Price Determination Process

The market price is the price determined by the free play of demand and supply. The market price of a product affects the price paid to the factors of production – rent for land, wages for labor, interest for capital and profit for enterprise. In fact, price becomes a basic regulator of the entire economic system because it influences the allocation of these resources.

The pricing decisions must take into account all factors affecting both demand price and supply price. The price determination process involves the following steps:

  1. Market Segmentation : On the basis of market opportunity analysis and assessment of firms strengths and weaknesses marketers will find out specific marketing targets in the form of appropriate market segments. Marketers will have firm decision on : (a) the type of products to be produced or sold, (b) the kind of service to be rendered, (c) the costs of operations to be estimated, and (d) the types of customers or market segments sought.
  2. Estimate of Demand : Marketers will estimate total demand for the products. It will be based on sales forecast, channel opinions and degree of competition in the market.
  3. The Market Share : Marketers will choose a brand image and the desired market share on the basis of competitive reaction. Market planners must know exactly what his rivals are charging. Level of competitive pricing enables the firm to price above, below, or at par and such a decision is easier in many cases. Higher initial price may be preferred if you expect a smaller market share, whereas if you expect of much larger market share, you prefer lower price.
  4. The Marketing Mix : The overall marketing strategy is based on an integrated approach to all the elements of marketing mix. It covers : (1) product-market strategy, (2) promotion strategy, (3) pricing strategy, and (4) distribution strategy. All elements of the marketing mix are essential to the overall success of the firm. Price is the strategic element of marketing mix as it influences the quality perception and enables product positioning.
  5. Estimate of Costs : Straight cost-plus pricing is not desirable always as it is not sensitive to demand. Marketing must take into account all relevant costs as well as price elasticity of demand, if necessary, through market tests.
  6. Pricing Policies : Price policies provide the general framework within which managerial decisions are made on pricing. Pricing policies are guidelines to carry out pricing strategy. Pricing policy may desire to meet competition or we may have pricing above or below the competition. We may have fixed or flexible pricing policies. Pricing policies must change and adapt themselves with the changing objectives and changing environment.
  7. Pricing Strategies: Pricing policies are general guidelines for recurrent and routine issues in marketing. Strategy is a plan of action (a movement or counter movement) to adjust with changing conditions of the market place. New and unanticipated developments may occur, e.g., price cut by rivals, government regulations economic recession, fluctuations in purchasing power of consumers, changes in consumer demand, and so on. Situations like these demand special attention and relevant adjustments in our pricing policies and procedures.
  8. The Price Structure: Developing the price structure on the basis of pricing policies strategies is the final step in price determination process.

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