Key Factors in Product Price Determination

Factors Influencing Price Determination

Base or list price: Refers to the unit price of the product at its point of production or resale. It does not reflect discounts, freight charges, or other adjustments, including allocation for a price leader.

Setting a price for an established product is generally less difficult than pricing a new product.

Estimating Demand

Key steps include:

1. Determine if there is a market-expected price.
2. Estimate potential sales volume at various price points.

Note:

• This is usually expressed as a price range rather than a specific amount.
• Intermediaries should be considered; it is easier to promote products if they align with their pricing expectations.
• Setting a price much lower than market expectations can lead to lost sales. Conversely, sometimes sales increase after a price increase (known as inverse demand: higher prices leading to higher demand). This can happen if consumers perceive higher prices as indicating higher quality (typically only effective within a certain price range and not at the lowest levels).
• Evaluate the vendor's price elasticity of demand, which refers to how the quantity demanded reacts to price changes.
• Methods for estimating sales include test marketing and buyer intention surveys.

Competitive Reaction

A new product remains distinctive only until competition emerges. Consider competitors:

• Direct competitors (e.g., Nike, Adidas, New Balance)
• Available substitutes (e.g., air vs. truck shipments)
• Related products targeting the same consumer (e.g., DVDs, bikes, vacations).

Marketing Mix Elements

Pricing interacts with other marketing elements:

Product Considerations

Price changes may be necessary to keep a product competitive. Consider whether the product will be purchased or rented, if partial barter or trade-ins are involved, return/exchange policies, and the product's end-use.

Distribution Channels

Selling wholesale often means lower prices directly from the factory, as intermediaries provide services like storage and credit to retail buyers.

Promotion Strategies

Pricing strategies must align with promotional efforts. Retailers undertaking promotion (e.g., advertising) might expect lower purchase prices.

Product Costs

Product costs must be considered when setting prices. Key cost types include:

• Fixed costs (e.g., salaries, rent)
• Variable costs (change with production quantity)
• Total cost (Fixed Costs + Variable Costs)
• Marginal cost (cost of producing and selling one additional unit)

Standard Delivery Pricing

(Assigning postage prices)

This involves charging all buyers the same price, regardless of location. It's often used when freight costs are a minor part of the seller's total costs. Net income per sale will vary based on the actual freight cost for each transaction.

Example: While FedEx uses geographical zones and weight to determine fees, some retailers offer 'free' shipping, incorporating the cost into the product price or treating it as a service cost.