Price Setting Steps - Stages For Establishing Prices: 1. Pricing Objectives

Price Setting Steps – Stages for Establishing Prices
We have already examined the nature and importance of price. It is now time to move on to the stages
followed in price setting. Setting price for the first time is a real challenge to a firm, and it faces this
situation when it plans to launch a new product or introduce an existing one into a new distribution
channel or area, or participates in a bid.
In setting its pricing policy, a firm must consider several factors and proceed following a logical process
consisting of seven steps.
Selection of pricing objective;
Assessment of the target market’s evaluation of price and its ability to purchase;
Determination of demand;
Analysis of costs;
Analysis of competitors’ costs, prices, and offers;
Selection of a pricing method; and,
Determination of a specific price
1. Pricing objectives
Pricing of goods and services is often a critical factor in the successful operation of business
organizations. Although the basic pricing ingredients (costs, competition, demand, and profit) are the
same for all firms, the optimum mix of these factors varies according to the nature of products, markets,
and corporate objectives.
The manager’s job is to develop and implement a pricing strategy that meets a particular company’s
needs at a certain point in time.
Many different ways of handing prices are observed.
Prices are often set by top management rather than by marketing or salespeople in smaller companies.
In comparison, division and product-line managers handle larger companies’ prices following the top
management’s general pricing policies and objectives.
2. Assessment of Target Market’s Evaluation of Price and Its Ability to Purchase

Although it is assumed that price is a significant issue for customers, the price depends on the type of
product and the type of market the company targets.
By assessing the target market’s price evaluation, a marketer is better positioned to know how much
emphasis to place on price. Information about the target market’s price evaluation may also help a
marketer determine how far above the competition a firm can set its prices.
Understanding buyers’ purchasing power and knowing how important a product is to them compared to
other products helps marketers assess the target market’s price evaluation accurately.
3. Determination of Demand
The level of demand for a product depends on the price set levels, thus having different impacts on the
concerned firm’s marketing objectives. We can understand the relationships between price and demand
through the demand schedule.
The demand schedule tells us how much a product will be demanded (sold) at various prices. It is known
that the price-quantity relationship is inverse except for a few exceptions. That is, less will be demanded
if the price is charged high, and more will be demanded if the price is charged less, which means that
buyers are price sensitive.
In the case of specialty or prestige goods, a price increase may increase demand because buyers draw a
price-quality relationship: they take the higher price to signify a better or more exclusive item. We shall
now discuss the factors affecting the price sensitivity of buyers.
5. Evaluation of Competitors’ Costs, Prices, and Offers

To set prices appropriately, a company should have a clear picture of competitors’ cost, prices, and
reactions against the possible range of prices determined by market demand and cost. It is also
imperative to know in detail about competitors’ offers regarding quality, price, and other variables.
If the company finds that its offer is more or less similar to competitors’ offers, it should price close not
to lose sales. If it finds that it is in a superior position, it can charge a high price and charge a lower price
than competitors if its offer is found inferior to competitors’ offers.
Becoming aware of competitors’ prices, particularly, is not always an easy task, especially in producer
and reseller markets. Competitors’ price lists are often closely guarded.
6. Selection of a Pricing Method

When a company has three Cs in hand, it is ready to select a price. The three Cs are customers’ demand
schedule, cost function, and competitors’ prices.
In selecting a price, a company has to select a particular pricing method, including cost considerations,
competitors’ prices, prices of substitutes; and, customers’ assessment of unique product features.
7. Determination of a Specific Price

The final price may be selected easily based on the pricing methods discussed earlier. To select the final
price, a few additional factors to be taken into consideration by a company.
Analysis of Cost
In setting prices, a company considers its production, distribution, and other costs as demand elasticity.
To stay in business, a company has to set prices that cover all its costs.

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Price Setting Steps – Stages for Establishing Prices

Selection of pricing objective;

Analysis of competitors’ costs, prices, and offers;

Selection of a pricing method; and,

Determination of a specific price

Many different ways of handing prices are observed.

2. Assessment of Target Market’s Evaluation of Price and Its Ability to Purchase

5. Evaluation of Competitors’ Costs, Prices, and Offers

6. Selection of a Pricing Method

7. Determination of a Specific Price

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