Every organization faces a problem of setting the prices of products. The main aim of marketing strategy of an organization is to attain marketing objectives and satisfy the targeted market.

The marketing decisions affect the prices of products to a great extent.

The marketers follow various steps to set prices as shown in Figure-3:

Process of Setting Prices

Now, let us discuss the steps of setting prices (Figure-3) in detail:


1. Setting price objectives:

Refers to set the goals of the pricing policy. An organization can have multiple pricing objectives.

Some of the price objectives are discussed as follows:


a. Survival:

Involves the formulation of a short-term price objective to face the fierce competition. The price of a product is reduced to increase sales volume. However, this strategy does not work in the long term as an organization would not be able to cover its costs, thus, profit margin may decrease in future.

b. Quality of a Product:

Affects the price of products. An organization incurs high cost in research and development to improve the quality of a product. Therefore, it covers the research and development cost in the price of the product. Sometimes, the organization raises prices to make customers aware about the improved quality of its products.


2. Estimating the product demand:

Helps in knowing the factors that affect the demand of a product. Some of the important factors can be the prices of products, environmental factors, and income and expectations of customers. There are three things that are studied by the marketers for estimating the demand.

These are discussed as follows:

a. Price Sensitivity:

Affects the demand of a product. If the price of the product rises then the demand falls and vice versa. In this case, the demand may shift to the substitute of the product. A marketer tries to study the price sensitivity of the product for making decisions about the price of the product.

b. Demand Curve:

Implies a statistical tool that shows a relationship between the demand and price of a product. It helps in knowing the demand and price fluctuations of the product.

c. Price Elasticity of Demand:

Refers to a percentage change in the demanded quantity of the product with respect to the percentage change in the price of the product. If the demand of a product changes with the change in price then the demand is said to be elastic. On the other hand, if the demand of a product does not change with the change in price then the demand is said to be inelastic.


3. Analyzing the competitor’s prices:

Influences the decisions of setting the prices of products. The pricing strategies of competitors affect the demand of the product and lead to a loss of market share. Thus, it is clear that the marketers should be careful about the future competition.

Following are the three ways by which an organization reacts to price changes:

a. Maintaining the status quo and not reacting to any price change


b. Setting the prices equal to the organization’s prices

c. Setting the prices less than the organization’s prices

The process of analyzing the prices of competitors is difficult. Therefore, the organizations depend on the publicly available data or public statements to know the price strategies of competitors.

4. Selecting the pricing method:


Involves the selection of a technique for setting the price. There are various types of pricing methods used by organizations.

5. Selecting the pricing policy:

Involves a strategy or practice used by an organization to achieve its pricing objectives.