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7.1.3 Price Setting Process

Pricing is a critical aspect of marketing and business strategy. Setting the right price involves aligning organizational objectives, marketing goals, and pricing strategies. Below is a structured approach to price setting, elaborating on each step for clarity and understanding.


1. Selecting the Pricing Objective

Pricing objectives must align with the organizational objectives and marketing objectives.

Organizational Objectives

  • ROI (Return on Investment): Achieving a specific financial return.
  • Profit Maximization: Focusing on high margins.
  • Market Share: Capturing a specific portion of the market.

Marketing Objectives

  • Unit Sales Target: Determined by the desired market share.
    For example, if the total market consists of 100 units, a 10% market share means selling 10 units.

Pricing Objectives

The pricing objective derives from the organizational and marketing objectives: - Penetration Pricing: Reducing prices to increase market share. - Skimming Pricing: Charging premium prices to create or defend a brand. - Growth-Oriented Pricing: Expanding into new territories by lowering prices. - Survival Pricing: Matching market lows to sustain business in a competitive market.


2. Determining the Demand

Understanding demand is essential to gauge the feasibility of pricing strategies.

Key Factors

  1. Demand Funnel:
  2. Need or Desire: The fundamental requirement for the product.
  3. Ability to Pay: Financial capacity to purchase.
  4. Willingness to Pay: Consumer readiness to spend.

  5. Price Sensitivity:

  6. Elastic Demand: Small price changes lead to significant shifts in demand (e.g., non-essential goods).
  7. Inelastic Demand: Demand remains stable despite price changes (e.g., essential commodities, luxury items).

3. Estimating the Cost

Costs form the baseline for setting prices and ensuring profitability.

Types of Costs

  • Fixed Costs (Overheads): Costs that do not change with production volume (e.g., rent, salaries, loan interest).
  • Variable Costs: Costs that vary with production and distribution (e.g., raw materials, fuel, worker wages).
  • Total Cost: Sum of fixed and variable costs.

Importance

  • Fixed costs are incurred regardless of sales volume.
  • Variable costs depend on production and distribution scale.
  • Estimating costs helps determine the Cost of Goods Sold (COGS).

4. Analyzing Competitor Costs, Prices, and Offers

Competitor analysis ensures that pricing is competitive and aligned with market dynamics.

Considerations

  • Economy of Scale: Market leaders often have lower per-unit costs due to large-scale production and a broad customer base.
  • Technological Advantage: New players can offset higher costs with advanced, cost-efficient technologies.

5. Selecting a Pricing Method

After analyzing demand, costs, and competition, the next step is to choose an appropriate pricing method.

Pricing Range

  • Ceiling: The maximum price customers are willing to pay (perceived value).
  • Floor: The minimum price covering the cost of goods sold.
  • True Economic Value (TEV): Includes the cost of the next-best alternative and the performance differential.

Common Pricing Methods

  1. Cost-Plus Pricing: Adding a standard markup to the COGS.
  2. Value-Based Pricing: Centered around the perceived value to the customer.
  3. Competitor-Based Pricing: Setting prices relative to competitors.
  4. Dynamic Pricing: Adjusting prices based on real-time market demand and supply.

6. Choosing the Final Price

Finally, after considering all the factors, select a price that: - Balances cost, demand, and competition. - Aligns with the chosen pricing objective. - Appeals to the target customer segment.


Summary of the Steps:

  1. Select the Pricing Objective: Align it with organizational and marketing goals.
  2. Determine the Demand: Assess consumer need, ability, and willingness.
  3. Estimate the Cost: Calculate fixed, variable, and total costs.
  4. Analyze Competitors: Compare costs, offers, and market positioning.
  5. Select a Pricing Method: Choose between cost-based, value-based, or competition-based pricing.
  6. Set the Final Price: Ensure it falls between the cost floor and the perceived value ceiling.

By following this structured approach, businesses can set prices that maximize profitability while meeting customer expectations and maintaining market competitiveness.

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