Price Setting Procedure

Price Setting Procedure

Price Setting Procedure

The steps involved in price setting Procedure include:
Development of Pricing Objectives
Determination of Demand
Estimation of Costs
Examining Competitors’ Costs, Prices, and Offers
Selecting a Pricing Strategy
Selection of Pricing Method
Final Price Decision.

Price Setting Procedure

Development of Pricing Objectives

In the beginning of this chapter ( Price Setting Procedure ) various pricing, objectives have been looked at. Developing pricing objectives are necessary because all subsequent decisions are based on objectives. Objectives must be consistent with company’s overall objectives and marketing objectives. As stated earlier, companies generally have multiple pricing objectives keeping in view their short-term and long-term interests. No company can remain satisfied with just one unchanging pricing objective. All companies typically alter their pricing objectives over time in response to changes occurring in the marketplace. In terms of priority of objectives, most companies set their pricing objectives in terms of profit optimization, market share, or return on investment. [ Price Setting Procedure ]

Determination of Demand

Demand determination of a product is the responsibility of marketing manager, aided by marketing research personnel and forecasters. Demand and competition typically set the upper limits of the price. Demand forecasts furnish estimates of sales potential of a product reflecting the quantity that can be sold in a specified period. These estimates help in examining the relationship between product’s price and the quantity likely to be demanded.
The Demand Curve: For most products, there is an inverse relationship between price and the quantity demanded. Higher the price, lower the demand and vice versa. As price goes down, the quantity demanded goes up. When the price is raised, the quantity demanded goes down. This fundamental relationship continues as long as the marketing environment, consumers’ buying power, willingness to buy and authority to buy remain stable.
The classic demand curve (Figure 8.2) (D1) shows the expected quantity of a product that will be sold at different prices, provided other factors remain constant. The demand of a product depends on other factors in the marketing mix that include product quality, promotion, and distribution. Some kind of improvement in one or more of these factors may shift the demand to, say, demand curve (D2) and an increased product quantity (Q2) will be sold at the same price (P1).
There are certain exceptions to the classic demand curve that do not conform to this concept. In stock markets, when the share prices decrease, the demand for the specific shares also decreases and demand increase with rising prices of shares. Another illustrative example relates to ego-intensive or prestigious products such as perfumes or lifestyle products that sell more at high prices than low prices. Such products are viewed as desirable mainly because their use reflects buyers’ status. If the prices of Rolex watches or Channel No. 5 perfume fall drastically, these products will most probably lose their status appeal. [ Price Setting Procedure ]

Estimation of Costs

Over the long-run, prices must exceed average unit costs to earn a profit. Cost set the lower limits of the price. The reality of the free market economy is such that customers now pass up certain brand names in case they pay less without sacrificing quality. The purpose of price setting Procedure for a company is to set a price to cover costs involved in a product’s production, selling, and distribution and some desired level of profit for its efforts and risks. A product’s costs set the lowest point below which a company would not set price and demand sets a ceiling on the price.

Examining Competitors Costs, Prices, and Offers

Examining the market demand and company costs, a range of possible prices can be considered. However, the company must also examine the cost, prices, and possible responses of competitors in the industry. Learning competitors’ costs, prices, and offers is an ongoing function of marketing research. When one company dominates an industry, it may set the tone for price decisions in the industry, such as De Beers Consolidated Mines Ltd., or Intel in the case of computer processors. The company must appreciate that other companies in the industry can change their prices in reaction to prices set by the company. Obviously, the nearest competitor is the first choice to consider for setting a price. The first step is to ascertain what positive differentiation features the company’s offer contains and not offered by the nearest competitor. The second step is to a ascertain the worth of additional positive features to consumers and this worth should be added to the competitor’s price to set the company’s product price. If the worth of positive differentiation features of competitor’s product is more and the company’s product does not have those features on its offer, then the value should be subtracted from competitor’s price for setting the company’s product price. This exercise can help whether to keep the price higher, or lower than the competitor, or the same.[ Price Setting Procedure ]

Selecting a Pricing Strategy

A pricing strategy is a course of action framed to affect and guide price determination decisions. These strategies help realizing pricing objectives and answer different aspects of how will the price be used as a variable in the marketing mix, such as new product introductions, competitive situations, government pricing regulations, economic conditions, or implementation of pricing objectives. More than one pricing strategy may be selected to address the needs of different markets or to take advantage of opportunities in certain markets. [ Price Setting Procedure ]

Selection of a Pricing Method

After selection of the pricing strategy or strategies to accomplish the pricing objectives, a company decides about a pricing method. A pricing method is a systematic procedure for setting the prices on a regular basis. The pricing method structures the calculation of actual price of a product based on considerations of demand, costs, and competition

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