Price Setting (Pricing)

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Summary
Price Setting (Pricing)

What is Price Setting (Pricing)? Meaning.

When firms develop new products or services, it is necessary to set the price correctly in order to target the right customer segment, to correctly position the product with respect to price & quality, and to maximize the profits.


Pricing is one of the four Ps of the marketing mix, the other three aspects being Product, Promotion, and Place. Of these 4, price is the only revenue generating element; the other 3 are cost centers.


Price Setting (a.k.a. Pricing) is the process/procedure firms are following for setting the price. This procedure can be used when a firm develops a new product/service, when introducing an existing product into a new distribution channel or geographical area, and when bidding on a new contract. Of course a firm may also adapt an existing price. This is formally not considered as price setting, but called "Price Adaptation".


Process of Price Setting. Steps

  1. SELECTING THE PRICING OBJECTIVE: The firm needs to have a clear objective as to why the new product/service is being introduced. There are six pricing objectives:
  2. DETERMINING THE DEMAND: Every price level leads to a different level of demand from the market. Typically, price and demand have an inverse relationship (indicated by the Demand Curve). The firm has to focus on the following issues when estimating the demand:
  3. ESTIMATING COSTS: While the demand sets the upper limit to the Price, the underlying costs set the lower limit for the Price. Firms aim to set a price which covers the manufacturing, distribution, and selling cost, and yet obtain a fair margin over it. The Total Cost of a firm be broken down into Fixed Costs or Overheads (don't vary with the production levels or revenue) and Variable Costs (vary with the production levels).
    Firms achieve a decrease in the product costs via:
  4. ANALYZING COMPETITOR'S COSTS/PRICES/OFFERS: Along with the price band obtained by estimating the market demand and the company costs, the firm must take into consideration the competitor's costs, prices, offers, and possible reactions to the firm's product launch.
    If the firm's product has an additional feature over the competitor's product, the value from the additional feature can/should be added to the price. If the competitor's product has an additional feature, then it's associated value can/should be subtracted from the product's price.
  5. SELECTING THE PRICING METHOD: As already mentioned, the market segment demand establishes the price ceiling, the company cost establishes the price floor, while analyzing the competitor's prices establishes an orienting point in between the two. The following pricing methods take one or more of the above points into consideration:
  6. SELECTING THE FINAL PRICE: The pricing methods narrows down the price band for the new product. Additionally, the firm must also take the following factors into account while setting the final price:

Now, having set the initial price for the product/service, the firm can launch the product/service into the new market/region/segment. Later on, the firm may decide to adapt the price (instead of maintaining a static price) based on changing market conditions. The firm may undertake Price Adaptation strategies such as Geographical Pricing, Price Discounts and Allowances, Promotional Pricing, or Differentiated Pricing.


Source: Kotler, P. & Keller, K. L. (2016), "Marketing Management", 2016, pp. 506-522, G10


Special Interest Group

Price Setting (Pricing) Special Interest Group.



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Forum

Forum about Price Setting (Pricing).


 

Product Line Pricing
Product Line Pricing or Price Lining is the process used by manufacturers and retailers of separating goods into cost categories in order to create various quality levels in the minds of customers. Ef...
6
 
1 comments
🔥 NEW Personalized Pricing and Price Discrimination
Major online companies like Google process a large amount of users' data, which is commonly known as "Big Data." This includes a lot of information, like past purchase behavior, list of websites visit...
5
 
How to Determine Price Sensitivity? Analysis
The marketing mix, commonly referred to as the 4Ps (Product, Promotion, Place, and Price), helps capture the value for a firm's chosen customer segments. The first three variables of the marketing mi...
5
 
1 comments
Dynamic Pricing
WHAT IS DYNAMIC PRICING? INTRODUCTION
Dynamic Pricing, also called: Surge Pricing or Demand Pricing or Time-based Pricing or Algorithmic Pricing, is a pricing strategy. It is used when a company ...
4
 
2 comments
Bundle Pricing / Price Bundling
Bundle Pricing, also called "Price Bundling" or "Product Bundling", is a strategy where two or more products/services are clubbed together and sold at a single price, often at a price lower than the c...
4
 
1 comments

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Pricing
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