Determination process:
Estimating the demand for the product: the first step in determining the price of a new product is to estimate the anticipated demand of the product. However the anticipation of the demand for a new product is an uphill task but still it can be estimated taking into account the two factors:
1. Estimated price, and
2. Estimated demand of the product at the different price level. Estimated price can be anticipated on the basis of the relative importance of the product to the consumers in their budget estimates. The estimate of the demand at different price levels can be fixed on the basis elasticity of the demand of the product. If the demand is elastic, the prices may be fixed lower on in the case of inelastic demand, prices may be higher.
Anticipating competition: having estimated the demand of the product, competitive situation in the present and in future should also be studied. Estimating the future competitive situation is more important in fields where production of the product can be started with low initial capital and efforts and the profit margin is quite attractive. In such cases, future competition may be very server. The study of the competition should be made with the two angles:
1. Competition from the producers of similar product, and
2. Competition from the substitutes of the product. Reactions and activities of both types of competitions should be made extensively.
Determining expected share of market: the next step will be to determine the market share which a company will try to capture. It depends on various factors such as present production capacity, cost of extension programmes, cost of the production and completion, etc. the market share should not be fixed beyond the production capacity of the plant.
Selecting a suitable price strategy: keeping in view the business objectives in mind, a suitable price strategy should be selected. There are various price strategies to be adopted such as.
1. Skimming the cream pricing strategy,
2. Low penetration pricing strategy,
3. Discouraging potential strategy
4. Follow the competition, etc. each strategy possesses its own merits and demerits. The firm is to select any one of the strategy.