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9.5. Setting Prices

Price setting follows eight stages.

  • Development of pricing objectives - The pricing objectives derive from the organisation's overall objectives; does the firm seek to maximise market share, or maximise profits?
  • Assessment target market's ability to purchase and evaluation of price - of the Buyers tend to be more sensitive to food prices in supermarkets than to drinks prices in clubs. Also, a buyer's income and availability of credit directly affect the ability to buy the product at all.
  • Determination of demand - For most products demand falls as price rises. This is not necessarily a straight-line relationship, nor is the line necessarily at forty-five degrees; for some products even a small price rise results in a sharp fall in demand (e.g. petrol) whereas for other products (e.g. salt) even a large price rise hardly affects demand at all.
  • Analysis of demand cost and profit relationships - The firm needs to analyse the costs of producing the item against the price that the market will bear, taking into account the profit needed. The cost calculation will include both the fixed costs and the unit costs for making a given quantity of the product; this quantity will be determined by the market, and will relate to the selling price.
  • Evaluation of competitors’ prices - This will involve a survey of the prices currently being charged, but will also have to consider the possible entry of new competitors. Prices may be pitched higher than the competitors in order to give an impression of exclusivity or higher quality; this is common in the perfume market, and in services such as restaurants and hairdressing.
  • Selection of a pricing policy - The pricing policy needs to be chosen from the list given in the early part of the chapter.
  • Development of a pricing method - Here the producer develops a simple mechanism for determining prices in the future. The simplest method is to use cost-plus or mark-up pricing; these do not take account of customers, however, so something a little more sophisticated should be used if possible.
  • Determining a specific price - If the previous steps have been carried out in a thorough manner, determining the actual price should be a simple matter.

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Price setting can be complex if it is difficult to identify the closest competitors, but it should be borne in mind that no product is entirely without competition; there is almost always another way in which customers can meet the need supplied by the product. Also, different customers have different needs and therefore will have differing views on what constitutes value for money – this is why markets need to be segmented carefully to ensure that the right price is being charged in each segment. As in any question of marketing, it is wise to begin with the customer.

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