Strategic Management: Formulation and Implementation

Setting The Price

Particularly, pricing is a problem when a firm has to set a price for the first time. The company must decide where to position its product on quality and price.

In setting the price of a product, the company follows a six-step procedure:

Selecting the pricing objectives
There are six major business objectives that a company can pursue through its pricing, such as survival, maximum current profit, maximum current revenue, maximum sales growth, maximum market skimming, or product quality leadership.
Determining demand
The company determines the demand schedule, which shows the probable quantity purchased per period at alternative price levels. The more inelastic the demand, the higher the company can set its price.
Estimating costs
The company wants to charge a price that covers all of its costs of producing, distributing, and selling the product, including a fair return for its effort and risk. Moreover, the company estimates how its costs vary at different output levels and with different levels of accumulated production experience.
Analyzing competitors's prices and offers
The company examines competitors' prices as basis for positioning its own price.
Selecting a pricing method
The company selects one of the following pricing methods: markup pricing, target return pricing, perceived-value pricing, going-rate pricing, sealed-bid pricing.
Selecting the final price
The purpose of previous pricing methods is to narrow the price range from which to select the final price. In selecting the final price, management must consider the following additional factors: the psychology of prices, the influence of other marketing-mix elements on price (e.g., the brand's quality and advertising relative to competition), company pricing policy, and impact of price on other parties (such as distributors, dealers, competitors, suppliers, and government).