Involves establishing the value of the market and its trends, the unit prices being paid within the market, finding a credible position within that range which is consistent with your offering and your strategy, and deducing the margins and volumes which should be available from different channels into the market.
Method in which costs are deducted from what consumers are willing to pay, to see if an adequate profit margin is possible.
Setting prices according to the psychographics ( analysis of consumer lifestyles to create a detailed customer profile ) of the aimed-at market segment.
Price Lining or Product Line Pricing
Method that primarily uses price to create the separation between the different models.
Fictional Example of Backward/Discounted Pricing
Assume you are the manufacturer and you are going to want to supply this globally via retail outlets and retailing catalogues , duty free outlets and via distributors selling other items . Each step the product makes must make a margin to cover that steps distribution and logistics costs etc.
Example route to an overseas market into retail outlets.
Starting at the end customer who buys from retailer for the RRP of $200, the retailer whose revenue is $200 per unit sold buys from a wholesaler at a 50% discount off RRP or RRP$200 x 0.5 = $100 leaving the retailer a margin $100 per unit sold above purchase cost to cover their costs of selling and logistics with their multiple local stores.
The wholesaler who gets $100 total revenue per unit sold to retailers, buys from import/export sales agent expecting to make a 20% margin (less because they are handling in bulk and logistics are therefore simplified), buys at $80 each from the import/export sales agent making $20 each to cover their costs.
The import/export sales agent who makes $80 revenue each when selling to wholesalers, buys the unit direct from the manufacturer expecting to make a 15% margin because of their extensive links with wholesalers in the target country but minimal logistics, they buy at $80 x 0.85 = $68 each.
So having researched and established this route to that market for this product the manufacturer can plan to expect that "import/export sales agents" be offered terms equivalent to $68 of the RRP of $200 which could be described as "0.34 of RRP" or a 66% discount off RRP.
Note: The Manufacturer will know that to sell through that channel they can expect to get $68 each for these Mid range Hi-fi system which end customers like you or I pay the RRP of $200 each for in the shops. (these figures are made up for example purposes, I have no idea what the relative margins are in this particular market) .
If the direct costs associated with making this product are parts $25, labour $10, plus direct tooling and machinery capital writing down costs of $5 per unit making a total product (production) specific unit cost of $40, the manufacturer will make a gross margin of $28 per unit or 28/68 = a 41% margin.
From this 41% margin, $28 per unit, the manufacturer must be able fund all their fixed costs including management and administration, production management, development engineering, their own sales and marketing efforts, buildings, etc.
A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to ensure their price remains below competitors.
Above Competition Pricing
Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer.
A simple method for setting the initial price at the same level of competitors’ price.