The six stages in the process of setting prices are (1) developing pricing objectives, (2) assessing the target market's evaluation of price, (3) evaluating competitors' prices, (4) choosing a basis for pricing, (5) selecting a pricing strategy, and (6) determining a specific price. Setting pricing objectives is critical because pricing objectives form a foundation on which the decisions of subsequent stages are based. Organizations may use numerous pricing objectives, including short-term and long-term ones, and different objectives for different products and market segments. Pricing objectives are overall goals that describe the role of price in a firm's long-range plans. There are several major types of pricing objectives. The most fundamental pricing objective is the organization's survival. Price usually can be easily adjusted to increase sales volume or combat competition to help the organization stay alive. Profit objectives, which are usually stated in terms of sales dollar volume or percentage change, are normally set at a satisfactory level rather than at a level designed to maximize profits. A sales growth objective focuses on increasing the profit base by raising sales volume. Pricing for return on investment (ROI) has a specified profit as its objective. A pricing objective to maintain or increase market share links market position to success. Other types of pricing objectives include cash flow, status quo, and product quality. Assessing the target market's evaluation of price tells the marketer how much emphasis to place on price and may help determine how far above the competition the firm can set its prices. Understanding how important a product is to customers relative to other products, as well as customers' expectations of quality, helps marketers correctly assess the target market's evaluation of price.
A marketer needs to be aware of the prices charged for competing brands. This allows the firm to keep its prices in line with competitors' prices when nonprice competition is used. If a company uses price as a competitive tool, it can price its brand below competing brands.
The three major dimensions on which prices can be based are cost, demand, and competition. When using cost-based pricing, the firm determines price by adding a dollar amount or percentage to the cost of the product. Two common cost-based pricing methods are cost-plus and markup pricing. Demand-based pricing is based on the level of demand for the product. To use this method, a marketer must be able to estimate the amounts of a product buyers will demand at different prices. Demand-based pricing results in a high price when demand for a product is strong and a low price when demand is weak. In the case of competition-based pricing, costs and revenues are secondary to competitors' prices.
A pricing strategy is an approach or a course of action designed to achieve pricing and marketing objectives. Pricing strategies help marketers solve the practical problems of establishing prices. The most common pricing strategies are differential pricing, new-product pricing, product-line pricing, psychological pricing, professional pricing, and promotional pricing.
When marketers employ differential pricing, they charge different buyers different prices for the same quality and quantity of products. Negotiated pricing, secondary-market discounting, periodic discounting, and random discounting are forms of differential pricing. With negotiated pricing, the final price is established through bargaining between seller and customer. Secondary-market pricing involves setting one price for the primary target market and a different price for another market; often the price charged in the secondary market is lower. Marketers employ periodic discounting when they temporarily lower their prices on a patterned or systematic basis; the reason for the reduction may be a seasonal change, a model-year change, or a holiday. Random discounting occurs on an unsystematic basis.
Two strategies used in new-product pricing are price skimming and penetration pricing. With price skimming, the organization charges the highest price that buyers who most desire the product will pay. A penetration price is a low price designed to penetrate a market and gain a significant market share quickly.
Product-line pricing establishes and adjusts the prices of multiple products within a product line. This strategy includes captive pricing, in which the marketer prices the basic product in a product line low and prices of related items higher; premium pricing, in which prices on higher-quality or more versatile products are set higher than those on other models in the product line; bait pricing, in which the marketer tries to attract customers by pricing an item in the product line low with the intention of selling a higher-priced item in the line; and price lining, in which the organization sets a limited number of prices for selected groups or lines of merchandise. Organizations that employ price lining assume the demand for various groups of products is inelastic.
Psychological pricing attempts to influence customers' perceptions of price to make a product's price more attractive. With reference pricing, marketers price a product at a moderate level and position it next to a more expensive model or brand. Bundle pricing is packaging together two or more complementary products and selling them at a single price. With multiple-unit pricing, two or more identical products are packaged together and sold at a single price. To reduce or eliminate use of frequent short-term price reductions, some organizations employ everyday low pricing (EDLP), setting a low price for products on a consistent basis. When employing odd-even pricing, marketers try to influence buyers' perceptions of the price or the product by ending the price with certain numbers. Customary pricing is based on traditional prices. With prestige pricing, prices are set at an artificially high level to convey prestige or a quality image.
Professional pricing is used by people who have great skill or experience in a particular field, therefore allowing them to set the price. This concept carries the idea that professionals have an ethical responsibility not to overcharge customers. As an ingredient in the marketing mix, price is often coordinated with promotion. The two variables are sometimes so closely interrelated that the pricing policy is promotion oriented. Promotional pricing includes price leaders, special-event pricing, and comparison discounting.
Price leaders are products priced below the usual markup, near cost, or below cost. Special-event pricing involves advertised sales or price cutting linked to a holiday, season, or event. Marketers that use a comparison discounting strategy price a product at a specific level and compare it with a higher price.
Once a price is determined by using one or more pricing strategies, it needs to be refined to a final price consistent with the pricing practices in a particular market or industry.