Choosing the correct Pricing Strategy is crucial for success of the product in the market. The base driver for purchasing some product is the need. We all have different needs. In order to satisfy the needs we buy different products. Every of these needs have its price. The product price is value of the product expressed in certain amount of money.

Everybody is looking for the product that is the best for him. This product needs to satisfy their needs. It needs to bring the biggest value for the shopper. This value is perceived differently from one shopper to the other, but basically, everybody is choosing the best value, represented as ratio between benefit and price.

Value = Benefits / Price

From this formula it is obvious that more benefit that some product or service brings, the greater price can be applied. For example, what do you thing what would be the price of the Elixir of Youth? What benefit this product might bring? Imagine what the price could be?

The method of price determination depends from internal and external factors. Pricing goals represents internal policy. Price policy should be aligned on several other factors.

Demand for the product is the key determinant for market oriented company. Demand is the starting point for all activities. The market will be demanding different product quantities, depending on the price. Law of the market says that demand and price are counter proportional ( price increase leads to demand decrease and vice versa ).

Competition is the next factor that has a significant influence to price determination. Prices need to be adjusted in order to address the competition. Every company should research market and competition, before setting the price. Survey should include direct competitors but also the substitutes. Based on market survey and the strength of the company the prices can be the same, lower or higher than competition.

Costs – While demand and competition are external factor, the costs are belonging to the internal factors. The costs must be part in every stage of price determination process. There are several methods of cost embedding into price:

1. Costs Plus – company calculates the costs and increases the price for the specific profit margin.

2. Markup – price based on cost increased for amount of specific markup percentage.

3. Target Return Method – calculated required markup, in order to achieve targeted return on investment.

4. Profit Maximizing is the method of price setting where the marginal profit equals marginal cost.

5. Breakeven Analysis – is the number of units sold that generates profit that can cover cost. This point does not have profit nor lost.

Life Cycle pricing approach analysis the current phases of product life in market and adjust the price accordingly.

1. Entering phase usually requires higher sales prices in order to payback initial development costs. Customers are usually willing to pay more for a new product, in order to test it.

2. Growth phase is bringing the market stabilization. Prices are getting more or less stabile.

3. Saturation phase leads to price fall, due to competition entrance and loss of consumer\’s interest for the product.

4. Declining phase is the last part of product life cycle. Prices are still going down.

Sales channels have the different shopping occasion, therefore shoppers have the different price sensitivity level, depending on the sales channel. The pricing is adjusted to sales channel. For example, the same product is cheaper in hypermarket than on petrol station, since shoppers are more sensitive to the price when shopping in hypermarket.

Government is usually not interfering into price determination. Exceptionally, they may limit maximal prices for a certain products. Still, government is influencing pricing, since the taxes & custom duties are the part of the price.

Price Determination and Price Strategy are the main tool of forming the price, as a part of Marketing Mix. Read more on Biz-Development.com

Check http://www.biz-development.com/Finance/7.21.Price-Determination.htm and http://www.biz-development.com/Finance/7.6.BasicPricingStrategies.htm for more information about price determination factors.

Author Bio: Price Determination and Price Strategy are the main tool of forming the price, as a part of Marketing Mix. Read more on Biz-Development.com

Category: Finances
Keywords: price determination, price determination factors, price sensitivity