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Price is one the elements of the marketing mix that generates revenue, while the other elements generate costs. It is one of the easiest elements to adjust. It takes a lot of time and money to adjust the other elements like product features, channels and even promotion.
Traditionally, the price of a product was a major determinant of buyer choice. Although non-price factors have become important, still price remains as the most important determining factor of market share and profitability.
Companies do their pricing in a variety of ways. In small companies the prices are often set by the Boss or the Owner of the company. In larger companies the price is handled by division and product-line managers. Even here the top management sets the general pricing guidelines and policies which the managers should keep in mind while pricing their product.
Setting the price: The company must set is price in accordance with the value delivered and perceived by the customer. If the price is higher than the value then the company will miss potential profits and if the value is higher than the price, then the company will fail to harvest potential profits.
Selecting the price objective: The company should first decide where it wants its position in the industry. The clearer a firm’s objectives the easier it is to set the price.
Determining the demand: Each price will lead to a different level of demand and therefore have a different impact on a company’s marketing objectives. The relation between alternative prices and the resulting current demand is captured. In normal conditions, demand and price are inversely proportional, the higher the price the lower the lower the demand and the higher the demand the lower the price. Companies want to work with customers who are less price-sensitive. But, the internet on the other hand has increased the price sensitivity of people. If shopping online if one visits two or more websites, then looking for the same product, he will buy from that website which sells the product for the lowest price.
Estimating costs: Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company’s costs take two forms fixed and variable. Fixed costs do not vary with production or sales revenue. But, variable costs vary with the production. The more the company produces the more the variable costs.
Analyzing the price of the competitors: A company must always keep in mind the price of its competitors. Before changing its price a company must consider the possible outcomes of the price change. It should consider whether the price change will initiate a price-war.
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