Market Pricing: Backward Method
In some marketing organizations the price the market is willing to pay for a product is an important determinant of many other marketing decisions. This is likely to occur when the market has a clear perception of what it believes is an acceptable level of pricing. For example, customers may question a product that carries a price tag that is double that of a competitor’s offerings but is perceived to offer only minor improvements compared to other products. In these markets it is important to undertake research to learn whether customers have mentally established a price range or reference price for products in a certain product category. The marketer can learn this by surveying customers with such questions as: “How much do you think these types of products should cost you?”
In situations where a price range is ingrained in the market, the marketer may need to use this price as the starting point for many decisions and work backwards to develop product, promotion and distribution plans. For instance, assume a company sells products through retailers. If the market is willing to pay (US)$199 for a product but is resistant to pricing that is higher, the marketer will work backwards factoring out the profit margin retailers are likely to want (e.g., $40) and as well as removing the marketer’s profit (e.g., $70). From this, the product cost will remain ($199 -$40-$70= $89). The marketer must then decide whether they can create a product with sufficient features and benefits to satisfy customers’ needs at this cost level.