Published by MBA Skool Team, Last Updated: March 24, 2015
What is Price Setting?
Price is the amount of money charged for a product/service or Total sum value of exchange the consumer offers for using a product/service. Price is one of the main factors which affect the consumer’s buying decision. Particularly in price sensitive segments proper price setting plays a major role in the success of the product or the service offered. High price will make the buyer to look for other options. On the other side low price might give an impression that the product might be of low quality. So marketers must be very careful in setting the correct price.
The process of price setting is described below
The first step in price setting is to identify the firm’s pricing objective. The objective of the firms could be to increase the profit or to maximize the market share. In the first case the pricing could be premium where as in the latter case the focus is on increasing volume by offering low prices. Five major objectives of the companies are
2. Maximum current profit
3. Maximum Market share
4. Maximum market skimming
5. Product-quality Leadership
Example: Sony uses market skimming prices
Once the firm’s objective is determined the demand for the product need to be analysed as different pricing the demand will vary. Estimating the demand will help in understanding the price sensitivity of the market and the demand curve. Demand analyses help us to arrive at the price ceiling. Cost estimation will give the price floor. To set proper prices the management should know how different production level affects the total costs. Knowing the cost and price of the competitors will help in positioning the product better in terms of price.
Generally different pricing methods are used for products based on the type of product and industry. They are
Hence, this concludes the definition of Price Setting along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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