Pricing procedure
Setting the Pricing Objectives
Identifying the pricing objective is the foremost step
towards pricing.
Deciding target market is one of the pre-requisites of
selecting pricing objectives.
If the objectives are clear, it becomes easier to
set the price In case the firm is facing intense
competition, having over capacity or dealing with
varying consumer needs, survival becomes its main
objective.
By designing price, which balances variable as well
as some portion of fixed costs attached with the
production of goods and services, the organisation is
able to remain in business.
Survival is considered to be a short-term objective.
The firm must find out ways to increase its value,
otherwise the situation of extinction may arise.
Various firms price their products in order to
maximize their current profits.
Market is price sensitive and that is why, market
growth is increased if prices are low.
Gathered production experience reduces the
production as well as distribution costs. Potential
and actual competition decreases due to a low price.
For example, Sony practices market skimming' pricing
strategy on a regular basis. Irrespective of the specific
objective, profits will be higher for companies which use
pricing as their strategic tool as compared to those who
allow cost or market to decide about their prices.
Determining Demand
Once the objectives are identified, the firm
decides the demand.
The level of demand is different for each price Hence,
it will impact the marketing objectives of the firm
differently.
Generally, demand is inversely proportional to price,
i.e. demand decreases with the increase in price.
For example, when a perfume company increases
its prices, more of its goods get sold. Sometimes,
higher prices depict better quality products for some
consumers. Yet, if the prices are too high, demand
for the product decreases.
Demand curve displays the relationship between
alternate prices and the subsequent current
demand. Demand for a particular product can be
determined by observing following elements :
1) Price Sensitivity :
Price sensitivity is impacted by the following nine factors
i) Unique Value Effect :
In case of products that are unique, the buyers become
less price-sensitive.
ii) Substitute-Awareness Effect :
If the buyers are not much aware of the alternatives, they
become less price-sensitive.
iii) Difficult-Comparison Effect :
When buyers. are not able to compare the features of the
substitutes easily, they become less price sensitive.
iv) Total Expenditure Effect :
If the expenditure, i.e., a share of their total income is
low, buyers become less price-sensitive.
v) End-Benefit Effect :
If the cost of the end product is higher than the
expenditure, the buyers become less price-sensitive.
vi) Shared-Cost Effect :
If some of the cost is tolerated by the other entity, buyers
become less price-sensitive.
vii) Sunk-Investment Effect :
If there are some previously bought assets that are used
in combination with the product, the buyer becomes less
price-sensitive.
viii) Price-Quality Effect :
Buyers become less price-sensitive in case of prestigious,
special or high quality products.
ix) Inventory Effect :
If the buyers are not able to store the product, they
become less price sensitive.
2) Estimating Demand Curves :
There are various methods that a company can use for
measuring the demand curve:
In the first method, past prices, quantities sold and other
such factors are statistically analysed and their
relationships are studied.
In the second method, price experiments performed. For
example, the prices various products sold at a discount
store changed and the results are monitored.
In the third method, buyers are questioned about the
number of units they plan purchase at different proposed
prices.
3) Price Elasticity of Demand :
Price elasticity of demand or PED is the reaction in
the form change in quantity demanded with respect
change in price. The following formula is used t
calculate it :
PED = % Change in Demand /% Change in Price
Estimating Costs
Costs are divided into two types:
1) Overhead or Fixed Costs :
This cost remains constant irrespective of the
revenue earned from production and sales. For
example, the amount of goods produced has no
impact on the cost of land.
2) Variable Costs :
This cost changes with the quantity of goods
produced. For example, with the amount of goods
produced the cost of raw material changes.
Analyzing Competitor's Pricing
Next crucial step that needs to be taken while
setting prices is the analysis of competitors' costs,
offers and prices. In addition, the company should
also consider the competitors' price responses to
market changes, which lie within the array of prices
decided on the basis of company costs and market
demand.
Selecting Pricing Method
The company needs to decide upon three elements called
the 3 Cs while setting the final price :
1) Cost-based Price :
This lays down the floor for pricing.
2) Competitor-based Price :
This gives the orientation framework for pricing.
3) Customer Demand-based Price :
This lays down the ceiling for pricing.
Selecting Final Price
After selecting the suitable pricing method, it becomes
easier for the organisation to finalize the price. Below
mentioned are certain additional factors that the
organisation needs to take into account while
finalizing its price :
1) Psychological Pricing :
Price acts as quality indicator for certain
customers.
Generally, the perceptions regarding quality and
price of products interact in consumer buying
activity.
Products like cars, which are priced high, are
believed to be of high quality and vice versa.
In case of lack of this information, price becomes the
most crucial quality indicator. If Mercedes Benz
costs 25 lacs only, customers will not perceive it to
be prestigious. When buyer aims to buy a product,
he has a reference price in his mind which he
gathers by observing the current prices, past prices
or the perspectives of buying. These reference prices
are frequently influenced by the sellers.
2) Company's Pricing Policies :
The prices should fall in line with the pricing
policies of the company.
Several companies have a separate department
that takes care of pricing policies and develops or
approves pricing decisions.
Here, the main purpose is to make sure that the
prices, which appear fair to the customers and are
profitable to the organisation, are quoted by their
sales people.
3) Impact of Price on Other Parties :
The management needs to analyse how other parties are
going to react to the final price.
What are the responses of the dealers and
distributors. concerning it?
Are the sales people ready to sell. the product at
that price?
How will the competitors respond? Will the
government interfere and stop the organisation
from charging this price?
4) Influence of Other Marketing Mix Elements :
The quality and advertising of the brand must be
considered in comparison to competition. When the
relationship between relative price, advertising and
quality was studied, the following findings were revealed :
Premium prices were charged by brands providing
average relative quality with the help of a high relative
budget for advertising. For a product that was known
to the consumers, they willingly paid higher prices as
compared to the ones that were unknown.
Highest prices were charged by brands providing high
relative quality with the help of a high relative advertising
budget. On the other hand, lowest prices were charged
by brands, providing low quality in presence of low
advertising budget.
In the later stages of the product life cycle, the firm
witnessed a positive relation between high advertising
and high prices in case of leading brands.
