In order to formulate an appropriate pricing procedure for the firm certain general steps are to be kept in view. As we know pricing of product is a very complex problem; infact it is twilight zone between business interest and public good. A firm has to reconcile both these objectives. There cannot be a model process for pricing the products of each firm; however, following general considerations can be described as the gradual steps in this process.
The brief description of the steps is as follows:
1. Firm’s Objectives:
Pricing is a means to achieve the objectives of the firm. Thus the objectives of the firms are the objectives of pricing. Now the question is what the possible objectives of a firm are. Ordinarily, the broadest object of a firm is ‘Survival’ but to be specific a firm’s objectives are related to rate of growth, market shares, maintenance of control or ownership and independence of operations and earning revenue.
These objectives are often in conflict. Therefore, it is necessary to prepare long range plans to reconcile them. The role of a price policy starts at this point and the firm has to decide how prices are to be used in the overall strategy.
2. Anticipating Competitive Situations:
A firm may have to face different competitive situations. Different competitive situations require different pricing policies. Therefore, a good solution of pricing problems needs a clear understanding of the firm’s competitive environment. For instance, a firm faced with a pure competitive situation has pricing problems.
Such a firm has no discretion, it has to sell or it may devoid not to sell at the price prevailing in the market. But when the firm is faced with imperfect competition, the price policy attains a real practical significance. The firm can use its discretion and sell its products inspite of disparities with its competitor’s prices.
The degree on prices discretion that a firm can have depends on the following conditions:
(i) Number of competitors.
(ii) Size of competitors.
(iii) Product line of competitors.
(iv) Likelihood of potential competition.
(v) The state of consumer acceptance of the product.
(vi) The degree of potential market segmentation and price discrimination.
(vii) Degree of physical distinction from competitor’s product.
(viii) The extent of reputation of the product and service.
3. Product and Promotional and Distribution Policies:
Though pricing is a very important but not the only aspect of market strategy. There are other important aspects like products and promotional aspects which must be considered by the firm along with pricing. If the product and promotional policies are faulty, it is no justification to change the price for better results. Various policies of company relating to products channel of distribution should be given proper.
4. Nature of Price Sensitivity:
There are many forces which tend to minimize the importance of price sensitivity which is often exaggerated by businessmen. The forces that create insensitivity to change in princes are flexibility in consumer behaviour, change in effectiveness of market effort, nature of the product, multiple dimensions of the quality of the product and importance of the service after sales.
5. Entry of Non-Business Groups into the Consideration of Price:
The government or trade unions control price to prevent misuse of monopolistic power and collusion among businessmen. Therefore there is need of some policies even in price determination.
6. Estimation of Demand:
First step in the pricing of product is the estimation of the total demand for the product. It will depend upon the expected price. Experienced wholesalers/retailers can evaluate our product. We can conduct regular survey of potential buyers. We can determine the expected price in a few test markets, by trying different prices in different test markets and comparing the results with a controlled market in which price is not altered. Once we know the expected prices, we can compute sales volume at special prices.
Determining the share of market you expect at the expected price. Higher initial price may be fixed if you anticipate a smaller share whereas if you expect a much larger market share, you will have to prefer relatively lower prices. Proper pricing strategy is to be evolved to research the market target either through skimming price of through penetrate price or through a compromise.
8. Selecting a Suitable Price:
The last step in the process of price determination is selecting a suitable price. The most appropriate method is the cost plus mark-up method, usually called cost-plus method. It is very suitable for wholesalers and retailers too.
According to it:
Price of Product = Cost of Production + Operating Expenses + Profit Margin.
Yardsticks Used in Pricing a Product:
There are number of factors affecting the price range of product:
(i) Cost of production and distribution.
(ii) Price of rival producers.
(iii) Consumer reaction response.
(iv) Middlemen’s reactions.
(v) Prices of substitute products.
(vi) Government rules and regulations.
Price fixation is the right of one department or one manager only but it is the prerogative of top management to decide it. But a foresighted management should try to involve all the important functional executives in the process so that an integrated price policy for different products of the firm may be evolved.
Adjustments and revision in the prices are very much essential as there is nothing static in a competitive economy, suggested is a foundation for such judgement based on facts with a realistic regard for the current position of the firm and an optimistic eye towards the future.
Pricing is a means for achieving the goods of business. There is no exact and infallible formula for pricing each firm’s product and market situation have some unique features of its own type. Therefore, every situation should be explored on its own merit and the pricing policy should emerge from careful consideration of all the forces.
Pricing is a matter of judgement but to be effective it should be based on sound principles and all possible information. A price is always to trial in the market and is supposed to be successful and right if it attracts sufficient number of customers.