Price is the only element in the marketing mix that produce revenue; the other elements produce cost. Price is the amount of money that customers have to pay for the product. There are six step procedure for price setting
Selecting the pricing objectives b) determining demand c) estimating costs d) analyzing competitors price and offers e) selecting a pricing method f) selecting the final price
A) Selecting the pricing Objectives: A company can pursue any six major objectives through its pricing
i) Survival- Companies pursue survival as their major objective if plagued with overcapacity, intense competition, or consumer wants. To keep the plant going and inventories turning over, they will often cut prices. Profits are less important than cut prices. Profits are less important than survival. However, survival is only a short run objectives.
ii) Maximum current Profit- Many companies try to set the price that will maximize current profits. They estimate the cost and demand associated with alternative prices and choose the price that produces maximum current profit, cash flow or rate of return on investment.
iii) maximum current Revenue- some companies will set a price to maximize sales revenue. Revenue maximization requires only estimating the demand function.
Many managers believe that revenue maximization will lead to long-run profit maximization and market share growth.
iv) Maximum Sales Growth: Some companies want to maximize unit sales. They believe that a higher sales volume will lead to lower unit costs and higher long run profit. They set the lowest price, assuming the market is price sensitive. This is called market penetration pricing.
v) Maximum Market skimming: Many Companies favour setting high prices to skim to the market. If estimates the highest price it can charge given the comparative benefits of its new product versus the available substitutes. Each time sales slow down, it lowers the price to draw in the next price sensitive layer of customers.
vi) Product-Quality Leadership:- A company might aim to be the product-quality leader in the market.
vii) Determining Demand: Each price that the company might charge will lead to a different level of demand and will therefore, have a different impact of its marketing objectives. In normal case, demand and price are inversely related , that is, the higher the price, the lower the demand.