Unit 1o. How toSeta Priceona Product
Unit 10. How to ◼ Set a Price on a Product ◼
HowtoSeta Priceona ProductPrice is one of the most importantmarketing variables in the marketing mix.Generally speaking,setting the rightpriceon a product is a four-step process(seeexhibitbelow):(SeeP176)Establishpricinggoals.EstimateDemand,Costs,andProfitsLChoose a price Strategy to help determine a base3.price.Finetune the base price with pricing tacticsThese four steps are discussed below
How to Set a Price on a Product Price is one of the most important marketing variables in the marketing mix. Generally speaking, setting the right price on a product is a four-step process (see exhibit below): （See P176) 1. Establish pricing goals. 2. Estimate Demand, Costs, and Profits 3. Choose a price Strategy to help determine a base price. 4. Finetune the base price with pricing tactics. These four steps are discussed below
Generally speaking,settingtherightprice on a productis afour-stepprocess.Choose aFine-tuneEstimatethe basepriceStrategyDemand,EstablishtohelpPrice withpricinggoalsdetermineCosts,andpricingtacticsa basepriceProfits
3 Establish pricing goals Estimate Demand, Costs, and Profits Choose a price Strategy to help determine a base price. Fine-tune the base Price with pricing tactics Generally speaking, setting the right price on a product is a four-step process
The first step in setting the right price istoestablishpricinggoals.Generallyspeaking,thepricing objectives fall into three categories:profitoriented,sales oriented,and status quo.Thesegoals are derived from the firm's overallobjectives.A good understandingof the marketplaceandofthe consumer can sometimes tell a manager veryquickly whethera goal is realistic.For example,iffirm A's objective of a 20 percent target return oninvestment(ROl),anditsproductdevelopmentand implementation costsare s5 million,themarket must berather large or mustsupport theprice required to earn a 20 percent ROI
◼ The first step in setting the right price is to establish pricing goals. Generally speaking, the pricing objectives fall into three categories: profit oriented, sales oriented, and status quo. These goals are derived from the firm’s overall objectives. ◼ A good understanding of the marketplace and of the consumer can sometimes tell a manager very quickly whether a goal is realistic. For example, if firm A’s objective of a 20 percent target return on investment (ROI), and its product development and implementation costs are $5 million, the market must be rather large or must support the price required to earn a 20 percent ROI
Assumethatcompany B hasapricingobjectivethat all new products must reach at least 15percent market share within three years after theirintroductionA thorough study of the environment mayconvince the marketing manager that thecompetition is too strong and the market sharegoal can't be met.All pricing objectives havetrade-offs that managers must weigh.A profitmaximization objectivemay require a biggerinitial investment than the firm can commit orwantsto commit
◼ Assume that company B has a pricing objective that all new products must reach at least 15 percent market share within three years after their introduction. ◼ A thorough study of the environment may convince the marketing manager that the competition is too strong and the market share goal can't be met. All pricing objectives have trade-offs that managers must weigh. A profit maximization objective may require a bigger initial investment than the firm can commit or wants to commit
Reaching the desired market share often meanssacrificing short-term profit,because withoutcareful management,long-term profit goalsmaynot be met.Meeting the competition is the easiestpricing goal to implement.However,canmanagers really afford to ignore demand andcosts,thelifecyclestage,and otherconsiderations?When creating pricing objectives,managers must considerthese trade-offs in lightof thetarget customer and the environment.EstimateDemand,Costs,andProfits
◼ Reaching the desired market share often means sacrificing short-term profit, because without careful management, long-term profit goals may not be met. Meeting the competition is the easiest pricing goal to implement. However, can managers really afford to ignore demand and costs, the life cycle stage, and other considerations? When creating pricing objectives, managers must consider these trade-offs in light of the target customer and the environment. ◼ Estimate Demand, Costs, and Profits
Theoretically,total revenue is a function of priceand quantity demanded and that quantitydemanded depends on elasticity.Afterestablishingpricinggoals,managers shouldestimate total revenue at a variety of pricesNext,they should determine corresponding costsfor each price.They are then ready to estimatehow muchprofit,if any,and how muchmarketshare can be earned at each possible price.Thesedata become the heart of the developing pricepolicy.Managers can study the options in light ofrevenues,costs,and profits.In turn,thisinformation can help determine which price canbest meet thefirm'spricinggoals
Theoretically, total revenue is a function of price and quantity demanded and that quantity demanded depends on elasticity. After establishing pricing goals, managers should estimate total revenue at a variety of prices. Next, they should determine corresponding costs for each price. They are then ready to estimate how much profit, if any, and how much market share can be earned at each possible price. These data become the heart of the developing price policy. Managers can study the options in light of revenues, costs, and profits. In turn, this information can help determine which price can best meet the firm’s pricing goals
Choose apriceStrategy The basic,long-term pricing framework for a goodor service should be a logical extension of thepricing objectives:The marketing manager'schosen price strategy defines the initial price andgives direction for price movements over theproductlifecycleThe price strategy setsa competitive price ina specific market segment, based on a well-defined positioning strategy.Changing a pricelevelfrom premium to superpremium,mayrequire a change inthe product itself,the targetcustomers served,thepromotional strategy,orthedistributionchannels
◼ Choose a price Strategy ◼ The basic, long-term pricing framework for a good or service should be a logical extension of the pricing objectives. The marketing manager’s chosen price strategy defines the initial price and gives direction for price movements over the product life cycle. ◼ The price strategy sets a competitive price in a specific market segment, based on a welldefined positioning strategy. Changing a price level from premium to superpremium, may require a change in the product itself, the target customers served, the promotional strategy, or the distribution channels
Thus,changing a pricestrategycan requiredramatic alternations in the marketing mix.Acarmakercannot successfully competeinthesuperpremium category if the car looks and driveslikeaneconomycar.Acompany'sfreedominpricinganew productand devising a price strategy depends on themarket conditions and other elements of themarketing mix.If a firm launches a new itemresemblingseveral others alreadyon the marketsits pricing freedom will be restricted.To succeedthe company will probably have tocharge a priceclose to the average market price.In contrast,afirm that introduces a totally new product with noclose substitutes will have considerable pricingfreedom
◼ Thus, changing a price strategy can require dramatic alternations in the marketing mix. A carmaker cannot successfully compete in the superpremium category if the car looks and drives like an economy car. ◼ A company's freedom in pricing a new product and devising a price strategy depends on the market conditions and other elements of the marketing mix. If a firm launches a new item resembling several others already on the markets, its pricing freedom will be restricted. To succeed, the company will probably have to charge a price close to the average market price. In contrast, a firm that introduces a totally new product with no close substitutes will have considerable pricing freedom
Thethree basic strategies for settinga price onagood or serviceare price skimming,penetrationpricing,and status quo pricing.Adiscussion of each typefollows.Price Skimming Price skimming is sometimescalled a"market-plus"approach to pricing,because it denotes a high price relative to thepricesof competing products,Radius Corporationproduces unique oval-headed toothbrushes madeof black neoprene that look like a scuba-divingaccessory.Radius uses a skimming policy,pricingthe toothbrushesat$9.95,compared toaround$2.00 for a regular toothbrush
◼ The three basic strategies for setting a price on a good or service are price skimming, penetration pricing, and status quo pricing. A discussion of each type follows. ◼ Price Skimming Price skimming is sometimes called a “market-plus” approach to pricing, because it denotes a high price relative to the prices of competing products, Radius Corporation produces unique oval-headed toothbrushes made of black neoprene that look like a scuba-diving accessory. Radius uses a skimming policy, pricing the toothbrushes at $9.95, compared to around $2.00 for a regular toothbrush