What is Price?

The amount of money needed to buy products. Restated, it is the total sum of everything that is given in exchange for a good or service.

The considerations for setting a price are discussed below.

Considerations in setting Price

• What is the consumer acceptance price range for this type of product/service?
• How does the proposed product’s/service’s price compare?
• Is there sufficient margin between the manufacturer’s cost and the consumer acceptance price level to provide for markups at the wholesale, distributor and retail level?
• Does the price allow for freight, projected profit, price fluctuations in the market place and consumer interpretation of value?
• Are coupons or discounts being considered to promote consumers to try other flavors, etc.? Product introduction.
• What is the product cost breakdown?
  • Costs of goods sold:
    • direct labor
    • direct materials
  • Operating expenses
  • Selling expenses
  • Communications expense
  • General and administration expenses (including freight)
• What markups are allowed at each level of distribution (markup chain and channel pricing)?
• Are the most economical/cost efficient methods of processing and packaging utilized (including raw materials inputs) to keep product/service costs down?
• Other Price Considerations:
  • List Price
  • Discounts
  • Bundling
  • Payment Terms and Financing Options
  • Leasing Options

What are Strategies Used in Setting a Price? 

At it’s most basic level, companies will set the price of a product that meets produces the greatest revenue, greatest profit, or meets the strategic needs of the company.

A deeper analysis if pricing might include considerations of what is fair to the customer. Remember, an objective of marketing is to create value for customers as well as the company.

Then, there is the consideration of the strategic effect of pricing upon the customer. That is, marketer may wan to choose a pricing strategy that focuses on setting a prices that has an intended effect on the customer.

We gave the example of above of using a product as a loss leader to attract customers to purchase other products. Another strategy may be to position the product as a luxury good. This means the product will generally have a higher price that creates some level of exclusivity among purchasers.

Further, a slightly-higher price may indicate product quality to the customer. Conversely, a lower price may indicate lower quality and performance.

Some examples of pricing strategy are discussed in the following articles:

• Competition-Driven Pricing
• Profit-Oriented Pricing Strategy
• Sales-Oriented Pricing Strategy
• Status Quo Pricing Strategy
• Value-Based Pricing Strategy
• Penetration Pricing Strategy

General Advice on Setting Price

• Review product/service costs for accuracy, including all variable and fixed expenses.
• Be sure all products/services carry their share of overhead expenses plus provide for profit.
• Compare prices for your products/services with similar products/services in the industry.
  • If your prices are higher, do they provide the necessary added value to justify the higher price?
  • If your prices are lower, do you know why they are, and is the lower price part of your marketing strategy?
• How price sensitive is your market — in other words, how much change occurs in buying behavior when prices rise or fall?
• Do your prices position you as “top of the line” or “bargain basement?” Are you happy with your position?
• Does your current marketing strategy support this price position?