Determine the Price determination process

1) Estimating the demand for the product: the first step in determining the price of a new product is to estimation the anticipated demand of the product. However anticipation of demand for a new product is an unhill task but still it can be estimated taking into account the two factors:

Estimated price, and

Estimated demand of the product at different price level.

Estimated price can be anticipated on the basis of the relative importance of the product to the consumers in their budget estimated. The estimated at different price level can be fixed on the basis of elasticity of demand of the product. If demand is elastic, the price may be fixed lower or in case of inelastic demand, price may be higher.

2) Anticipating competition: having estimated the demand of the product, competitive situation in the there and in future should also be studied. Estimating the future competition 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 severe. The study of competition should be made with two angles:

3) Determining expected share of market: the next step will be to determine the market share which a company will try to capture. If depends on various factors such as present production capacity cost of extension programmers cost of production capacity competition, etc. the market share should not be fixed beyond the production capacity of the plant.

4) Selecting a suitable price strategy: keeping in view the business objectives in mind a suitable price method should be selected. There are various price strategies to be adopted such as,

Skimming the cream pricing strategy

            Low penetration pricing strategy,

            Discouraging potential competitors

            Follow the competition, etc. each strategy possesses its own merits and demerits. The firm is to select any one of the strategy.

5)  Company's marketing policies:  the marketing policies regarding the following aspect should be considered as a next step:

         1) Production policies:  in determine the prices the nature of the product, i e. whether it is a new or old product, perishable or durable consumer or industrial, etc should also be considered. Product mix is also one of the considerations.

         2) Channels of distribution:  channels of distribution also influence the price of the product because the distribution expenses and commission payable to various middlemen from part of the total cost. Price should also be fixed for wholesales and retailers separately in order to allow a fair return to them.

         3) Promotional policies:  who will perform the promotional function producer or wholesaler and retailer? If promotion function is allowed to be performed by wholesalers and retailers then naturally they would ask higher profit margin. If such functions are performers by produce him he can fix a lower price of his product. Therefore promotional policies affect the pricing of a product.

6) Selecting the price: having considered all the above factor a price is fixed for the product keeping in view the interests of all concerned parties, i.e. a fair return to the contribution of the capital a good profit margin to middlemen and a fair price to the consumers. There is a readymade formula for fixing the price. It requires a lot of experience to have a decision after analyzing the available information.