Price has become one of the more important marketing variables. Despite the increased role of nonprice factors in the modern marketing process, price is a critical marketing element, especially in markets characterized by monopolistic competition or oligopoly. In setting the price of a product, the company should follow a six-step procedure.
- Establish a marketing objective
- Determine the demand schedule
- Estimate how the product's costs vary at different output levels, production levels, different marketing strategies, differing marketing offers, and target costing based on market research.
- Examine competitors' prices as a basis for positioning product price.
- Select a pricing method, such as markup pricing, target return pricing, perceived-value pricing, value-pricing, going-rate pricing, and sealed-bid pricing.
- Select the final price.
Pricing involves the customer demand schedule, the cost function, and competitors' prices. The question is how should a company integrate cost-, demand-, and competition-based pricing considerations?
In setting a price the firm will have to consider the following cost, demand-, and competition-based pricing decisions:
- Cost-based pricing decisions, using marginal analysis or break-even analysis
- Demand-based pricing decisions, such as type of demand for the product, changes in buyer attitude toward price with changes in the economic environment,and the elasticity of demand. And finally,
- Competition-based pricing decisions. To set prices effectively, an organization must be aware of the prices charged by competitors.
Generally, but not always, price is a signal of product quality. The reason is fairly straightforward. Most products and services, in reality, are priced on a cost plus markup basis. Thus, if the cost of goods is $10 and the target margin is 50%, the selling price is $15. And generally, adding quality to a product or service increases the cost of goods. For example, using leather as a seating material in an automobile is more expensive than using cloth. To be profitable, the company must increase its prices to recover the added cost of leather over cloth. In this way, historically, price has generally been a reliable signal of quality. Sears Roebuck built their entire mail order catalog business on “Good”, “Better”, and “Best” quality levels with corresponding increasing prices.
