Setting the price of a product or service involves, generally 6 steps. We will examine each of these 6 steps.
Step 1: Selecting the Pricing Objective
Survival In order to survive, a firm sets the prices as long as they cover the cost.
Maximum Current Profit Demand of a product or service is affected by its price. Many firms choose the price that produces maximum current profit.
Maximum Market Share Higher sales volume will lead to lower unit costs and may discourage competition.
Maximum Market Skimming Firms unveiling a new technology favor setting high prices to maximize market skimming. The prices start high and slowly lowered over time.
Quality Leadership Many brands strive to be “affordable luxuries” – products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.
Step 2: Determining Demand
Each price will lead to different level of demand and therefore have a different impact on a firm’s marketing objectives. The relation between alternative prices and the resulting demand is captured in a demand curve. In general, the higher the price, the lower the demand. In the case of prestige goods, however, higher price may leads to higher demand!
If demand changes considerably with a small change in price, we say the demand is inelastic. If demand changes considerably, it is elastic. The diagrams below show the curves for inelastic and elastic demands.
Demand is likely to be less elastic under the following conditions:
- There are few or no substitutes or competitors.
- Buyers do not readily notice the higher price.
- Buyers are slow to change their buying habits.
- Buyers think the higher prices are justified.
One classical example of goods with inelastic demand is cigarette.
Reference: Kotler & Keller, “Marketing Management”, 12th edition