribution) of marketing mix. So, pricing decisions must be linked with
these elements so as to consider the effect of price on promotion, product and distribution, and effect of
these three elements on price.

For example, high quality product should be sold at a high price. When a company spends heavily on
advertising, sales promotion, personal selling and publicity, the selling costs will go up, and consequently,
price of the product will be high. In the same way, high distribution costs are also reflected in forms of high
selling price.

3. Degree of Product Differentiation:

Product differentiation is an important guideline in pricing decisions. Product differentiation can be defined
as the degree to which companys product is perceived different as against the products offered by the
close competitors, or to what extent the product is superior to that of competitors in terms of competitive
advantages. The theory is, the higher the product differentiation, the more will be freedom to set the price,
and the higher the price will be.

4. Costs:
Costs and profits are two dominant factors having direct impact on selling price. Here, costs include
product development costs, production costs, and marketing costs. It is very simple that costs and price
have direct positive correlation. However, production and marketing costs are more important in
determining price.

5. Objectives of Company:
Companys objectives affect price of the product. Price is set in accordance with general and marketing
objectives. Pricing policies must the companys objectives. There are many objectives, and price is set to
achieve them.

6. Stages of Product Life Cycle:

Each stage of product life cycle needs different marketing strategies, including pricing strategies. Pricing
depends upon the stage in which companys product is passing through. Price is kept high or low,
allowances or discounts are allowed or not, etc., depend on the stage of product life cycle.

7. Product Quality:
Quality affects price level. Mostly, a high-quality-product is sold at a high price and vice versa. Customers
are also ready to pay high price for a quality product.

8. Brand Image and Reputation in Market:

Price doesnt include only costs and profits. Brand image and reputation of the company are also added
in the value of product. Generally, the company with reputed and established brand charges high price for
its products.

9. Category of Product:
Over and above costs, profits, brand image, objectives and other variables, the product category must be
considered. Product may be imitative, luxury, novel, perishable, fashionable, consumable, durable, etc.
Similarly, product may be reflective of status, position, and prestige. Buyers pay price not only for the
basic contents, but also for psychological and social implications.

10. Market Share:

Market share is the desired proportion of sales a company wants to achieve from the total sales in an
industry. Market share may be absolute or relative. Relative market share can be calculated with
reference to close competitors. If company is not satisfied with the current market share, price may be
reduced, discounts may be offered, or credit facility may be provided to attract more buyers.

(B) External Factors:

External factors are also known as environmental or uncontrollable factors. Compared to internal factors,
they are more powerful.
Pricing decisions should be taken after analyzing following external factors:

1. Demand for the Product:

Demand is the single most important factor affecting price of product and pricing policies. Demand
creation or demand management is the prime task of marketing management. So, price is set at a level at
which there is the desired impact on the product demand. Company must set price according to purchase
capacity of its buyers.
Here, there is reciprocal effect between demand and price, i.e., price affects demand and demand affects
price level. However, demand is more powerful than price. So, marketer takes decision as per demand.
Price is kept high when demand is high, and price is kept low when demand of the product is low. Price is
constantly adjusted to create and/or maintain the expected level of demand.

2. Competition:
A marketer has to work in a competitive situation. To face competitors, defeat them, or prevent their entry
by effective marketing strategies is one of the basic objective organisation. Therefore, pricing decision is
taken accordingly.
A marketer formulates pricing policies and strategies to respond competitors, or, sometimes, to misguide
competitors. When all the marketing decisions are taken with reference to competition, how can price be
an exception?
Sometimes, a company follows a strong competitors pricing policies assuming that the leader is right.
Price level, allowances, discount, credit facility, and other related decisions are largely imitated.

3. Price of Raw Materials and other Inputs:

The price of raw materials and other inputs affect pricing decisions. Change in price of needed inputs has
direct positive effect on the price of finished product. For example, if price of raw materials increases,
company has to raise its selling price to offset increased costs.

4. Buyers Behaviour:
It is essential to consider buyer behaviour while taking pricing decision. Marketer should analyze
consumer behaviour to set effective pricing policies. Consumer behaviour includes the study of social,
cultural, personal, and economic factors related to consumers. The key characteristics of consumers
provide a clue to set an appropriate price for the product.

5. Government Rules and Restrictions:

A company cannot set its pricing policies against rules and regulations prescribed by the governments.
Governments have formulated at least 30 Acts to protect the interest of customers. Out of them, certain
Acts are directly related to pricing aspects. Marketing manager must set pricing within limit of the legal
framework to avoid unnecessary interference from the outside. Adequate knowledge of these legal
provisions is considered to be very important for the manager.

6. Ethical Consideration or Codes of Conduct:

Ethics play a vital role in price determination. Ethics may be said as moral values or ethical code that
govern managerial actions. If a company wants to fulfill its social obligations and when it believes to work

within limits of the ethics prescribed, it always charges reasonable price for its products. Moral values
restrict managerial behaviour.

7. Seasonal Effect:
Certain products have seasonal demand. In peak season, demand is high; while in slack season, demand
reduces considerably. To balance the demand or to minimize the seasonal-demand fluctuations, the
company changes its price level and pricing policies. For example, during a peak season, price may be
kept high and vice versa. Discount, credit sales, and price allowances are important issues related to
seasonal factor.

8. Economic Condition:
This is an important factor affecting pricing decisions. Inflationary or deflationary condition, depression,
recovery or prosperity condition influences the demand to a great extent. The overall health of economy
has tremendous impact on price level and degree of variation in price of the product. For example, price is
kept high during inflationary conditions. A manager should keep in mind the macro picture of economy
while setting price for the product.

Factors Affecting Pricing Product: Internal

Factors and External Factors
by Smriti Chand Pricing

Advertisements:

The pricing decisions for a product are affected by internal and external factors.

A. Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost involved in producing the product.
This cost includes both the variable and fixed costs. Thus, while fixing the prices, the firm must be able to
recover both the variable and fixed costs.

2. The predetermined objectives:

While fixing the prices of the product, the marketer should consider the objectives of the firm. For
instance, if the objective of a firm is to increase return on investment, then it may charge a higher price,
and if the objective is to capture a large market share, then it may charge a lower price.

3. Image of the firm:

The price of the product may also be determined on the basis of the image of the firm in the market. For
instance, HUL and Procter & Gamble can demand a higher price for their brands, as they enjoy goodwill
in the market.

4. Product life cycle:

The stage at which the product is in its product life cycle also affects its price. For instance, during the
introductory stage the firm may charge lower price to attract the customers, and during the growth stage,
a firm may increase the price.

5. Credit period offered:

The pricing of the product is also affected by the credit period offered by the company. Longer the credit
period, higher may be the price, and shorter the credit period, lower may be the price of the product.

6. Promotional activity:
The promotional activity undertaken by the firm also determines the price. If the firm incurs heavy
advertising and sales promotion costs, then the pricing of the product shall be kept high in order to
recover the cost.

B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree of competition in the market. If
there is high competition, the prices may be kept low to effectively face the competition, and if competition
is low, the prices may be kept high.

2. Consumers:
The marketer should consider various consumer factors while fixing the prices. The consumer factors that
must be considered includes the price sensitivity of the buyer, purchasing power, and so on.

3. Government control:
Government rules and regulation must be considered while fixing the prices. In certain products,
government may announce administered prices, and therefore the marketer has to consider such
regulation while fixing the prices.

4. Economic conditions:
The marketer may also have to consider the economic condition prevailing in the market while fixing the
prices. At the time of recession, the consumer may have less money to spend, so the marketer may
reduce the prices in order to influence the buying decision of the consumers.

5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their expectations. The longer the
chain of intermediaries, the higher would be the prices of the goods.

Microeconomics - Types of Markets & Concentration

Measures
Price Taker Markets
A purely competitive (price taker) market exists when the following conditions occur:
Low entry and exit barriers - there are no restraints on firms entering or exiting the market
Homogeneity of products - buyers can purchase the good from any seller and receive the same good
Perfect knowledge about product quality, price and cost
No single buyer or seller is large enough to influence the market price
Sellers must take the existing market price and they will adjust the quantity of their products so as to maximize profit at the
market price. Because sellers must take the current market price, a purely competitive market also is called a "price takers"
market.
Price-Searcher Markets
Price-searcher markets are characterized by:

1.Barriers to Entry
2.Firms in the Markets that have Downward-Sloping Demand Curves
While perfectly competitive markets have a homogeneity of goods, price-searcher markets have a differentiation of goods.
The differentiation could be in the form of location, taste, packaging, design, quality and many other factors. Some textbooks
use the phrase "monopolistic competition" to describe markets where each firm has something unique about its product
while facing significant competition. A good example would be a gas station. Although there are many competing gas
stations, an individual gas station is the only one at its particular location and, therefore, to some degree it has a monopoly
or is a sole seller. The CFA text prefers the term "competitive price searcher".
Firms in a price-searcher market with low barriers to entry have some flexibility to raise prices, as they will not lose all their
customers if they do so. For example, if Valvoline raises the price of its motor oil, some people will be willing to pay the price
for the motor oil they prefer. However, rival firms such as Pennzoil or Castrol also provide similar motor oils. As Valvoline
raises its prices, many customers will switch to rival suppliers. The demand curve faced by firms in competitive price search
markets, such as motor oil, will be highly elastic.
Firms in price-searcher markets with low barriers to entry face competition from existing suppliers and potential new
entrants. If economic profits are being made in the market, then more firms will be expected to enter the market. Price
searchers can set their prices, but the actual quantities sold will depend upon market forces.
Monopoly
Monopoly refers to a "single seller". The single seller will have a market with no well-defined substitute. The monopolist does
not need to worry about the reactions of other firms. Utility companies are often monopolists in particular markets.
Concentration
Concentration within an industry refers to the degree to which a small number of firms provide a major portion of the
industry's total production. If concentration is low, then the industry is considered to be competitive. If the concentration is
high, then the industry will be viewed as oligopolistic or monopolistic. Government agencies such as the U.S. Department of
Justice examine concentration within an industry when deciding to approve potential mergers between industry firms.
The most common measure of concentration is the four-firm concentration ratio, which is defined as the percentage of the
industry's output sold by the four largest firms. An industry with a four-firm concentration ratio of forty percent is generally
considered to be competitive.
The Herfindahl-Hirschman Index (HHI) calculates concentration ratios by squaring the market share of the fifty largest
firms in an industry. The formula can be expressed as follows:
Formula 3.4
HHI = s12 + s22 + s32 + ... + sn2
(where sn is the market share of the ith firm).
A monopoly would have the largest possible value - 1002 = 10000. The HHI for a highly fragmented industry would be close
to zero. The Justice Department generally considers an industry with an HHI above 1800 to be highly concentrated.

Limitations of Concentration Measures

Concentration ratios have some of the following limitations:
Foreign production concentration ratios often fail to fully incorporate the revenue from foreign companies, thus
overestimating the concentration of a domestic industry and underestimating the impact of foreign goods on competition.
Ease of entry an industry may have relatively few participants, but low barriers to entry. In such cases, a concentration
ratio will overstate the power of current suppliers.
Elasticity of demand concentration ratios do not factor in the elasticity of demand and the availability of substitutes.
Many highly-concentrated industries (metals, airlines, et al) are constrained by the availability and cost of substitute products
and services.
Imprecise definitions a narrowly-defined industry will appear to be more concentrated than a more broadly-defined
industry. Suppose we were looking at concentration within the shoe industry. Should the market be simply "shoes", or do we
break that down further into "athletic shoes", "men's shoes", "children's shoes", etc.?
Coordinating Economic Activity
Economic activity can be coordinated by markets or by individual firms. A firm organizes input production factors so as to
produce and market goods and/or services.
Auto manufacturers are actually assemblers of cars - most the parts in a car are produced by hundreds of component
suppliers. This is an example of market coordination. If General Motors decides to coordinate all activities associated with
brake components, then the coordination is being done by that firm. A firm will decide to coordinate a particular type of
economic activity when it can do so more efficiently than what is provided by the market.
Firms can be more efficient than markets due to:
Economies of scope - this applies when a firm hires specialized resources that can produce a broad range of goods and
services. For example, a person with a difficult to diagnose medical condition would probably be sent to a hospital, which will
have a broad range of medical specialists and diagnostic equipment.
Economies of scale - for many types of goods, per unit production costs decline as larger volumes of output are produced
by an individual firm.
Team production can often lower production costs.
Transaction costs are often reduced when economic activity is coordinated by a firm. Suppose you want to perform a
major remodeling of your house. If you decide to coordinate the work yourself, you will have significant transaction costs
associated with hiring qualified personnel such as plumbers and carpenters, monitoring their work, negotiating contracts with
them, finding suitable building materials, arranging for delivery of materials and coordinating work schedules of the various
subcontractors. If you hire a building firm or general contractor to coordinate the work, they probably will have lower
transaction costs because they already will have knowledge of suitable subcontractors in the area and how best to get
building materials. By hiring a general contractor, you will reduce your transaction costs by only having to negotiate one
contract.

Microeconomics - Modifying Output

The "Short Run"
The short run is a time period so short that the firm cannot alter some production factors (typically these factors include the
size and/or number of plants, the technology used, equipment and the management organization). Those factors are
sometimes referred to collectively as the "plant". The firm usually can increase output in the short run by adding variable
inputs. Labor is the most common variable input.
The "Long Run"
In the long run, firms have sufficient time to adjust to any and all production factors. Factories can be expanded, shrunk,
demolished or built. The firm can leave or enter an industry.
Suppose a car manufacture decides to build a new plant to build SUVs. This would be an example of a decision made in the
long run. If that manufacturer decided to expand output by having employees work overtime, then that would be an example
of a short-run decision.

and the "long run", and the concept of economic profit are critical to understanding economics!

Total Product: The total product is the total quantity of goods produced, in association with specified levels of
input.

Marginal Product: The marginal product is the change in output that occurs when one more unit of input (such as
a unit of labor) is added.

Average Product: The average product is the total product divided by the number of input units, usually a variable
input such as labor.

Example:
Suppose only one worker was present at an assembly plant and that worker had to do all functions of the plant - order and
stock supplies, assemble the good, provide maintenance for the factory, prepare the good for shipping, etc. If a second
worker is added, there may be a larger increase in productivity, as the two workers can allocate the tasks according to their
abilities, and less time will be lost going to and from various locations in the plant.
A possible schedule of plant output could be as follows:

In this example, hiring the fourth worker increases output by 110 units, which is not as large as the increase created by hiring
the third worker.
The cost of all production factors is equal to the firm's total cost (TC). Total fixed costs (TFC) include all fixed costs, while
total variable costs (TVC) include the cost of all variable inputs such as labor. Marginal cost is the increase in costs
associated with producing additional output. At some point in time, marginal costs will begin to increase because each
additional worker contributes less to total output. The average fixed cost (AFC) is the fixed cost per unit of output, while the
average variable cost (AVC) specifies the variable cost per unit of output. AFC and AVC combined are equal to the average
total cost (ATC). As production increases, average fixed cost (total fixed cost divided by quantity) will decrease. When
marginal cost exceeds average total cost, average total costs will go up, at which point the firm must receive higher prices if
higher production is to occur.
The table below assumes that the firm has fixed costs of $1,000 per day, each worker is paid $200 per day, and each unit
produced has variable material costs of $1 per unit.

From the table above we can see that both average total cost and marginal cost initially decrease as production increase, but
both start going up at certain levels of production.

Microeconomics - Marginal and Average Total Cost

Curves
Cost Curves
The short-run marginal cost (MC) curve will at first decline and then will go up at some point, and will intersect the average
total cost and average variable cost curves at their minimum points.
The average variable cost (AVC) curve will go down (but will not be as steep as the marginal cost), and then go up. This will
not go up as fast as the marginal cost curve.
The average fixed cost (AFC) curve will decline as additional units are produced, and continue to decline.
The average total cost (ATC) curve initially will decline as fixed costs are spread over a larger number of units, but will go up
as marginal costs increase due to the law of diminishing returns.
The graph below illustrates the shapes of these curves.
Figure 3.8: Cost Curves

Diminishing Returns and Diminishing Marginal Product of Capital

The law of diminishing returns states that as one type of production input is added, with all other types of input remaining the
same, at some point production will increase at a diminishing rate.
There may be levels of input where increasing inputs causes production to go up at an increasing rate. However, according
to the law of diminishing returns, at some point production will go up at a decreasing rate.
The marginal product of capital is the increase in total output associated with an increase in capital, while holding the
quantity of labor constant. Capital is also subject to the law of diminishing returns.
Economies of Scale
Economies of scale mean that goods can be produced at a lower cost per good, as the quantity produced increases. Large-

scale factory operations can permit the most efficient specialization of machinery and labor. Average fixed costs will decline
as costs such as advertising can be spread across more and more units.
Diseconomies of Scale
Diseconomies of scale occur when per unit costs go up as output is increased. A typical reason given is bureaucratic
inefficiencies - more attention may be given to administrative rules as opposed to innovation. Worker motivation is also more
difficult as the number of employees increases.
When economies of scale occur, the long-run average total cost (LRAC) curve will be declining; with diseconomies of scale,
the LRAC curve will be rising.
Figure 3.9: Long Run Average Total Curve

Microeconomics - Perfectly Competitive Markets

A purely competitive (price taker) market exists when the following conditions occur:

Low entry and exit barriers - there are no restraints on firms entering or exiting the market

Homogeneity of products - buyers can purchase the good from any seller and receive the same good

Perfect knowledge about product quality, price, and cost

No single buyer or seller is large enough to influence the market price

Sellers must take the existing market price; if they set a price above the market price, no one will buy their product because
potential buyers simply will go to other suppliers. Setting a price below the market price does not make any sense because
the firm can sell as much as it wants to at the market price; selling below the market price will just reduce profits.

Because sellers must take the current market price a purely competitive market is also called a "price takers" market.
The firm can sell as much as it can produce at the existing market price, so demand is not a constraint for the firm. Revenue
will be simply the market price multiplied by quantity produced.
Maximizing Profit in Perfect Competition
A price taker can sell as much as it can produce at the existing market price.
So total revenue (TR) will be simply P Q, where P = price and Q = quantity sold.
Marginal revenue (MR), the increase in total revenue for production of one additional unit, will always be equal to the market
price for a price taker.
If the market price of a good is $15, and a firm produces 10 units of a good per day, then its total revenue for the day will be
$15 10 = $150. The marginal revenue associated with producing an eleventh unit per day would be the market price, $15;
total revenue per day would increase from $150 to $165 (11 $15).
Marginal costs will vary, depending upon the quantity produced. We would expect the firm to increase input up to the point
where marginal cost is equal to the market price. In the short run, a firm will produce as long as its average variable costs do
not exceed the market price. If the market price is less than the firm's total average cost, but greater than its average variable
cost, then the firm will still operate in the short run. Its losses will be lowered by producing, since nothing can be done about
fixed costs in the short run. Over the long run, the firm will need to cover all of it costs if it is to keep on producing.
If the market price at least covers the firm's variable costs, it may make sense to keep on operating. Any price in excess of
the average variable cost will at least help to cover the fixed cost. Unless the firm decides to completely leave the business, it
will come out ahead by continuing to operate.
If the market price is below the firm's average variable cost, it will not make sense for the firm to operate as it will lose even
more money. If the firm believes that business conditions will improve, it will temporarily shut down. Seasonal businesses
such as ski resorts or restaurants located by vacation areas will shut down temporarily at certain times. Manufacturers
temporarily might shut down a factory and plan to reopen the factory when business conditions improve.
When Does a Firm Maximize Profit in Perfect Competition?
Profit () is equal to total revenue minus total cost. We can express this mathematically by stating:
= TR - TC
In terms of calculus, we can state that profit will be maximized when the first derivative of the profit function is equal to zero:
d = dTR -dTC= 0
dQ dQ dQ
We also can rearrange the terms to state that profit maximization occurs when:
Formula 3.4
dTR = dTC

dQ

dQ

The term on the left represents the change in revenue from producing one more unit, which is called marginal revenue. The
term on the right represents the change in total costs resulting from producing one more unit, which is marginal cost.
The firm's profit will be maximized at the level of output whereby the marginal (additional) revenue received from the last unit
produced is just equal to the marginal (additional) cost incurred by producing that last unit. Maximum profit for the firm
occurs at the output level where MR = MC.
For a firm operating in a competitive environment, the marginal revenue received is always equal to the market price.
Therefore a firm operating under perfect competition will always produce at the level of output where the marginal cost of the
last unit produced is just equal to the market price.
The following equation will hold:
Formula 3.5
MR = MC = P

CFA level I exam. Just make sure you understand the relationship above.
Effects on Equilibrium in the Short and Long Run

Get Out of Debt Start Making Money

Want to get out of debt, get a mortgage and save for retirement? Investopedias FREE Personal Finance newsletter shows
you 7 Steps to Become Financially Independent. Take control of your money and Click here to start managing your finances
like the pros.

Read more: Perfectly Competitive Markets - CFA Level 1 | Investopedia http://www.investopedia.com/exam-guide/cfa-level1/microeconomics/perfectly-competitive-markets.asp#ixzz3n384cxJM

Follow us: Investopedia on Facebook
Read more: Types of Markets & Concentration Measures - CFA Level 1 | Investopedia http://www.investopedia.com/examguide/cfa-level-1/microeconomics/markets-concentration-measures.asp#ixzz3n36p1b8w
Follow us: Investopedia on Facebook