Fixing the right price for a product is the most difficult task as it affects the volume of sales of the product of the firm as well as the profits of the firm. Although non-price factors have become more important in recent decades, price remains one of the important elements in determining the market share and profitability. Prices are set by a firm by taking into consideration factors like costs, profit targets, competition and perceived value of products. Taking into account the various factors, the steps generally followed in setting the price of a product are:
Setting the Pricing Objective of the Firm
It is the most important step as it varies from firm to firm. Setting a lower price may attract more customers and thus fetch a larger market share for the firm's product. But charging a higher price might reflect a high quality and prestige product.
Determining the Demand for the Product
Demand for the product sets a ceiling price. Penetration pricing is used when the product has a highly elastic demand and there is strong competition in the market. Under this policy, prices are fixed below the competitive level in order to obtain a larger share of the market. Once your product is in demand or is accepted in the market, the price of your product is increased. But when the demand for the product with respect to price is more inelastic, higher prices are charged for the product. This policy is generally followed during the initial stages of introduction of the new product.
Estimating the Costs and Profits
Costs set a floor price. Amount spent and return expected is the key factor in deciding the price. The various costs involved in producing the product must be covered in pricing the product. On a long term basis also the price must take into consideration the costs of doing business. This also includes sales forecast and profit margin.
Determining the Competition for the Product
Competitors prices and the price of substitutes provide an orientation point. The number of competitors for the product in the market as well as the policy followed by them is also an important factor. Competitive pricing is used if the market is highly competitive and the product is not differentiated from that of the competitor's.
Considering the Governmental Regulations
Government policies and incentives are also taken into account. Prices are also affected by various tax liabilities which a company and the product is subjected to. It includes, excise duty, sales tax and local taxes like octroi.
Sales tax is levied on the sale of moveable goods in India at the rates which vary depending upon the type and nature of goods and the state in which sale has taken place. The Central and State Government are both empowered to impose sales tax. The Central Sales tax deals with transactions in the nature of inter-state sales. While the State sales tax deals with intra-state sales.
Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Goods in transit are exempted from it.
Selecting a Suitable Pricing Method/Policy
Right price for the product can be determined through pricing research and by adopting test-marketing techniques. The various pricing methods are:-
Perceived value pricing:- in which a firm sets its price in relation to the value delivered and perceived by the customer. Perceived value is made up of several elements like buyer's image of the product performance, warranty, trustworthiness, esteem, etc. Each customer gives different weightage to these elements. Some may be price buyers, others may be value buyers and still others may be loyal buyers. If either the price is higher than the value perceived or the price is lower than the value perceived, the company will not be able to make potential profits.
Value pricing:- in which companies develop brand loyalty for their product by charging a fairly low price for a high quality offering.
Going rate pricing:- is followed if it is difficult to ascertain the exact costs involved and the competitive response. Hence, firms base their price on competitor's price by charging the same, more or less than the major competitor.
Introducing a product at a premium price:- When a product is innovative and competition is low or non-existent, this policy can be applied. Thus profits are optimised. But when competition arises prices are lowered.
Ethical pricing:- Price is fixed keeping the welfare of the society in mind. For many life saving drugs, this particular policy is used. The product is sold at the lowest possible price with either a very reasonable margin or no profit at all. Profit may be earned from other products.
Full Line pricing:- If you are selling a range of particular product for example pickles, then you price the product in a particular range, this way you may earn more profit in one flavour and less on the other. But, you cannot sell only the one that gives you maximum profit, or else a customer may switch over to another brand where he would be able to exercise an option for other flavours.
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