Question

This is for Principles of Marketing

1. Describe the procedure for setting the right price.

Answer 1

There are essentially five steps for setting the right price:

1. Determine the pricing objective - It is important to first set the pricing objective. Does the company aim for Maximum profitability or maximizing the market share. Further, do we wish to follow a market skimming approach? It is important to set an objective first and work towards it.

2. The demand of product - We need to understand the market potential for the product and expected market growth. Each price point has a different level of demand and it has to be aligned with pricing objective. We need to formulate the inverse relationship between price and demand and at arriving at a demand curve. With the help of demand curve, we can set the price that helps in achieving our objective.

3. Costs and Profits - It is important to determine our variable, fixed and overhead costs. We need to determine an amortization period for fixed costs and at the minimum product, pricing must cover all variable costs and overheads. Further, our target profits play a role in costs we need to cover. For example - We have spent $1200 as a fixed cost, $ 10 as variable cost and we expect to make $2 as profit per unit. If we plan to amortize our fixed cost on a monthly basis for 1 year, then our product pricing should cover 1/12 of fixed cost, variable cost, and profit. Note - The fixed cost would be apportioned to each unit i.e. if we plan to sell 100 units a month then fixed cost apportioned per unit in a month 1/12 * 1/100 * 1200 = $1.

4. Analyzing industry pricing - We need to benchmark against our price against competitors. For example - Our competitor charges $1 for the product. Our product has twice the utility of our competitor, then we can probably charge the customer $2. However, again pricing depends on our objectives followed by the demand curve at price points.

5. Choose a Pricing method - Once we have set our objectives and know the demand curve, our pricing can follow different methods:

• Markup Pricing: Charging a fixed markup over costs to achieve profit objectives
• Target Return Pricing: Pricing to achieve ROI over fixed cost
• Value Pricing: Based on utility provided by the product
• Going Rate Pricing: Charge as per competitor's product or standard rate as industry