The company should fix a price for the first time when it introduces a new product or when it introduces its existing products in a new country or region. The first decision that the company has to take is about the market segment to target and positioning of the product in that market segment. Subsequent decisions of distribution strategy and channel design, product strategy, media selection and communication strategy as well as pricing strategy, will follow from the segmentation, targeting, and positioning decisions.

In the case of new products at the introduction stage of the lifecycle, the S-T-P decisions (segmentation, targeting, and positioning decisions) will not be relevant, in which case the company has to make an independent decision on the pricing strategy.

Companies that follow strategic pricing, use price and cost information (break even sales and contribution margin) even to select the target markets that they can serve profitably. Therefore, preliminary financial analysis will become an important input to the S-T-P decisions.

The pricing strategy will indicate a broad range of prices within which the company would look to pricing the product. The next step is to determine the demand for a product, in the given target market at different price levels indicated by the pricing strategy.

Each price will have different level of demand and therefore a differing impact on the company’s profitability. To estimate the differing levels of demand, companies have to estimate the price sensitivity of the target market. Based on the price sensitivity, companies must estimate the how responsive or elastic the demand would be to changes in prices.

If demand hardly changes with a price increase or decrease, we say that the demand is inelastic. Elastic demand is when there is a substantial change in the quantity demanded resulting from a price increase or decrease. The higher the elasticity of demand, the greater the volume growth with a 1% price reduction. Price elasticity of demand depends on the direction and magnitude of the price change.

Demand sets a ceiling or narrows the range within which marketers can set prices. Estimating costs at different levels of production, will determine the most profitable quantity and hence the most profitable price that companies can charge.

Knowledge of competitor’s costs and prices and possible reactions to different price levels must be taken into account.

Selecting the pricing tactic is the final step of determining the price, but not necessarily the final step in the pricing process. The last step involves the actual reaction of the market, and monitoring and evaluating the response.