Six Step Procedure for Formulating

Pricing Policy:
1. Select pricing objective
2. Determine demand
3. Estimate costs
4. Analyze competition
5. Select pricing method
6. Select final price

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 Step 1: Select pricing objective:
 Survival E.g. New IT start-ups
 Maximize current profits
 Market skimming E.g.

 Maximize market share

 Penetration strategy E.g.

 Product quality leaders E.g.

 Partial cost recovery

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 Step 2: Determine Demand:
 Methods of Estimating
Demand Curves
 Statistical analysis of
past prices, qty. sold &
their relationship (Model
Building)
 Conduct Price
Experiments
 Ask buyers to state their
price sensitivity
 Understand price
elasticity of demand
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Step 3: Estimate Costs:
 Fixed costs: do not vary directly with changes
in level of production
 Variable costs: vary with production
 Total costs: sum of fixed and variable costs a
given level of production
 Average cost: cost per unit at a given level of
production
 Activity Based costing: Different costs in
serving different customers
 Target Costing: Reduce cost to target level

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 Step 4: Analyzing Competitors’ costs, prices
& offers
 Step 5: Selecting a Pricing Method:
 Markup Pricing: Adding std. markup to
product’s cost
 Risk factors & demand level should be

accounted for
 Target-Return Pricing: Firm determines its
return on investment
 Make break even chart & calculate break even

volume
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Step 5: Selecting a Pricing Method
(Cont.):  Perceived Value
Pricing
 Pricing done

according to
buyer’s
perception of
value.
 Advertisement

s used to
build the
perceived
value
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