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Price Setting Process

>> June 13, 2010


When  a company develops a product, it is very necessary to set its specific price. But there are many factors which affect its setting which we can show following steps of its process.

1st Step : Selecting the Price Objectives :

We all know the price setting is the major part of marketing policy and one of P4 of marketing mix. So, it is the first in which you have to select the price object for setting it. It may be

a) Survival the product in market :

Company thinks that his product is new and for creating its position in market, company should take minimum price from its customers.

b) Maximum profit objective :

If company wants to earn maximum profit, the company can set high price under price skimming. Company thinks that if it will fix high price, no competitor faces it.

c)  High market share objective :

Company's object is to increase sale. So, it will determine low price than competitors.

2nd Step : Determining the Demand :

Main aim of taking second step is to check whether our set price is best for increasing demand or not. In this step, we takes following decisions

a) Create the demand curve and check the trend :

With past records of our company's product price and past sales company can create demand curve, it shows the effect of changing price on demand of customer. The company can take the help of economist which they can explain its technical explanation. But with this, company can know whether company's price are creating bad effect on demand or good effect on demand.

b) Demand Elasticity

With this, company can estimate about how much demand is effected with increasing or decreasing the price.

3rd Step : Estimate the Costs :

For determination the price of product company should estimate the cost of product.

I) Calculate variable and fixed cost :

Fixed cost = Electricity + salary bill etc

variable cost = raw material cost + labour cost + other expenses etc.

II) Calculate differential cost in differential market :

Use activity base costing system if company sells product different time period.

III) Target Costing :

This is japan's technique

at what price consumer wants the product xxxx

                                         Less margin = xxxx

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                                    Estimated price = xxxx

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Cost must be less than estimated price

IV) Also estimate competitor's price:

4th Step : Selecting a Good Price Method :

a) Markup pricing :

Total cost price xxxx

Add % Margin on sale xxxx

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Sale price  xxxx

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b) Perceived value price :

it is fixed on the basis of cost of market mix and margin

( product cost + advertising cost + placement cost ) + margin = fix price

c) Value Price :

Low price of quality product than competitors.

6th Step : Select the Final Price

After analysis of above five steps, marketer selects the final price of a new product.




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