In any business enterprise, the price of goods and services in the only component in the marketing mix that will directly generate revenue and that makes it a core factor in marketing (Kotler 2003. p 44). In determining the prices for its products the company must first analyze the competitors’ prices visa vie the company’s cost structure and also the competitor’s chances to introduce new prices. It is important that a company considers the effects of the changes in the business environment including price variations initiated by its competitors.
Understanding the various types of costs incurred in the business including fixed and variable costs is of paramount importance. This is best done by first analyzing the prices offered by the competitors visa vie the company’s cost structure and the competitor’s chances to change in response to the company’s new price offers (Kotler 2003. p 66). Factors to Consider in Determining Prices In setting the price of a new product the company must set a pricing policy.
This policy will entail six steps.
These steps are; to select the pricing objective, determining the demand for the product, estimating the cost of production, analyzing the competitors’ prices, costs and any offers made by them, selecting a method of pricing the product, and finally selecting the final price (Kotler 2003. p 64). In the first step there are three basic points to consider namely; survival, which is a short-term objective necessitated by a fall in the demand for the product or a change in consumer preferences.
The next point is considering maximizing the current profits, another short-term objective, and the final point is maximizing the company’s market share and this entails setting the price at the lowest possible with a view that increased sales in units will lower the production costs (Kotler 2003. p 64). In the second step the points to consider are the sensitivity of the price, the total cost of ownership, an estimate of the demand curves and the price elasticity of demand for the product.
The third step has considers the types of costs as well as the levels of production. The costs of production are the fixed costs, variable costs, total costs and average costs. In the selection of the pricing method, there are six pricing methods namely; markup pricing method, the target return pricing method, perceived value method of pricing, value based pricing, the going-rate method of pricing and the sealed-bid method of pricing ((Pressley 2003,p. 10-13).
In the final step which is the selection of the final price, the points to consider are; psychological pricing, the gain and risk sharing pricing, the influence of other marketing elements, the company’s pricing policy and the impact of price on other parties (Pressley 2003,p. 13-22). To calculate the price for one unit using the markup pricing method Unit cost= variable cost + (fixed cost/unit sales)
Unit cost = 150 + (6,500 / 50) = 150 + 130 = $280 The price for one unit using the markup pricing method will be $280 (Pressley 2003, p. 15). Break Even Price To calculate the minimum price to break even Break even price = [(unit price x units) + fixed cost] / units Break even price = [(150x 50) x 50) + 6500] / 50 Break even price = (7500 + 6500)/50= 280 The break even price = $ 280 (Kotler, 2003). Pricing Methods
The pricing method is mainly concerned with the type of information used to gauge or estimate price evolution (Kennesy et al, 2005, p. 2). There are six pricing methods that would lead to an informed decision in fixing prices. There are six pricing methods namely; markup pricing method, the target return pricing method, perceived value method of pricing, value based pricing, the going-rate method of pricing and the sealed-bid method of pricing (Kotler 2003. p 66). References
Kennesy, A. , Buisson, B. and McKenzie, R. (2005). 20th Meeting of the Voorburg Group. Producer Price Index for Services. Pricing Methods. Retrieved March 11, 2009, from http://www. stat. fi/voorburg2005/kenessey_1. pdf Kotler, P. (2003). Marketing Management. 11th Ed. New Jersey: Prentice Hall. Pressly, M. M. (2003). Developing Price Strategies and Programs. University of New Orleans. Prentice-Hall. Retrieved March 11, 2009, from http://rhowell. ba. ttu. edu/Lecture%20Slides/K16. ppt