Understanding Pricing
Price has operated as the major determinant of buyer choice. Consumers and purchasing agents have more access to price information and price discounters. Consumers put pressure on retailers to lower their prices. Retailers put pressure on manufacturers to lower their prices. The result is a marketplace characterized by heavy discounting and sales promotion.
Setting the Price
The firm must consider many factors in setting its pricing policy. Let’s look in some detail at a six-step procedure: (1) selecting the pricing objective; (2) determining demand; (3) estimating costs; (4) analyzing competitors’ costs, prices, and offers; (5) selecting a pricing method; and (6) selecting the final price.
Step 1: Selecting the Pricing Objective
The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership.
Step 2: Determining Demand
Each price will lead to a different level of demand and will therefore have a different impact on company’s marketing objectives. In the normal case, the two are inversely related: The higher the price, the lower the demand. In the case of prestige goods, the demand curve sometimes slopes upward. Some consumers take the higher price to signify a better product. However, if the price is too high, the level of demand may fall.
Step 3: Estimating Costs
Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its costs of producing, distributing, and selling the product, including a fair return for its effort and risk. Yet, when companies price product to cover their full costs, profitability isn’t always the net result.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company costs, the firms must take competitors’ costs, prices, and possible prices reactions into account. The firm should first consider the nearest competitor’s price. If the firm’s offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor’s price. If the competitor’s offers contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor.
Step 5: Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is now ready to select a price. Costs set a floor to the price. Competitors’ prices and the price of substitutes provide an orienting point. Customers’ assessment of unique features establishes the price ceiling.
Step 6: Selecting the Final Price
Pricing methods narrow the range from which the company must select its financial price. In selecting that price, the company must consider additional factors, including the impact of other marketing activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.
Adapting the Price
Companies usually do not set a single price, but rather developing a pricing structure that reflects variations in geographical demand and cost, market – segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts, and other factors. As a result of discounts, allowances, and promotional support a company rarely realize the same profit from each unit of product that is sells. Here we will examine several price-adaptation strategies: geographical pricing discounts and allowances, promotional pricing and differentiated pricing .
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