We view price setting as a series of decisions the marketer makes in order to determine the price direct and indirect customers pay to acquire the product. Direct customers are those who purchase products directly from the marketer. For example, consider the direct pricing decisions that take place when a high-end fashion company launches a new product line:
- The fashion company must decide at what price they will charge their immediate customers in the channel of distribution, such as a boutique clothing stores.
- The boutique clothing stores must decide at what price they will sell the the fashion line to their immediate customers, which are typically final consumers (e.g., retail shoppers).
As we see with the fashion company example, many organizations sell indirectly to the final customer through a network of resellers, such as retailers. For marketers selling through resellers, the pricing decision is complicated by resellers’ need to earn a profit and the marketer’s need to have some control over the product’s price to the final customer. In these cases, setting price involves more than just worrying about what the direct customer is willing pay. The marketer must also evaluate pricing their direct customers will change to indirect customers (e.g., retail shoppers). Clearly, sales can be dramatically different than what the marketer forecasts if the selling price to the final customer differs significantly from what the marketer expects. For instance, if the marketing organization has forecast to sell 100,000 units if the price to the final customer is one price and resellers decide to raise the price 25% higher then the expected price, then the marketer’s sales may be much lower than forecast.
With an understanding that marketers must consider many factors (see the Pricing Decisions Tutorial) when setting price, we now turn to the process by which price is set. We present this as a five-step approach. As we noted earlier, while not all marketers follow these steps, what is presented does cover the methods used by many marketers.
The steps we cover in this tutorial and in the next tutorial include:
1. Examine Objectives
2. Determine an Initial Price
3. Set Standard Price Adjustments
4. Determine Promotional Pricing
5. State Payment Options