1) Selecting Price Objectives:
The organization has to first of all analyse its position of offering in the market. If the organizational objectives are clearly set, price setting becomes easier. Therefore, First of all while determining the price of a product or service, a producer / marketer is required to decide price objective such as survival in the market, maximum current profit, maximum market share, maximum market skimming, product – quality leadership, return on investment and development of product line etc.
2) Determining Demand
Having selected price objective, next step is to determine demand for the product. The different prices set by organization will lead to difference in demand for the product in the market. This stage involves price sensitivity, estimating demand curve and price elasticity of demand. The demand curve shows the different quantities demanded by customers at varying prices. Universally, as demand and price of the products are inversely related. Price sensitivity is the degree to which the price of a product affects consumers’ purchasing behaviour, in economics it is measured by price elasticity of demand. Generally customers are more prices sensitive to products that cost much as speciality goods and those goods which are frequently required such as staple goods. They are less price sensitive to goods which are bought infrequently or cost of which is insignificant. Price elasticity of demand is to extend the responsiveness of demand to the different prices charged. The marketer needs to have an idea of how responsive the market demands are, to various prices set by the firm. If with the change in price the demand for the product changes substantially then we can say that the demand is elastic to price.
3) Estimating Costs
Another important stage of pricing process to work out costs involved in production, promotion and distribution of product. The company may have to bear a loss if such estimate goes wrong. Pricing policies of firm significantly depend on the cost of production and other related costs incurred by the organization for offering the product market. The firm generally charges a price which covers the production cost as well as a fair profit for the firm’s effort and risk. Therefore, proper method and technique of costing should be adopted to determine and control the costs of product for which cost accounting is useful.
4) Analysing Competitor Price Mix
If competitors’ price mix is not considered while making price decision, it proves to be a big blunder / mistake. Competitors’ policies have significant effect on the firm’s own policies and strategies. The firm should have a good knowledge of the competitors pricing policies and their possible response to the firms pricing policies. In case the firm is offering product features which are exclusive and not provided by its competitors then their price should be set accordingly. Therefore, a producer should…..
- Identify nearest price competitors
- Take competitors’ product features and price into account
- Make decision to change more or the same or the less than competitors
- Monitor competitors’ reaction to his/her strategy
5) Selecting Pricing Method
After completion of above steps, the producer is to adopt an appropriate method of pricing. Following are the various methods of pricing
- Mark up pricing: The most widely used pricing technique in which a standard mark up is added in the product cost. Under this method, price is determined after adding a definite amount of profit to the cost of production. This method is adopted by retailers. They (retailers) fix selling price of each product by adding a predetermined mark up to its purchase price. Eg; cost price of a watch Rs 400 and mark up is Rs 50, selling price would be Rs 450
- Target return pricing: When the producer decides the price with the expectation of certain percentage of profit on capital investment, it is called Fixed Target Pricing. Therefore such price would give a targeted rate of return on its total cost or on investment.
- Perceived value pricing: It means value or worth of product perceived or thought by the buyer. In other words, buyers think a particular value of that product is proper. Eg. If buyers feel that the worth of LG microwave is Rs. 7,000 then the perceived value of microwave is Rs.7,000 and the company keeps the same price, they will not hesitate to buy. Sometimes customers’ perceived value can be high for the product of reputed company. For this a company has to undertake market research so that it can determine the perceived value. In the absence of knowledge about it, company may fix higher price than perceived value then there will be decline in sales.
- Value pricing: Here the firm charges a fairly lower price for high quality products thereby winning loyal customer
- Going-rate pricing: Going rate pricing is also termed as current rate pricing. When the management keeps the price of the products exactly as the price kept by the competitors. In other words, a firm keeps its price at the average level charged by the industry. It is adopted where it is not possible to measure costs. It is believed that competitors must have fixed the price after detailed calculation.
- Auction-type pricing: This method is adopted while quoting for government or private firms’ tenders for the supply of machinery, tool, other equipments and material. In this method, producer does not quote the price based on cost of production & intensity of demand but the expectation of price quoted by the competitors. Here, there is selling of a diverse range of products and services by auctioning them through bidding process.
- Gain-and-risk sharing pricing (this type of pricing is used for the pricing of complex, high valued product or services. Many times buyers refrain from accepting sellers proposal due to the high risk if the promised value is not delivered.)
6) Selecting final Price
Finally, a producer will decide the final price to be charged for the product having considered following
- Impact of other marketing activities
- Company pricing policies
- Impact of price on other parties
The organizations generally set different prices according to variations in geographical demand and costs, market segment requirement, purchase time period, order levels, frequency of delivery, guarantees and various other factors.