Methodology > Private sector > Setting and testing prices

Private sector

Setting and testing prices

Although the role played by other variables of the marketing mix is ever increasing, the price remains a key element, particularly in its impact on market share and profitability. However, despite their importance, pricing decisions are rarely optimal.

Very often, the sell price:

• is determined by the cost price alone
• is not modified fast enough to keep up with changes in the marketplace
• is set without reference to other marketing variables
• does not take into account the variety of products offered or market segments.

In order for the price to remain a key element in your marketing strategy, we help you to ensure that it is closer to the market requirements

This methodology follows these main steps:

• First we need to define your objectives in terms of image, profit, turnover, growth, market share, etc. This means a prior cost estimate for different production levels must be carried out.
• Next the price-market relationship must be evaluated by analysing demand curves. This enables the volume of demand to be deduced for different pricing levels.
• Setting a price is fundamentally a strategic choice and a necessary element in determining your competitive advantage. Competitive analysis is an important decision tool. Apart from enabling your products to be positioned in terms of value for money, knowing the price of competitors’ products helps you to choose your own pricing policy. Price expresses the competitive positioning of a product.
• Once the demand curves, cost and competitors’ pricing are known, we can determine the price. Costs are used to fix the minimal price, the competition provides a pole of reference, and the perceived differentiation of the product fixes the upper limit. Pricing methods vary: cost-plus pricing, mark-up pricing, targeted profit pricing, perceived value, market pricing, cost-volume pricing, tender price… Each places emphasis on different factors. The most appropriate choice of pricing method will depend on the objectives previously defined together
• Having narrowed the range of acceptable prices, we now need to optimise the final price proposed to the market, taking into account psychological factors associated with the price and the reactions of distributors, vendors, competitors, suppliers, and authorities. For this we use different methods of price testing:
  • The “psychological” price method:
    This method is based on the theory that the price shouldn’t be so high as to discourage the buyer, nor so low as to reflect a poor image of the product. The test outcome provides a psychologically acceptable range of prices, from which the final price of the product can be chosen.
  • The “trade-off” method:
    This method consists of varying the price according to different attribute criteria of other variables of the marketing mix. It is useful for measuring the importance of the price variable in the eyes of the consumer.
  • The simulation method:
    This tests the price in the context of a simulated test market or even an in-store test (Latin square test). The optimal price is the one that generates the most sales.