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 new novel is sold:
- Publisher of the book must decide at what price they will charge their immediate customers in the channel of distribution such as online booksellers (e.g., Amazon.com).
- Booksellers must decide at what price they will sell the book to their immediate customers which are typically final consumers (e.g., website shopper).
As we see with the bookseller example, many companies also 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 only worrying about what the direct customer is willing pay since the marketer must also evaluate pricing to indirect customers (e.g., resellers’ customers). 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 forecasted to sell 1,000,000 novels if the price to the final customer is one price and resellers decide to raise the price 25% higher than that price the marketer’s sales may be much lower then forecasted.
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 include:
1. Examine Company and Marketing Objectives
2. Determine an Initial Price
3. Set Standard Price Adjustments
4. Determine Promotional Pricing
5. State Payment Options