Setting Price

Market Pricing

Under the market pricing method cost is not the main factor driving price decisions; rather initial price is based on analysis of market research in which customer expectations are measured.  The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price.  Of course this price should also help the organization meet its marketing objectives.

Market pricing is one of the most common methods for setting price, and the one that seems most logical given marketing’s focus on satisfying customers.  So if this is the most logical approach why don’t all companies follow it?  The main reason is that using the market pricing approach requires a strong market research effort to measure customer reaction.  For many marketers it is not feasible to spend the time and money it takes to do this right.  Additionally for some products, especially new high-tech products, customers are not always knowledgeable about the product to know what an acceptable price level should be.   Consequently, some marketers may forego market pricing in favor of other approaches.

For those marketers who use market pricing, options include:

• Backward Pricing
• Psychological Pricing
• Price Lining

Backward Pricing

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.