Following are the steps in setting price for a product: 1. Selecting the pricing objectives; 2. Determining the consumers' demand; . estimating costs; !. "nal#sing the competitors' costs$ prices and offers; %. Selecting a pricing method; and &. Selecting the final price. 1. Selecting the pricing objectives: 'efore selecting a suitable price for a product$ the mar(eter is needed to review the compan#'s objectives. )he more clearer the compan#'s objectives$ the more easier to set a price. Following are the possible pricing objectives: a* survival$ b* ma+imum current profit$ c* ma+imum mar(et share$ d* ma+imum mar(et s(imming$ and e* product ,ualit# leadership. )he decision whether to select high price or low price depends on various factors: -i* .rice susceptibilit# of mar(et$ -ii* /umber of competitors in the mar(et$ and -iii* .roduction cost per unit. )he price level also depends on the t#pe of mar(eting strateg# adopted for the product. )he possible mar(eting strategies are listed below: (a) Rapid Skimming: 0t refers to launching a new product at a high level of price with high level of sales promotion. 0t refers to the product which is of high ,ualit#$ but not (nown to the bu#ers. "s soon as the product is (nown to the bu#ers$ the bu#ers are willing to purchase them even at a higher price. 0t ma# also refer to the mar(et where there are strong potential competitors. (b) Slow Skimming: 0t refers to launching a new product at a high price with low level of promotion. 0t also refers to the situation where the compan#'s brand is (nown to the bu#ers and the# are willing to purchase them even at a higher price. 0t ma# also refer to the mar(et where there are few competitors. (c) Rapid Penetration: 0t refers to launching a new product at a low price with high level of promotion. )his mar(eting strateg# is adopted where the compan#'s brand is un(nown in the mar(et and where there are strong potential competitors. (d) Slow Penetration: 1nder the slow penetration mar(et strateg#$ the compan# launches a new product at a low level price with low level of promotion. )he brand of the compan# is (nown and there are few competitors in the mar(et. 2. Determining the consumer's demand: )he ne+t step is determining the consumer's demand. "t this stage$ mar(eter anal#ses the different level of demand at different prices. )herefore$ it leads to the stud# of law of demand$ elasticit# of demand$ demand curve$ etc. 0n normal case$ the demand and price are inversel# related$ i.e$ the higher the price$ the lower the demand$ and vice versa. 'ut some goods have 'elastic' or 'inelastic' demand. For e+ample$ demand for automobiles$ perfumes$ etc. are elastic; whereas the demand for rice$ flour$ eggs$ etc. are inelastic. 3. Estimating costs: Demand sets a ceiling on the price and the costs set the floor. )he compan# wants to charge a suitable price covering the cost of production$ selling and distribution$ and administration. 2osts ta(en into two forms$ i.e$ variable costs and fi+ed costs. 3ariable costs var# directl# with the variation in production$ but remain fi+ed per unit of production. 4owever$ the fi+ed cost does not var# with the change in production units$ but it does not remain fi+ed per unit$ as the production units varies. 0n other words$ the fi+ed cost remain fi+ed in total and decreases in 5s. per unit with the increase in the production units or increases in 5s. per unit with the decrease in the production units. 4. Analysing the competitors' costs prices and o!!ers: For a mar(eter$ the ne+t step in setting a price for a product is to anal#se the costs and prices of the product and after6sales services and different other services offered b# the competitors of the compan#. " deep anal#sis ma# enable a mar(eter to discover the strengths and wea(nesses of the competitor and the tastes or the purchasing trends of bu#ers. 5. Selecting a pricing method: )he compan# has to select an appropriate method for pricing its products. Following are the suggested pricing methods: (a) "ark#up Pricing: 1nder mar(6up pricing$ the price is e,ual to cost plus percentage mar(6up on cost. For e+ample$ the cost of constructing one residential flat for a constructor 7 developer is 5s. %88$888 and the constructor 7 developer charges 2%9 above cost$ the selling price of 1 residential flat will be e,ual to 5s. &2%$888$ i.e$ :%88$888 ; -%88$888 < 2%9*=. )his (ind of pricing method is common among the contractors$ law#ers$ chartered accountants$ different practitioners and manufacturing companies for pricing job orders$ custom products$ etc. (b) $arget Return Pricing: 1nder target return pricing$ the price of a product is e,ual to cost plus re,uired rate of return on investment. For e+ample$ the shareholders 7 owners of a product6selling compan# is e+pecting a return of 289 on net assets that amounts to$ let sa#$ 5s. 288$888$ the mar(eter would select a price which would scratch a net profit of 5s. 288$888. )his sort of pricing method is adopted in public investment companies$ large6scale manufacturing companies$ etc. (c) Perceived %alue Pricing: )he mar(et price of a product is calculated on the basis of customers' perceptions about a product. 0t is e+tensivel# used in non6durable consumer goods manufacturing companies. /on6durable or soft goods ma# be defined either as goods that are used up when used once$ or that have a lifespan of less than #ears. >+amples of non6durable goods include cosmetics$ food$ cleaning products$ fuel$ office supplies$ pac(aging and containers$ paper and paper products$ personal products$ rubber$ plastics$ te+tiles$ clothing and footwear$ etc. (d) %alue Pricing: 0t refers to pricing high ,ualit# products at fairl# level. )his sort of pricing method is e+tensivel# used in personal computer manufacturing industr#$ electronic goods manufacturing industr#$ etc. (e) &oing Rate Pricing: 1nder this pricing method$ the price of a product is based on prices of e+isting products in the mar(et. )he going rate pricing method is used in pricing paper$ cement$ fertili?ers$ steel$ petrol and chemical industries. (f) Sealed 'id Pricing: 0t also refers to 'competitive6oriented pricing'. 0t is common where firms submit scaled bids for jobs 7 contracts. For e+ample$ pricing for scraps$ wastages of factor#$ etc. 6. Selecting a !inal price: )he final and the last step in setting prices is$ of course$ selecting a final price from a number of alternative prices$ which would match the compan#'s short term and long term objectives. Price Adaptation Strategies: Following are the price adaptation strategies: 1. &eographical Pricing: @eographical pricing refers to the product pricing for the customers in different locations$ cities and countries. 0t also accounts for various tariffs$ ta+es and shipping costs. 0n foreign trade$ another term is e+tensivel# used$ i.e$ counter6trade. 0t has ta(en 1%62%9 of the total world trade and ma# have the following forms: (a) 'arter: >+change of goods with no mone# and third part#. (b) (ompensation deal: )he seller receives partial cash pa#ment and the rest in products b# the bu#er. (c) 'uyback arrangement: )he seller receives cash$ as partial pa#ment for the plant or machiner# or an# other technolog# being sold. "nd the rest of pa#ment is made in the products manufactured on that machiner#. (d) )!!set: )he seller receives the full amount$ but he will have to spent a part of it in the countr# or the location of bu#er. 1. Price Discounts and Allowances: )o promote the sales$ the seller has to allow price discounts and allowances. Following are the forms of price discounts and allowances: (a) (ash Discounts: 2ash discounts are allowed b# suppliers on earl# pa#ments within the stipulated time$ e.g$ 2718$ net 8$ 7A >BC$ 271%$ net !8 5B@$ etc. which are e+tensivel# used in trading and merchandising. 2718$ net 8 means the bu#er must pa# within 8 da#s of the invoice date$ but will receive a 29 discount if the# pa# within 18 da#s of the invoice date.. 7A >BC 6 this means the bu#er will receive a cash discount of 9 if the bill is paid within A da#s after the end of the month indicated on the invoice date. 0t should be noted that if an invoice is received on or before the 2%th da# of the month$ pa#ment is due on the Ath da# of the ne+t calendar month. 0f a proper invoice is received after the 2%th da# of the month$ pa#ment is due on the Ath da# of the second calendar month. 271% net !8 5B@ 6 this means the bu#er must pa# within !8 da#s of receipt of goods$ but will receive a 29 discount if paid in 1% da#s of the receipt of goods b# the purchaser. -5B@ is short for D5eceipt of goods.D*. (b) *uantity Discounts: Euantit# discounts are the price reductions generall# allowed on bul( purchases$ for e+ample$ 19 on less than 1888 units$ 29 on 1888 units or more than 1888 units. )he rationale behind them is to obtain economies of scale and pass some -or all* of these savings on to the customer. 0n some industries$ bu#er groups and co6ops have formed to ta(e advantage of these discounts. Euantit# discounts are$ generall#$ of two t#pes$ i.e$ cumulative ,uantit# discounts and non6cumulative ,uantit# discounts. (i) (umulative +uantity discounts: also (nown as accumulation discounts. )hese are price reductions based on the ,uantit# purchased over a set period of time. )he e+pectation is that the# will impose an implied switching cost and thereb# bond the purchaser to the seller. (ii) ,on#cumulative +uantity discounts: are price reductions based on the ,uantit# of a single order. )he e+pectation is that the# will encourage larger orders$ thus reducing billing$ order filling$ shipping$ and sales personal e+penses. (a) -unctional Discounts: Functional discounts are allowed to channel members if the# perform various functions li(e distribution$ storing$ shelf6stoc(ing and record (eeping. "lso (nown as 'trade discounts'. )rade discounts are often combined to include a series of functions$ for e+ample 287127% could indicate a 289 discount for warehousing the product$ an additional 129 discount for shipping the product$ and an additional %9 discount for (eeping the shelves stoc(ed. )rade discounts are most fre,uent in industries where retailers hold the majorit# of the power in the distribution channel. (b) Seasonal Discounts: Seasonal Discounts are allowed on off6seasoned bu#ings. For e+ample$ warm6wear in Fune6Ful#$ cold drin(s in December6Fanuar#$ etc. (c) Allowances: "llowances are e+tra6pa#ments designed to gain reseller participation in special programmes$ e.g$ trade allowances$ promotional allowances$ bro(erage allowances$ etc. 1. Promotional Pricing: )he promotional pricing strategies are: (a) .oss#.eader Pricing: Super mar(ets and departmental stores often drop prices on branded products to promote their stores' sales. 'ut it dilutes the compan#'s brand image and ma# lead to complaints from other retailers who charge the normal list price. (b) Special Event Pricing: Special event pricing are for special events$ e.g$ >id sale$ 2hristmas sale$ bac(6to6school sale$ >id Cela$ etc. (c) (ash Rebates: 2ash rebates allowed b# auto manufacturers and some consumer goods manufacturers within a specified time period. (d) .ow /nterest -inancing: Gow interest financing is provided on certain consumer goods li(e automobile$ motorc#cle$ television$ refrigerators$ air conditioners$ etc. (e) .onger Payment $erms: Sellers$ especiall# mortgage ban(s and auto companies$ stretch loans to their customers over longer periods and thus lower the monthl# pa#ments. (f) 0arranties and Service (ontracts: Harranties and service contracts are provided on$ especiall#$ the consumer goods li(e television$ refrigerators$ air conditioners$ personal computers$ etc. (g) Psychological Discounting: .s#chological discounting involves in setting an artificiall# high price and then offering the same product at substantial savings. 1. Discriminatory Pricing: .rice discrimination e+ists when sales of identical goods or services are transacted at different prices from the same supplier. Different prices are charged on the basis of different consumer groups$ locations$ product forms$ etc. Discriminator# pricing ma# ta(e the following forms: (a) (onsumer#Segment Pricing: Discriminator# pricing based on consumer segments$ e.g$ museum often charge low admission fee for students and senior citi?ens. (b) Product#-orm Pricing: Different versions of the same product are priced differentl# but not proportionatel# to the increase in costs. For e+ample$ Cicrosoft sold different versions of its operating software Hindows I. at different price level. 'Hindows 3ista 4ome 'asic 3ersion' is sold at J288 and with some variations the same operating software 'Hindows 3ista 1ltimate 3ersion' is sold at J28. (c) /mage Pricing: 0mage pricing refers to pricing the same product on the basis of different images$ e.g$ a perfume manufacturer ma# put a perfume in a bottle$ name it and give it an image and ma# price it at J18 per ounce; he ma# put the same perfume in a different bottle$ give it another name and image and ma# price it at J1K per ounce. (d) .ocation Pricing: Discriminator# pricing based on different locations$ even though the cost of offerings at each location is identical$ e.g$ theatre charges different prices for different audience preferences for different locations. (e) $ime Pricing: .rices are varied b# seasons$ da# or hours. )ime pricing is usuall# applicable in public utilities li(e electricit#$ telephone bills$ hotels and airlines$ and also for internet hours. Predatory Pricing: )here is another t#pe of pricing of discriminator# pricing (nown as 'predator# pricing'. 0t refers to setting a price of a product below its cost$ just to beat the competitors in the mar(et. )his has been prohibited b# law. )here was a strong legal allegation against the Cicrosoft that it has been perceived from its pricing tactics that it is involved in predator# pricing. )hus$ the 1S @overnment's anti6trust lawsuits against Cicrosoft$ bring it to a big trouble. 0t even led the court to thin( to bifurcate the compan# into two companies. "ctuall#$ in 1LL&$ the compan# started giving awa# its product '0nternet >+plorer' below its cost and in some cases absolutel# free. )his Cicrosoft's pricing tactics wrest the mar(et dominance from /etscape 2ommunication 2orporation. /etscape constantl# revised its pricing structure but failed to appeal the customers. )his cause rivals to label Cicrosoft as a predator$ which was further tendentious for raising prices as it gains the lion's share of the mar(et. 1. Product "i1 Pricing: 0n pricing a product$ the mar(eter must also accounts for profitabilit# of product mi+. .roduct mi+ pricing is a difficult tas( because each product has different demand$ cost and competition. .roduct mi+ pricing ma# ta(e several forms: (a) Product#.ine Pricing: 2ompanies normall# develop product lines rather than single products and develop different price levels$ for e.g$ three price levels J288$ J%8 and J%88 for men's suits$ the customers will associate low$ average and high ,ualit# with the three price levels. (b) )ptional -eatures Pricing: 0t refers to the pricing of additional features with the main products$ e.g$ pricing of air conditioners$ personal computers$ automobiles$ etc. (c) (aptive#Product Pricing: Fr e+ample$ manufacturers of ra?ors and cameras often price them low and set high mar(6ups on ra?or blades and camera film rolls. (d) $wo#Part Pricing: 0t consists of a fi+ed charge and a variable charge based on consumption$ e.g$ pricing in telephone billings$ electricit#$ etc. (e) 'y#Product Pricing: 0t refers to pricing of b#6products for the consumers see(ing to purchase the b#6products. (f) Product#'undling Pricing: Sellers often bundle their products and features at a set price.