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 a price. Five major objectives are: • Survival •
Maximum current profit • Maximum market share • Maximum market skimming • 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 a company’s marketing objectives. • In the normal case, the higher the price, the lower
the demand. In the case of prestige goods, the demand curve sometimes slopes upward.
1 PRICE sensitivity:The first step in estimating demand is to understand what affects price sensitivity.
Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They
are also less price sensitive when: (1) there are few or no substitutes or competitors; (2) they do not readily
notice the higher price; (3) they are slow to change their buying habits;
2: PRICE elasticity of demand: Marketers need to know how responsive, or elastic, demand would be to a
change in price. If demand hardly changes with a small change in price we say the demand is inelastic. If
demand changes considerably demand is elastic.
3: Estimating demand curves
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 cost of producing, distributing and selling
the product, including a fair return for its effort and risk. Yet, when companies price products to cover their
full costs, profitability isn’t always the net result.
Types of costs and levels of production: • Fixed (also known as overhead) costs are costs that do not vary
with production level or sales revenue. A company must pay bills each month for rent, heat, interest,
salaries, and so on regardless of output. • Variable costs vary directly with the level of production. For
example, each handheld calculator produced by Texas Instruments incurs the cost of plastic, microprocessor
chips and packaging. These costs tend to be constant per unit produced, but they’re called variable because
their total varies with the number of units produced. • Total costs consist of the sum of the fixed and
variable costs for any given level of production. • Average cost is the cost per unit at that level of
production; it equals total costs divided by production.
Step 4: Analyzing Competitors’ Costs, Prices and Offers
• Decide whether to charge more, same or less to the competitor: This depend on the features offered by
the firm. If more feature than competitor then ask more otherwise less or same. • Competitors are most
likely to react when the number of firms are few, the product is homogeneous (i.e., when no important
differences between the product and competing products are perceived by buyers), and buyers are highly
informed. Competitor reactions can be a special problem when these firms have a strong value proposition.
Step 5: Selecting a Pricing Method : Shapiro and Jackson identified three methods used by managers to
set prices. The first of these – cost-based pricing – reflects a strong internal orientation and, as its name
suggests, is based on costs. The second is competitororientated pricing, where the major emphasis is on the
price levels set by competitors and how our prices compare with those. The final approach is market-led
pricing, so called because it focuses on the value that customers place on a product in the marketplace and
the nature of the marketing strategy used to support the product.
Cost-based pricing: Prices which are based on costs and make no explicit reference to market factors are
called cost based prices.
Step 6: Selecting the final Price • Impact of other marketing activities: Expenses on advertisement and other
promotion • Company pricing policies: Basic pricing policies • Gain-and-risk sharing pricing: Sharing risk of
buying something with customer • Impact of price on other parties: Like whole seller, retailer etc.
