Setting Price: Part 1 Tutorial

setting price tutorial part 1

In the Pricing Decisions Tutorial, we provided the foundation marketers use to make pricing decisions. We now turn our attention to the methods marketers use to determine the price they will charge for their products. The central point of theses tutorials is a five-step process for setting price. We want to emphasize that while the process serves as a useful guide for making price decisions, not all marketers follow this step-by-step approach. Additionally, it is important to understand that finding the right price is often a trial-and-error exercise, where continual testing is needed.

Like all other marketing decisions, market research is critical to determining the optimal selling price. Consequently, the process laid out here is intended to open the marketer’s eyes to the options to consider when setting price and is in no way presented as a guide for setting the “perfect” price.

In Part 1, we look at steps 1 and 2 with our primary emphasis on the approaches to setting an initial price. We will continue our price discussion in the Setting Price: Part 2 Tutorial with steps 3, 4 and 5 that focus on adjustments to the initial price and payment options.

It is also important to understand that, just like many other marketing areas, technology serves a key role in pricing. For example, companies in such industries as retailing, travel, and insurance have turned to computerized methods for helping set the right price. In particular, marketers are using price optimization software, that is built using advanced mathematical modeling. These software programs take into consideration many of the internal and external pricing factors discussed in the Pricing Decision Tutorial along with other variables, such as sales history, in order to arrive at an ideal price. Marketers should know that much of what is discussed in Part 1 and Part 2 are also essential elements of these price setting programs.

Image by Walmart Corporate

Steps in the Price Setting Process

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