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