Pricing strategy is one of four major items in a well thought out marketing plan. Pricing is a strategic issue because it relates very closely to how you will position your product. Pricing affects other marketing items such as features, promotions, and channel decisions.
There is no simple rule to determine pricing, the following is a basic sequence of steps that could be used for developing the price of a new product or service.
- Develop marketing strategy
- Estimate the demand curve
- Understand environmental factors
- Make marketing decisions
- Calculate cost
- Set pricing objectives
- Determine price
Before a product or service is developed, the marketing strategy should be formulated, including target market section and product positioning. Usually there is a tradeoff between product quality and price, so price is important variable in positioning. There is an inherent tradeoff between marketing elements, pricing will depend on other products/services, distribution, and promotion decisions.
Estimating the demand curve becomes important because there is a relationship between price and quantity demand. It is important to understand the impact of pricing on sales by estimating the demand.
If you decide to launch the new product or service, there should be at least a basic understanding of the cost. The unit cost of the product or service will set the lower limits that your company may charge, and determines the profit margin at a higher price.
Total unit cost contains all the variable cost of the product or service and all the fixed costs. The pricing policy should determine both types of costs.
The company must consider the implications of its pricing on the pricing decisions of their competitors. Setting the price too low may risk a price war that may not be in the best interests of your company. Setting the price too high will attract many competitors.
The company’s pricing objectives must be identified to determine the optimal price. Common objectives may include: current profit maximization, quality leadership, maximize quantity, current revenue maximization, partial cost recovery, or even survival.
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