PROCESS OF

SETTING PRICE OF
A NEW PRODUCT

A F ATAUR RAFEE
ROLL NUMBER 2110034103
FUNDAMENTAL OF MARKETING
EMBA 26TH
DEPARTMENT OF MANAGEMENT STUDIES
RAJSHAHI UNIVERSITY
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TABLE OF CONTENTS
INTRODUCTION ............................................................................................................ 1
LIFE CYCLE OF A NEW PRODUCT .............................................................................. 1
CONCEPT OF PRICE ..................................................................................................... 2
DEFINITION OF PRICE AND PRICING ....................................................................... 2
OBJECTIVE OF PRICE .................................................................................................. 3
PRICING CONSTRAINTS ............................................................................................... 4
FACTORS AFFECTING PRICE DECISIONS ................................................................. 7
PRICING APPROACHES .............................................................................................. 10
SETTING PRICE OF A NEW PRODUCT ...................................................................... 13
CONCLUSION ............................................................................................................... 19
BIBLIOGRAPHY ........................................................................................................... 20
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INTRODUCTION
The process of setting price of a new product is a very problematic specially during the
introduction stage of the product. In this stage it is very much important to set the price in
such a way that the price is right so that the product can be sold in large number of volumes.
The person responsible for making the decision should consider that, if the price is set too
high, potential customers might not accept the product. As a result of this, managers tend to
set the prices too low. (Urbany, 2001) According to consultants, 80-90% of new products
launched to market are under-priced. (Marn, Roegnar, & Zawada, 2003) At the same time, it
is necessary to estimate demand, foresee the effect of various possible combinations of prices,
and choose the most suitable promotion policy. (Dean, 1976)

How the price of a new product will be set is a complex management puzzle which is too
often solved by cost theology and hunch. The high rate of innovation in the present time
makes the economic evolution of a new product a strategic guide to practical pricing. In the
literature of new product development, the product pricing is often represented as a choice
between market penetration pricing, in which a low-price attempt to stimulate product
adoption, and market skimming, in which the market segment with the highest reference price
is targeted first, and the market is subsequently skimmed to capture segments with lower
reference prices. (Hultink, Griffin, Hart, & Robben, 1997) (Langerak, Hultink, & Robben,
2004) Before going into the process of setting price of a new product let us see the life cycle
of every new product that it has to pass. These price changes are affected by a number of
aspects which include the production cost, distribution and many others.

LIFE CYCLE OF A NEW PRODUCT

When a product is new, it has a protected features which is doomed to progressive relapse
from competitive inroads. The intent of a new marketable specialty is usually followed by a
period of patent protection. At this stage the market is still uncertain and unfamiliar and at the
same time the product design is fluid. After that there is a period of prompt expansion of sales
as the market is beginning to accept the new product. After a while, the product becomes the
target for competitive encroachment. At this stage, new product begins to enter the market to
compete with the earlier product, and innovations narrow the gap of uniqueness between the
product and its substitutes. At this time, the seller’s zone of pricing discretion is narrowed

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down as the distinctive feature of the product fades into a humdrum commodity. (Dean, 1976)
As a result, the seller has limited independence in pricing even if the rivals are few. During
the whole life cycle of a new product there is continual changes that occurs in the promotional
and price elasticity and in manufacture cost and distribution. These changes affect the
alterations in the pricing policy.

CONCEPT OF PRICE
The concept of price stems from the notion that the customer gives up or exchange something
to obtain a desired product. Payment may be in the form of money, goods, services. favours,
votes or anything that may have any kind of value to the other party.

DEFINITION OF PRICE AND PRICING

Ambrose Pierce have quotes about price as, the value, plus a reasonable sum for the wear and
tear of conscience in demanding it.’

“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.” (Kotler,
Armstrong, Saunders, & Wong, 1999)

“Price is the value that a firm captures in a mutually beneficial exchange with its customer.”
(Smith, 2011)

So, from the discussion we can conclude that price is something that an individual or
organization is willing to pay in exchange for something that is mutually beneficial for the
both parties. It can be said in another way that a price is the quantity of payment or
compensation given by one party to another in return for one unit of goods or services. In a
simple word price can be also defined as the amount of money expected, required, or given in
payment for something.

On the other hand, pricing is a part of marketing plan whereby a business sets the price at
which they will sell its products and services. While setting the price, the business may take
into account the price at which it could acquire the goods, the manufacturing cost the
marketplace, competition, market condition, brand, and the quality of product.

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OBJECTIVE OF PRICE
Like almost every other thing there are objective for pricing. But the main objective of pricing
are as follows:
 Sales or market share objectives: It seek to boost volume or market share. A volume
increase is measured against a company’s own sales across specific time periods.
Generally, the company’s market shares are measured against the sales of other
companies in the industry. Volume and market share are independent of each other, as
a change in either of those doesn’t affect the other. The main types of sales related
pricing objective may include sales growth, targeting market share and increase in
market share. (McCormick, 2017)
 Profit Objective: This objective primarily and simply deals with the fact that the
business organization wants to make as much as possible for the business and to
maximize the price for long term profitability. Price have both direct and indirect
effect on the profit. The direct effect relates to whether the price actually covers the
cost of producing the product. An indirect effect is that if the price affects profit by
influencing how many units were sold.
 Competitive effect objectives: Every company tries to react to their competitors with
appropriate business strategies. With reference to the price, they may wish to face up
to the competition,1 or deter competitors,2 or signal the quality of the product. 3
 Customer satisfaction objective: In every business organization customer should be
the central to every marketing decision. So, in order to keep the customers on the
businesses side there is a need of suitable pricing policies and practices to win the
confidence of customers. Customers as targets the company should be setting its
pricing policies to win over the confidence of the target market. By doing appropriate
pricing an organization can establish, maintain or even strengthen the confidence of
customers that the price charged for the product is fair and that they are not being
cheated on. At the same time, the company has to think about the customer
satisfaction. It is their key objective of all the marketing efforts and pricing is no

1
Means that they modify their pricing policies so as to respond to their competitors.
2
Means they keep the price as low as possible to minimise profit attractiveness of products. In some cases, they
may react offensively by selling products at a loss.
3
Sometime buyers believes that high quality mean high price. To create a positive image of the product in the
customers mind that the product is superior than the competitors the design should be like that.

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exception. The company should set, adjust, and readjust its pricing to satisfy its target
customer. This objective calls for charging the lowest possible price so that it wins the
buyers who are price sensitive. This strategy is right for the businesses that are in a
position to rapidly gain market share, bring down unit costs and purposefully lower
the price to create barriers to entry. This will help the product to grab share and then
expand. But we must consider that this is the riskiest from a profit and revenue
standpoint.
 Market Penetration: Another objective of pricing deals with the product entering deep
into the market so that it can attract the maximum number of consumers.
 Survival: Is the most fundamental pricing objective. Pricing is aimed at survival with a
hope for growth in the future. The company may use a survival-based pricing
objective when it’s willing to accept short term losses for the sake of long-term
viability.
 Skimming: From a business perspective, the pricing objective is concerned with
skimming maximum profit in the initial stage of a product’s life cycle. As the product
is new at this stage, offering new and superior advantages, the company can charge a
relatively high price because you are catering to customers with a higher willingness
to pay. Certain customer segments will buy a product even at a premium price in order
to be ahead of the game. Later the company can aim at more price-sensitive consumers
with a lower price. With skimming pricing policy theoretically, the company can get
the maximum profit from each level of customer.
 Stabilising: This objective seeks to keep your product prices in line with the same or
similar product offered by the competitors to maintain stable level of profit generated
from a specific product. It is a tactical goal that encourages competition on factors
other than price and focuses on maintaining market share. Stability in the price ensures
a good impression on the byers on the other hand, frequent changes in pricing can
affect the prestige of the company adversely.

PRICING CONSTRAINTS
These are the factors that limit the latitude of prices that a firm may set. There are many
constraints on pricing. Here we will consider the following as the main pricing constraints.

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 Demand for the product class, product, and brand: Demand plays a very important role
in pricing. The number of potential buyers for the product class (i.e., cars) products
(i.e., sports cars) and brand, (i.e., BMW) affect the price. At the same time whether the
product is a necessity or a luxury also affects the price. As there is a change in the
price of the product there is also a change in the quantity demanded.
 Newness of the product Stage in the product life cycle: The newer a product and the
earlier it is in its life cycle, the higher the price that can be charged for the product.
The goal is to take advantage of the price insensitive buyers for a new product.
 Single product vs Product line: Single product means it is the only variety of the
product in the market. As the merchandise gains market share, companies create
additional versions of the product in order to satisfy the differing needs of their market
segments. After setting the initial price of the single product in the introduction stage,
the price of the other version of the product line that would be introduced at a later
stage must be aligned with the initial price.
 Cost of producing and marketing the product: During different stage of the product a
firm san incur some loss. But they have to build their market share during these stages.
Nevertheless, in the long run the price that the firm set should cover all the costs of
producing and marketing a product. Else, it will be impossible to survive.
 Cost of Changing Prices and Time period they apply: When there is a change in price
there are some additional costs. The retailer has to update the prices of the products in
the shelves when there is a change in price. Because there are few associated costs
related to printing new catalogue, there are research which indicates that many firms
change their prices once a month. (Wolman, 2000) There is an exception though, it is
the online sellers or retailer. There are no printing costs for price changes online.

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 Types of Competitive Market: There are four types of competitive market namely,
monopoly, oligopoly, monopolistic competition, and pure (or perfect) competition.
The figure below illustrates a simple synopsis which includes the extent if price

Table 1: Pricing, Product, and Advertising Depend on Market Structure

competition, product differentiation, and advertising.

From the above table we can highlight the part related to the extent of advertising.
There is very little need of advertising in pure competition due to the fact that the
products offered in the market are identical. Availability of product can be advertised
but there is no need of advertisement to emphasize how the product is superior in the
case of pure competition. The same thing goes for pure monopolistic market as they
sell product with no close substitutes. There may be need of advertisement to raise
awareness if the product is not necessity.
In the oligopolistic markets, products can be undifferentiated, and for this reason there
is a need of some informative advertising. Firms generally avoid head-to-head price
competition in oligopolistic markets so that they can maximize profit collectively.
On the other hand, there is a need of advertising in monopolistically competitive
markets. In this type of market, the products are differentiated, which raises the need
for the firms to advertise in order to highlight their products’ superior characteristics,
and differentiate their brand form competitors.

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 Competitors Price: Firms have the control over price and it is one of the marketing
mix elements. While setting the price of the product the firm has to consider the
features of the product and compare it with those of the competitor’s product. This
was they will not set the price higher or lower than the market price.

FACTORS AFFECTING PRICE DECISIONS

There are several factors that influence the pricing decisions of a firm. They can be divided
into two broad categories, namely Internal Factors and External Factors. These factors are
divided on the basis of whether the management has control over the factors or not. If the
management has control over the factors, then it will come under internal factors, and if not
then it will come under external factors.
1. The Internal Factors affecting the Pricing Decisions:
The internal factors are within the control of the management and are particularly
related to the internal environment of the firm. The internal factors affecting the
pricing decisions of the firms are:
I. Company Objectives: This has one of the most importance on the pricing
decision of the firm. Firm’s pricing objectives must be in conformity with the
pricing policies and the strategies. If there is a targeted rate of return on capital
investment, then the pricing decisions are made in such a way so that the total
sales revenue from all the products exceeds the total cost by a sufficient
margin. It will provide the desired return on the total capital investment.
II. Organisation Structure: This is another significant internal factor which affects
the pricing decision. Some organisational structure allows the workers to
participate in their decision-making process, and hence in these types of firms,
all the employees have some views and suggestions for the pricing policy.
These types of strategies are helpful if the firm has several products, which
necessitates frequent pricing decisions and the price differs in different
markets. On the other hand, in some organisations, the top management has
the full authority for framing pricing objectives and policies. To determine
what will be the selling price is a key policy decision for the organisation and
the cost accountant can make an important input by providing the managing
with cost to this decision-making policy.

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III. Marketing Mix: While the firm is making decisions on the pricing policies of
the firm, they must take into consideration about the other marketing mix 45 as
well, because all of these factors are closely related. At the same time, with the
changing of market conditions these factors are tend to change and will be
different for each of the markets. Hereafter, for forming appropriate pricing
policy marketing research and the marketing information system can be
applied.
IV. Product Differentiation: If a product of an organization has some distinctive
features such as new style, design, package, etc., then the competitor’s product
then it can be sold at a higher price. In this case the firm has the greater
freedom in fixing the prices and customer will be willing to pay that price for
the product.
V. Cost of the Product: The cost of the product includes the cost of production as
well. If the price of the product is less than the cost of production, then the firm
may incur loss. But the cost of the production can be reduced, by coordinating
the activities of production properly. This way the price can be reduced
accordingly.

2. External Factor Affecting the Pricing Decisions:

These are the factors that the management have very less or no control over. These
factors that affects the pricing decisions include the nature of the market and demand,
competition and other environmental elements that the firm doesn’t have any control.
The external factors affecting the pricing decisions of the firms are
I. Demand: The demand of the product in the market has a lot of influences on
the pricing. If there is no demand for the product then it cannot be sold in the
market. On the other hand, if there is a lot of demand for the product then this
product can be sold in a great quantity and the pricing decision can be aimed
to utilise this trend. At the same time, prices change in different types of
market. Such as, under pure competition 6, no single buyer has much effect on

4
Set of marketing tools that the firm uses to pursue its marketing objectives in the target market.
5
Price, Product, Promotion, and Place are the four ‘p’s of marketing mix.
6
A market in which many buyers and sellers trade in a uniform commodity.

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the market going price. No seller can demand more than the going price
because buyers can obtain as much as they need at the going price. On the
other hand, under monopolistic competition 7
II. Competition: This is another factor that affects the pricing decisions.
Competition is a crucial factor in price determination. A firm can fix the price
of the product equal to or lower than that of the competitors considering the
product quality.
III. Suppliers: The suppliers of the raw materials and other goods have significant
on the price of a product. If the price of a product goes up, then the increase is
passed on by the suppliers to the manufactures, who is turn pass it on to the
consumers. However, when a manufacturer making a huge amount of profit
from the sell, suppliers may attempt to make profits by charging more for their
supplies. In other words, the price of the finished product is intimately linked
up with price of raw materials. At the same time, scarcity or abundance of raw
materials also affect the determination of pricing.
IV. Economic Condition: If the economic condition of the country is in inflation 8
or deflation9 then this may affect the pricing. In the time of recession,10 the
price of the products is reduced to a substantial extent so that the turnover can
be maintained. On the contrary, the prices of the product are increased in
boom period to cover the increasing cost of production and distribution so that
the changes in demand, price can be met. In this case, various pricing
decisions are available, such as, a. price can be boosted to protect profits
against rising cost; b. Price protection systems can be developed to link the
price on delivery to current costs; c. emphasis can be shifted from sales
volume to profit margin and cost reduction.
V. Buyers: The consumers who buys the products and services of different firms
have some influences in the pricing decision. The nature and behaviour for the

7
A market which consists of many buyers and sellers that trade over a range of prices rather than a single price.
8
The decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the
decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of
selected goods and services in a economy over some period of time.
9
The decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls
below 0%. Where inflate decreases the value of currency over time, but sudden deflation increases it.
10
A recession is a business cycle contraction when there is a general decline in economic activity.

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purchase of a particular product, brand or service etc. affect the pricing

decision.
VI. Government: If there is a government legislation that control the pricing
decision then it is also affected by it. The prices cannot be fixed higher as the
government keeps a close watch on pricing in the private sector.

PRICING APPROACHES
The price that the company will set for a new product is somewhere between one that is too
low produce a profit and one that is too high to produce any demand. Products costs set a low
point of the price; consumers perceptions of the product’s value set the high point of the price.
Concurrently, the company must consider the price of the competition and other factors that
may influence the pricing decisions.
Companies set the price of a product by selecting a pricing approach that may include one or
more of these three sets of facts – cost, consumer perception and competitors prices. The few
pricing approaches that a company takes are 1. The Cost-based approach (cost plus 11 pricing,
break-even analysis and target profit pricing); 2. The buyer-based approach (perceived-value
pricing); 3. The competition-based pricing (going rate pricing, and sealed bid pricing)

1. Cost-Based Pricing: This is the method where pricing is set by calculating the cost of a
product or services. There are three approaches that the companies may use, namely
a) Cost-plus pricing: This s the simplest pricing method. This method says that the
price of the product is set after adding a standard mark-up to the cost of the
product. To give an example of how this method works, let us think about a
microwave oven company which have the following cost and expected sales:
Variable Cost – $50
Fixed Cost - $400,000
Expected Unit Sales – 10,000
Let us calculate manufacture’s cost per microwave oven is
Unit Cost+ variable cost + fixed/unit sales=50+$400000/10000= $90
If the manufactures want to earn a 30% mark-up on sales, then the price will be
Mark-up-price= unit cost/ (1.0-desired returns of sale) =90/ (1.0-0.3) =128.57

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Adding a standard mark-up to the cost of the product

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In this scenario the manufacturer would charge 128.57 to the dealers to make a
profit of 38.57 per unit. Now if the dealer wants to earn a profit on the sales price,
then they will mark-up on the price.
b) Break-Even Analysis and Target Profit Pricing: This is another cost-oriented
pricing approach. The firm tries to determine the price at which it will break even
or make the target profit it is seeking. Target pricing is used for a product so that is
can achieve a certain amount of profit on its investment. This pricing method is
also used by public utilities, which are constrained to make a fair return on their
investment. Target pricing uses the concept of a break-even chart. A break-even
chart shows the total cost and total revenue expected at different levels. The
formula for calculating break-even volume is as follows:
Break-Even volume=fixed cost/ (price-variable cost)
The manufacturer should consider different prices and estimate break-even
volumes, probable demand and profit for each. If the company charges a higher
price, it will not need to sell as many toasters to achieve its target return. But the
market may not buy even this lower volume at the higher price. Much of it
depends on the price elasticity and competitors’ price. Even though low price
attracts more buyers, demand still falls below the high break-even point and the
manufacturers loses money. But, at a high price, consumers but too few products
and profits are negative.
2. Value-Based Pricing: There is an increasing number of companies that are basing their
prices on the product’s perceived value. Value-based pricing uses buyers’ perceptions
of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the
marketer cannot design along with the other marketing-mix variable before the
marketing programme is set. In this method, the pricing begins with analysing
consumer needs and value perceptions and a price is set to match consumer’s
perceived value. A company which is using perceived-value pricing must find out the
value that the buyers assign to different competitive offers. However, measuring
perceived value can be difficult. Sometimes consumers are asked how much they
would pay for a basic product and for each benefit added to the offer. On the contrary,
a company might conduct experiments to test the perceived value of different products
offers. If the seller charges more than the buyers’ perceived value, the company’s sales

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will suffer. It is seen in many cases that, the company sets the price too high and their
products sells poorly, where some companies under-price products. Even though the
products sell very well but they produce less revenue than they would if prices were
raised to the perceived-value levels.
3. Competition-Based Pricing: Consumers will base their judgements of a product’s
value on the prices that the competitors charge for similar products. There are two
forms of competition-based pricing, these are as follows:
a) Going-Rate Pricing; The firm bases its price largely on competitors’ prices,
with less attention paid to its own cost or to demand. The firm might charge
the same as, more, or less than its chief competitors. In oligopolistic industries
that sell a commodity such as steel, paper or fertilizer, firms normally charge
the same price. The smaller firms follow the leader, they change their prices
when the market leader’s price change, rather than when their own demand or
costs change. Some firms may charge a bit more or less, but they hold the
amount of difference constant. Thus, minor petrol retailers usually charge
slightly less than the big oil companies, without letting the difference increase
or decrease. Even though, this approach of pricing gives the firm little control
of their revenue, going-rate pricing can be popular. When the demand
elasticity is hard to measure, firms feel that the going price represents the
collective wisdom of the industry concerning the price that will yield fair
return.
b) Sealed-Bid Pricing: Competition-based pricing is also used when firms bid for
jobs. Using sealed-bid pricing, a firm bases its price on how it thinks
competitors will price, rather than on its own costs or on the demand. The firm
wants to win a contract and winning the contract requires pricing less than
other firms. But the firm cannot set its price below a certain level. It cannot
price below cost without harming its position. In contrast, the higher the
company sets its prices above its costs, the lower its chance of getting the
contract. The net effect of the two opposite pulls can described in terms of the
expected profit of the particular bid. Using expected profit as a basis for setting
price makes sense for the large firm that makes many bids. In playing the odds,
the firm will make maximum profits in the ling run. But a firm that bids only

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occasionally or needs a particular contract basely will not find the expected
profit approach useful.

SETTING PRICE OF A NEW PRODUCT

Pricing strategies changes as the product passes through its life cycle. One of the challenging
stages of it is the introductory stages. The pricing of a product can be distinguished between
pricing a product that imitates existing products and pricing an innovative product that is
patent protected.
A company that plans to develop an imitative new product faces the problem of product
positioning. It must decide where to position the product versus competing products in terms
of quality and price. First, the company may decide to use a premium pricing 12 strategy. At
the other extreme, it might decide on an economy pricing 13 strategy. These strategies can
coexist in the same market as long as the market consists of at least two groups of buyers,
those who seek quality and those who seek price.
On the other hand, the companies who brings out an innovative, patent protected product face
the challenge of setting the price of the first time. They can choose between two strategies.
These are:
1. Market-Skimming Pricing: Many companies that invent new products initially set high
prices to ‘skim’ revenues layer by layer from the market. Intel is a prime user of this
strategy. When intel first introduced a new computer chip, it can charge as high as
charge it can as it has the benefit of having the new chip over their competing chips. It
sets a price that makes worthwhile for some segments of the market to adopt
computers containing the chip. As initial sales slows down and as competitors threaten
to introduce similar chips, Intel lowers the price to draw in the next price-sensitive
layer of customers.
2. Market-Penetration Pricing: Rather than setting. High initial price to skim off small
but profitable market segments, some companies use market-penetration pricing. They
set a low initial price in order to penetrate the market quickly and deeply so that they
can attract a large number of buyers quickly and win a large market share. The high

12
Producing high-quality products and charging the highest price.
13
Producing lower-quality products and charging a low price.

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sales volumes result in falling costs, allowing the company to cut its price even
further. Several conditions favour setting low price. First the market must be highly
price sensitive, so that a low price produces more market growth. Second, production
and distribution costs must fall as sales volume increases. Finally, the low price must
help keep out the competition otherwise the price advantages may be only temporary.

To determine what pricing policies are fitting for later stages in the cycle of market and
competitive maturity, the manufacturer must be able to tell when a product is approaching
maturity. Some of the indications of deterioration of competitive status toward the commodity
level are:

 Weakening in brand preference: This may be demonstrated by a higher cross-elasticity

of demand among leading products, the leading brand not being able to continue
demanding as much price premium as primarily without losing position.
 Narrowing physical variation among products as the best designs are developed and
standardized: This has been dramatically demonstrated in automobiles and is still in
process in television receivers.
 The entry in force of private-label competitors: This is illustrated by the mail-order
houses’ sale of own-label refrigerators and paint sprayers.
 Market saturation: The ratio of replacement sales to new equipment sales serves as a
display of the competitive degeneration of durable goods, but in general it must be
kept in mind that both market size and degree of saturation are hard to define.
 The stabilization of production methods: A intense innovation that slashes costs (e.g.,
prefabricated houses) may disrupt what appears to be a well-stabilized oligopoly
market.

The first step for the manufacturer whose specialty is about to slip into the commodity
category is to reduce real prices promptly as soon as symptoms of deterioration appear. This
step is essential if the manufacturer is to forestall the entry of private-label competitors.
Examples of failure to make such a reduction are abundant.

By and large, private-label competition has speeded up the inevitable evolution of high
specialities into commodities and has tended to force margins down by making price
reductions more open and more universal than they would otherwise be. From one standpoint,
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the rapid growth of the private-label share in the market is a symptom of unwise pricing on
the part of the national-brand sector of the industry.

This does not mean that manufacturers should declare open price war in the industry. When
they move into mature competitive stages, they enter oligopoly relationships where price
slashing is peculiarly dangerous and unpopular. But, with active competition in prices
precluded, competitive efforts may move in other directions, particularly toward product
improvement and market segmentation.

Product improvement at this stage, where most of the important developments have been put
into all brands, practically amounts to market segmentation. For it means adding refinements
and quality extras that put the brand in the elite category, with an appeal only to the top-
income brackets. This is a common tactic in food marketing, and in the tire industry it was the
response of the General Tire Company to the competitive conditions of the 1930s.

As the product matures and as its distinctiveness narrows, a choice must sometimes be made
by the company concerning the rung of the competitive price ladder it should occupy,
roughly, the choice between a low and a not-so-low relative price.

A price at the low end of the array of the industry’s real prices is usually associated with a
product mixture showing a lean element of services and reputation (the product being
physically similar to competitive brands, however) and a company having a lower gross
margin than the other industry members (although not necessarily a lower net margin). The
choice of such a low-price policy may be dictated by technical or market inferiorities of the
product, or it may be adopted because the company has faith in the long-run price elasticity of
demand and the ability of low prices to penetrate an important segment of the market not
tapped by higher prices. The classic example is Henry Ford’s pricing decision in the 1920s.

Additionally, the strategy for setting a product’s price often has to be changed when the
product is part of a product mix. In this case, the firms look for a set of prices that maximizes
the profits on the total product mix. Pricing is difficult because the various products have
related demand and costs, and face different degrees of competition. There are five product-
mix pricing situations, these are as follows:

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r Product Line Pricing: Companies usually develop product lines rather than single
products. The price steps should take into account cost differences between the
products in the line, customer evaluations of their different features and competitors’
prices. If the price difference between two successive products is small, buyers will
usually buy the more advanced product. This will increase company profits if the cost
difference is small than the price difference. If the price difference is large, however,
customers will generally buy the less advances products. In many industries, sellers
use well-establishes price points for the products in their line. Thus, record stores
might carry CDs at four price levels namely budget, mid-line, full-line, and superstar.
The customer will probably associate low to high quality recordings with the four
price points. Even if the four prices are slightly raised, people will normally buy CDs
at their own preferred price points. The seller’s task is to establish perceived quality
differences that support the rice differences.
r Optional-Product Pricing: Many companies use optional-product pricing, which offer
to sell optional or accessory products along with their main product. For example, a
car buyer may choose to order power windows, cruise control and a radio with CD
player. Pricing these options is a sticky problem.
r Captive-Product Pricing: Companies that make products that must be used with main
products are using captive-product pricing. Examples of captive products are razors,
camera film and computer software. Producers of the main products (razors, cameras
and computers) often price them low and set high mark-ups on the supplies, Thus,
polaroid prices its cameras low because it makes its money on the films it sells.
Camera makers that do not sell film have to price their main product products higher
in order to make the same overall profit.
r By-Product Pricing: In producing processed meats, petroleum products, chemicals
and other products, there often by-products. If the by-products have no value and if
getting rid of them is costly, this will affect the pricing of the main product. Using by-
product pricing, the manufacturer will seek a market for these by-products and should
accept any price that covers the cost of storing and delivering them.
r Product-Bundle Pricing: Using product-bundle pricing, sellers often combine several
of their products and offer the bundle at a reduced price. Thus, theatres and sports
teams sell season tickets at less than the cost of single tickets, hotels sell specially

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priced packages that include room, meals, and entertainment, computer makers
include attractive software packages with their personal computer. Price bundling can
promote the sales of products that consumers might not otherwise buy, but the
combined price must be low enough to get them to buy the bundle.

Companies usually adjust their basic prices to account for various customer difference and
changing situations. There are seven price-adjustment strategies. These are as follows:

I. Discount and Allowance Pricing: Most companies adjust their basic price to reward
customers for certain responses such as early payment of bills, volume purchases and
off-season buying. These price adjustments called discounts and allowance can take
many forms. A cash discount is a price reduction to buyers who pay their bills
promptly. A popular example is ‘2/10, net 30’, which means that although payment is
due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10 days.
The discount must be granted to all buyers meeting these terms. Such discounts are
customary in many industries and help to improve the sellers’ cash situation and
reduce debt and credit collection cost. A quantity discount is a price reduction to
buyers who buy in large volumes. A trade discount (also called functional discount) is
offered by the seller to trade channel members that perform certain functions, such as
selling, storing and record keeping. A seasonal discount is a price discount to buyers
who buys merchandise or services out of season. Allowance on the other hand is
another type of reduction for the list price.
II. Segmented Price: Companies will often adjust their basic prices to allow for
differences in customers, products and locations. In segmented pricing, the company
sells a product or service at two or more prices, even though the difference in prices is
not based on differences in costs. Segmented pricing takes several forms:

 Customer-segment pricing. Different customers pay different prices for the

same product or service. Museums, for example, will charge a lower admission
for young people, the unwaged, students and senior citizens. In many parts of
the world, tourists pay more to see museums, shows and national monuments
than do locals.

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 Product-form pricing. Different versions of the product are priced differently,

but not according to differences in their costs.
 Location pricing. Different locations are priced differently, even though the
cost of offering each location is the same. For instance, theatres vary their scat
prices because of audience preferences for certain locations and EU
universities charge higher tuition fees for non-EU students.
 Time pricing. Prices vary by the season, the month, the day and even the hour.
Public utilities vary their prices to commercial users by time of day and
weekend versus weekday. The telephone company offers lower 'off-peak'
charges and resorts give seasonal discounts.

For segmented pricing to be an effective strategy, certain conditions must exist. The
market must be segmental and the segments must show different degrees of demand.
Members of the segment paying the lower price should not be able to turn around and
resell the product to the segment paying the higher price. Competitors should not be
able to undersell the firm in the segment being charged the higher price. Nor should
the costs of segmenting and watching the market exceed the extra revenue obtained
from the price difference. The practice should not lead to customer resentment and ill
will. Finally, the segmented pricing must be legal.

III. Psychological Pricing: Price says something about the product. For example, many
consumers use price to judge quality, A $100 bottle of perfume may contain only S3
worth of scent, but some people are willing to pay the $100 because this price
indicates something special. In using psychological pricing, sellers consider the
psychology of prices and not simply the economics. For example, one study of the
relationship between price and quality perception of cars found that consumers
perceive higher-priced cars as having higher quality. When consumers can judge the
quality of. a product by examining it or by calling on past experience with it, they use
price less to judge quality. When consumers cannot judge quality because they lack
the information or skill, price becomes an important quality signal.

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CONCLUSION
From the discussion, we can say that, setting the price of a new product is a very complicated
job where the marketers have to take into consideration many things happening around the
market. In pricing products of perishable distinctiveness, a company must study the cycle of
competitive degeneration in order to determine its major causes, its probable speed, and the
chances of slowing it down. Pricing in the pioneering stage of the cycle involves difficult
problems of projecting potential demand and of guessing the relation of price to sales.
The first step in this process is to explore consumer preferences and to establish the feasibility
of the product, in order to get a rough idea of whether demand will warrant further
exploration. The second step is to mark out a range of prices that will make the product
economically attractive to buyers. The third step is to estimate the probable sales that will
result from alternative prices.
If these initial explorations are encouraging, the next move is to make decisions on
promotional strategy and distribution channels. The policy of relatively high prices in the
pioneering stage has much to commend it, particularly when sales seem to be comparatively
unresponsive to price but quite responsive to educational promotion.
On the other hand, the policy of relatively low prices in the pioneering stage, in anticipation
of the cost savings resulting from an expanding market, has been strikingly successful under
the right conditions. Low prices look to long-run rather than short-run profits and discourage
potential competitors.
Pricing in the mature stages of a product’s life cycle requires a technique for recognizing
when a product is approaching maturity. Pricing problems in this stage border closely on
those of oligopoly.

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