A company must set an initial price for new products or when entering new markets. There is a 5-step process: 1) Select a pricing objective like survival, maximum profit, or market share. 2) Determine demand through price sensitivity and demand curves. 3) Estimate costs like fixed, variable, and average costs. 4) Analyze competitors' prices and offers. 5) Select a pricing method like markup or target-return pricing and consider costs, competition, and customer value to set the final price. The main strategies are selecting the objective, determining demand, estimating costs, analyzing competition, selecting a method, and setting the final price.

1. HOW SHOULD A COMPANY
SET PRICES INITIALLY FOR
PRODUCTS OR SERVICES?

2. A firm must set a price for the first time when it develops a
new product, when it introduces its regular product into a
new distribution channel or geographic area, and
when it enter bids on new contact work.

3. This can be done in 5 steps.

4. STEP 1
Selecting the pricing objective.
The company first decides where it wants to position
its market offering.

5. STEP 1
Selecting the pricing objective.
The company first decides where it wants to position
its market offering.
There are 5 objectives to keep in mind.

6. SURVIVAL
Companies pursue survival as their major objective if they
are plagued with overcapacity intense competition, or
changing want.

7. SURVIVAL
Companies pursue survival as their major objective if they
are plagued with overcapacity intense competition, or
changing want.
Survival is a short-run objective; in the long run, the firm
must learn how to add value or face extinction.

8. MAXIMUM CURRENT
PROFIT
The company estimate the demand and costs associated
with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on
investment.

9. MAXIMUM CURRENT
PROFIT
The company estimate the demand and costs associated
with alternative prices and choose the price that produces
maximum current profit, cash flow, or rate of return on
investment.
However, this strategy is difficult to implement.

10. MAXIMUM MARKET
SHARE
Companies believe a higher sales volume will lead to lower
unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.

11. MAXIMUM MARKET
SHARE
Companies believe a higher sales volume will lead to lower
unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive

12. MAXIMUM MARKET
SHARE
Companies believe a higher sales volume will lead to lower
unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive
• Production costs fall with rise in production experience

13. MAXIMUM MARKET
SHARE
Companies believe a higher sales volume will lead to lower
unit costs and higher long-run profit. They set the lowest
price assuming the market price is sensitive.
The following conditions need to be fulfilled first:
• The market is a highly price sensitive
• Production costs fall with rise in production experience
• A low price discourages competition

14. MAXIMUM MARKET
SKIMMING
A pricing strategy by which a firm charges the highest initial
price that customers will pay.
As the demand of the first customers is satisfied, the firm
lowers the price to attract another, more price sensitive
segment.

15. PRODUCT QUALITY
LEADERSHIP
Many companies strive to be “affordable luxuries”; products
or services characterized by high levels of perceived quality,
taste and status with a price just high enough not to be out of
consumers’ reach

16. STEP 2
Determining Demand
There are 3 main factors that help determine demand

17. PRICE SENSITIVITY
Price sensitivity (also called price elasticity of demand) is the
degree to which price affects a consumer’s decision to
purchase a product or service.

18. PRICE SENSITIVITY
Customers are less price sensitive when:
• There are few or no substitutes or competitors
• They do not readily notice the higher prices
• They are slow to change their buying habits
• They think the higher prices are justified
• Price is only a small part of the total cost involved in
purchasing the product or service

19. ESTIMATING DEMAND
CURVES
Most companies attempt to measure their demand curves
using several different methods such as surveys, price
experiments & statistical analysis.

20. PRICE ELASTICITY OF
DEMAND
It is measured to show the responsiveness, or elasticity, of
the quantity demanded of a good or service to a change in its
price.

21. PRICE ELASTICITY OF
DEMAND
There is Elastic demand:
If a small change in price is accompanied by a large change
in quantity demanded, the product is elastic.

22. PRICE ELASTICITY OF
DEMAND
And there is inelastic demand:
If a change in price is accompanied by very little change in
quantity demanded, the product is inelastic.

23. STEP 3
Estimating Costs
There are 3 ways companies perform cost estimation

24. CONSIDERING
DIFFERENT TYPES OF
COSTS
Fixed Costs
These are costs defined as expenses that do not change as a
function of the activity of a business, within the relevant
period.
For example, a retailer must pay rent & utility bills
irrespective of sales.

25. CONSIDERING
DIFFERENT TYPES OF
COSTS
Variable Costs
Those costs that vary depending on a company’s production
volume; they rise as production increases and vice versa.
Examples are rent, advertising, insurance & office supplies.

26. CONSIDERING
DIFFERENT TYPES OF
COSTS
Total Costs
This consists of the sum of the fixed and variable costs for
any given level of production.

27. CONSIDERING
DIFFERENT TYPES OF
COSTS
Average Costs
This is the cost per unit at that level of production; it equals
total costs divided by production.

28. ACCUMULATED
PRODUCTION
The average cost pricing method, but using an estimate of
future average costs , based on accumulated production
creating an experienced learning curve.

29. TARGET COSTING
Target costing is a pricing method where overall cost of a
product is reduced over its entire life cycle with the help of
production, engineering, research and design.

30. STEP 4
Analyzing Competitor’s Costs, Prices &
Offers
Competitors are most likely to react when there is any price
change and when the number of firms is few, the product is
homogeneous, and buyers are highly informed.
Analyzing these reactions and consequent strategies can be
beneficial.

31. STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.

32. STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.
• Competitor’s prices and the price of substitutes provide
an orienting point.

33. STEP 5
Selecting a Pricing Method
There are 3 major considerations in price setting:
• Costs set a floor to the price.
• Competitor’s prices and the price of substitutes provide
an orienting point.
• Customer’s assessment of unique features etablishes the
price ceiling.

34. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING

35. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING

36. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING

37. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING

38. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING
GOING-RATE PRICING

39. SELECTING A PRICING
METHOD
Keeping these three considerations in mind, these are the six
methods of pricing:
MARKUP PRICING
TARGET-RETURN PRICING
PERCEIVED-VALUE PRICING
VALUE PRICING
GOING-RATE PRICING
AUCTION-TYPE PRICING

40. STEP 6
Selecting the Final Price
Pricing methods narrow the range from which the company
must select its final price.
In selecting that price, the company must consider additional
factors such as…….

41. SELECTING THE
FINAL PRICE
Impact Of Other Marketing Activities

42. SELECTING THE
FINAL PRICE
Company Pricing Policies

43. SELECTING THE
FINAL PRICE
Gain & Risk Sharing Pricing

44. SELECTING THE
FINAL PRICE
Impacting of Price On Other Parties

45. SO TO RECAP….
The Main Strategies Of Pricing are:
Selecting the Pricing Objective
Determining Demand
Estimating Costs
Analyzing Competitor’s Costs, Prices and Offers
Selecting a Pricing Method
Selecting the Final Price

46. THANK YOU
.
Created by
Kunal Eapen, IIIT Allahabad
During an internship under
Prof Sameer Mathur, IIM Lucknow
www.iiminternship.com