Step 2: Determine an Initial Price

With the objectives in Step 1 providing guidance for setting price, the marketer next begins the task of determining an initial price level. We say initial because in many industries this step involves setting a starting point from which further changes may be made before the customer pays the final price.

Sometimes called list price or published price, marketers will often use this as a promotional or negotiating tool as they move through the other price setting steps. For companies selling to consumers, this price also leads to a projection of the recommended selling price at the retail level often called the manufacturer’s suggested retail price (MSRP). The MSRP may or may not be the final price for which products are sold. For strong brands that are highly sought by consumers the MSRP may in fact be the price at which the product will be sold. But in many other cases, as we will see, the price setting process results in the price being different based on adjustments made by the marketer and others in the channel of distributions.

Speaking of distribution channels, as we discussed in the Distribution Decisions Tutorial, some marketers will utilize multiple channel partners to handle product distribution. When resellers are involved marketers must recognize that all members of the channel will seek to profit when a sale is made. If a marketer seeks to sell the product at a certain retail price (e.g., MSRP) then the price charged to the first channel member to handle the product can potentially influence the final selling price. To see how this can cause problems, assume a marketer sets an MSRP of (US) $1.99 for a product that sells through a distribution channel. This channel consists of wholesalers, who must pay the marketer $1.89 to purchase the product, and retailers who in turn buy the product from wholesalers. In this example it is unlikely the retailer will sell the product at the MSRP since the wholesaler will add to the $1.89 purchase price and most likely raise the price charged to the retailer to a point that is higher than the MSRP. The retailer in turn will add to their purchase price when selling to consumers. In this scenario it is possible the final price to the consumer will be closer to $2.99 than the $1.99 MSRP. As this example shows marketers must take care in setting the initial price so that all channel partners feel it is worth their effort to handle the product.

Marketers have at their disposal several approaches for setting the initial price which include:

  • Cost Pricing
  • Market Pricing
  • Competitive Pricing
  • Bid Pricing
Step 1: Examine Objectives
Setting Price Using Cost Pricing