Strategy - How Companies set prices for products?

To every individual success have different names, for some it’s strengthening top line while for others it’s all about bottom line of balance sheet but the central idea remains “Progressive Realization of Worthy Goals”.

Every corporation on this planet works with a common objective and that is to maximize profit and succeed in this highly competitive market. Pricing of the product is one of the most important and highly complex steps in whole of the value chain.
Elaborate study by the organization while setting the price determines future of the product and organizations in many cases.

In this article (and successive articles) I will be sharing my experience about handling some of the pricing projects for some of the successful automobile products.

So to start with it’s important to know -

What is the definition of price?
In simple terms it can be said “The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service” is called price of a product.

What is the role of corporation in whole of the process?
Major role of any corporation is to determine the optimal price for their product and quantifying the willingness of their customers to pay?

To start with, it needs to understand some important factors
1) Organizational considerations
- Corporate Objectives
- Key decision maker and their prejudice and hypothesis.

2) Marketing objectives of the organization
- Survival
- Profit maximization
- Market Share leadership

3) Costs incurred / to be incurred
(It must be kept in mind that some of the costs and their impacts change with level of production)
- Manufacturing costs (Factory cost)
- Selling costs (Marketing Expenses)
- Salary and Wages

4) Tax structures

In this exercise we will be using mix of different methods of pricing, which are
1) Competition based pricing: Industry norms, scenarios and game plan is considered while strategizing.
2) Cost based pricing: Costs are calculated and markup is worked upon.
3) Value based pricing: Set a price on buyer’s perception, buyer always look for right combination of quality and good service at fair price.
4) Penetration pricing: company sets his introductory price so low that they try to achieve a bigger market share in smallest time span.

Major consideration to be kept in mind (ALWAYS)

We also need to collect data at this preparatory stage.

1) Factory costs
2) Existing market size
3) Market potential (trend line / expert opinions)
4) Price Sensitivity and discrete choice analysis through Market Research
5) Segregation of Markets where we are strong and others where we are weak.
6) Competitor Prices and offers (in different geographies and markets)
7) Tax and duty structures in different markets.

With this we are ready work upon, I will be working upon differential pricing and follow steps as below -

1) Cost calculation
2) Price Sensitivity and discrete choice analysis through Market Research
3) Competition and Markets
4) Final Strategy.

Towards the end of this Article on Price Mechanism (Part 1), I must re-iterate, different marketer have different opinions and ways to work and calculate final price, over here I am discussing what I have used in my projects and learnt over-time.