how should a company set prices initially for product or services?

Setting The Price

Ankeita MallS.G.S.I.T.S.

How should companies set prices initially for products or services?

6 Steps in Setting a Pricing Policy

1. Selecting the Principle Objective

The clearer a Firm’s Objectives, the easier it is to set Price

Survival

Maximum Current Profit

Maximum Market Share

Maximum Market Skimming

Product Quality Leadership

5 Major Objectives

2. Determining Demand

Each Price leads to different level of demand

Factors leading to Less Price Sensitivity

•More Distinctive Product • Buyers are less aware of substitutes• Expenditure is smaller part of Buyer’s income

• Product is used in conjunctive with assets previously brought

• Product is assumed to have more quality, prestige and exclusiveness

Internet increases Price Sensitivity to a Great

Extent

Estimating Demand Curve

1. Surveys 2. Price Experiments of

products3. Statistical Analysis of past

prices, quantities sold, etc.

3. Estimating Costs

Companies want to charge a Price that includes

• Cost of Production • Cost of Distributing and Selling the Product• A fair return for its risks

Types of Costs Fixed cost- Cost that do not vary with production.

Like the bills, rent, salaries etc

Variable Cost- Varies with level of Production

Total Cost- Sum of Fixed Cost and Variable Cost for

any level of Production

Average Cost- Cost Per Unit

4. Analyzing Competitor’s Costs, Prices and Offers

Setting Prices and Offers by taking into account Competitor’s Cost, Prices and Offers.

5. Selecting aPricing Method

Price Setting Methods

Markup Pricing- Method to Add a Standard Markup

(Profit) to the product’s cost.

Target Return-Pricing

The Firm determines the price that yields its target rate of return on investment. Public utilities often use this method

Perceived Value Pricing-

It is made up of hosts of inputs, such as buyer’s image of product performance, the channel deliverables, the warranty quality, customer support, supplier’s reputation and trustworthiness.

Value Pricing-It is a matter of reengineering the company’s operations to become a low cost producer without sacrificing quality.

Going Rate-Pricing

In this the Firm bases its price largely on competition prices. Smaller Firms follow the leader. In steel, paper and fertilizer industries

Auction Type-Pricing

Auction for buying and selling products and is mainly of three types• English auction(Ascending bids)• Ditch auction(Descending bids)• Sealed Auction

6. Selecting the Final Price

Following factors should be kept in mind before selecting the Final

Price

• Impact of other marketing activities• Company Pricing Policies• Gain and Risk Sharing Pricing• Impact of Pricing on other Parties

RECAP

• Ways to set the price• Selecting the Pricing Objective• Determining Demand• Estimating Cost• Analyzing Competitor’s Costs, Prices and Offers• Selecting a Pricing Method• Selecting the Final Price

Created by ANKEITA MALL, S.G.S.I.T.S. , during an internship by Prof. Sameer Mathur, IIM Lucknow. www.IIMInternship.com