MarketingManagement.pdf

216 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS

SETTING THE PRICE

A firm must set a price for the first time when it develops a new product, introduces its

regular product into a new distribution channel or geographical area, and enters bids

on new contract work. Price is also a key element used to support a product’s quality

positioning, as described in Chapter 9. Because a firm, in developing its strategy, must

decide where to position its product on price and quality, there can be competition

between price-quality segments (see Figure 4-8).

In setting a product’s price, marketers follow a six-step procedure: (1) selecting

the pricing objective; (2) determining demand; (3) estimating costs; (4) analyzing

competitors’ costs, prices, and offers; (5) selecting a pricing method; and (6) selecting

the final price (see Figure 4-9).

Step 1: Selecting the Pricing Objective

A company can pursue any of five major objectives through pricing:

➤ Survival.This is a short-term objective that is appropriate only for companies that

are plagued with overcapacity, intense competition, or changing consumer wants. As

long as prices cover variable costs and some fixed costs, the company will be able to

remain in business.

➤ Maximum current profit.To maximize current profits, companies estimate the

demand and costs associated with alternative prices and then choose the price that

produces maximum current profit, cash flow, or return on investment. However, by

emphasizing current profits, the company may sacrifice long-run performance by

Figure 4-9 Setting Pricing Policy

Figure 4-8 Nine Price-Quality Strategies