7 Steps to the Right Price

Posted by Ksenia Shuvakina on July 15, 2015
Ksenia Shuvakina

Price is one of the four main elements in the marketing mix('4 Ps': product, price, place and promotion). All the elements of the marketing mix influence each other. They make up the business plan for a company, and handled in the right way, can provide exceptional success for your company.

Whilst there is no single rule to determine pricing, the following 7 STEPS aim to provide a suitable foundation for guiding you through this process.


1. Develop marketing strategy.

Marketing strategy is a fundamental goal of increasing sales and achieving sustainable competitive advantage. In order to develop a marketing strategy, you must perform market analysis, positioning of a product, segmentation of customers and complete research on your competitors.  A marketing strategy will help you tailor your messages, and put the right mix of marketing approaches in place so that you bring your sales and marketing activities together effectively in a marketing plan. The marketing strategy will heavily influence the chosen pricing approach. For example John Lewis advertise "never knowingly undersold". Therefore their pricing teams must keep abreast of what is happening in the market, and be prepared to deal with customer requests for price changes.


2. Make marketing mix decisions.

The marketing mix deals with the way in which a business uses price, product, distribution and promotion to market and sell its product. It is known as a "mix" because each ingredient affects the other, and the mix must overall be suitable to the target customer. Since marketing mix consists of 4 parts (Product, Place, Promotion, Price), and all the elements are interconnected, it is essential to understand each one in turn as they will influence the ultimate prices that should be set.


3. Estimate the demand curve.

It is important to understand the impact of pricing on sales by estimating the demand curve for the product or service. The demand curve shows how the demand for a product or service varies with changes in its price. It will help you identify for example the point at which increasing the price to a certain level has a drastic negative impact on total goods sold.


4. Calculate cost

The total unit cost of producing your product or service is composed of the variable cost of producing each additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing policy should consider the both types of costs. The calculations of the cost are essential to make sure that expenses do not exceed the profit. 


5. Understand environmental factors

Pricing must take into account the competitive and legal environment in which the company operates. The firm must consider how their competitors are pricing their goods and services as a suitable benchmark, and determine whether they should match, undercut, or set prices higher due to a value selling approach. Conversely, how do legislative factors influence the pricing decisions? For example, is there legislation in place meaning your pricing is controlled to a degree by the government such as in rail fares.


6. Set business objectives

The company's business objectives must be identified in order to determine the optimal pricing strategy to support the company goals. For example a business objective could be to improve profit margins or simply to increase the volume of goods sold. Each of these objectives will require a different pricing strategy. 


7. Determine pricing

Without all the information from the above 6 steps, it will be very difficult to determine a price and or pricing strategy for your goods or services. Guessing your prices simply means you are leaving money on the table, so it is important to do your research and plan appropriately.



You may also find the following article of interest: The 7 Challenges of Value.

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