The process of price determination varies from industry to industry due to various factors like the nature of the product, government rules and policies, competition, etc. Thus, no signal process can be applied to every marketing company.
Process of Price Determination
However, the following process may be adopted with the required modifications for the purpose of price determination:
1. Estimate the Demand for the Product
The first step in price determination process is to estimate the total market demand for the product.
This is easier to do for an established product than for a new one. Demand for the product can be estimated properly by calculating the expected price and probable sales volume of the product at different prices.
The expected price for a product is the price at which customers would like to buy the product. The prices of a product should not be set below the expected price and not much higher than the expected price.
For the identification of the expected price of the product, the opinions and reactions of middlemen should be given due regard, because they have a direct link with customers. With the help of a middleman, a marketing company can determine a reasonable range of prices on which product can be sold effectively to customers.
It is also meaningful and helpful in price determination to estimate what the sales volume will be different prices. The purpose of this exercise is to assess the demand elasticity of the product.
These volume estimates at different prices are also important in relation to determining the break-even point, where total revenues are equivalent to the total cost.
2. Anticipate the Competitive Influences
In the second step, a marketing company should anticipate present and potential competition for its products.
It is easier to assess present competition but it is difficult to assess the potential competition. The treat of the potential competition will be greater when the market has good profit prospects and easy entry.
A marketing company should take into account the various sources of competition like available substitutes of the company’s product, present similar products in the market and unrelated products influencing customers budget.
3. Anticipate Expected Market Share of the Product
The third step in price determination is to anticipate what share of the market the company expects.
The expected market share for the product will be influenced by the existing production capacity of the company’s plant, companies capacity to sell the product, cost of plant expansion if necessary and prospective competition.
If the company assesses a large market share in the future it may keep lower prices to capture maximum market share.
A marketing company may not be interested in expanding its plant capacity due to easy of competitive entry. Then the initial prices of the product may be set relatively high.
4. Consider Company Policies Regarding Product, Promotion and Pricing Objectives
Another step in the price determination promotional policies, distribution policies, and objectives.
Product policy with regard to quality, size, and branding affects pricing decisions.
If a company is marketing the products under its own brand name, the prices of the product would be higher when it is marketing products under middleman brands, prices may be kept lower.
The promotional methods used and the extent to which the work is performed by a marketing company or middleman have their own effect on the prices of products.
Pricing decision is also affected by the pricing objectives formulated by the management of the company.
For example, if the pricing objectives to achieve target return on investment then at the time of price determination of the product, expected target return on investment will be added to the cost of the product.
5. Selection of Pricing Policies and Strategies
The fifth step in the process of price determination is the selection of relevant policies and Strategies.
These policies and strategies provide clear guidelines and an action plan for price determination to secure maximum consumer satisfaction and effective market share.
For example, in the case of uniform pricing policy a company sells its products at the same prices within the country and in case of zonal pricing policy, the company will set different prices for different geographical areas keeping in view the transportation cost incurred in the distribution of products.
6. Selection of Specific Price
After the completion of the above steps in the process of price determination, the management may be poised for the task of selection of a specific price for the product of the company.
In the first phase, a tentative price should be set up and it is advisable to the market validity of this price during test marketing.
With the help of feedback from channels of distribution and Consumers, the company should make the required changes in the price of the product to select the final price of the product.