[MUSIC] So now that you're familiar with both approaches. Both the top-down approach, which is the one the marketeers should always think about. The one that begins with value to the customer, as you're only going to get. A price that is lower than the maximum value that you have created for a potential consumer. And the bottom up approach, which is the cost or cost plus approach. Which one shall we use? Are there other factors that are influencing the price? Obviously, right? One is competitors. Oftentimes, consumers will see what products are substitutes for the product that you're trying to sell. Which in essence means that your pricing possibilities or your pricing strategy may be cut by how close, or how much does your product or service resemble that of offered by some competitor. But in addition, there is many other references points that consumers will have in their mind. For example, the famous case is that of you sending your buddy to buy a very cold beer in a very hot summer day while you are laying on the beach. If he came back and told you that he paid two euros for a very cold beer and he bought it from a guy selling beers in a beach town, you would consider that to be a good or a very reasonable price. But if he came back and told you that he spent eight euros on the same beer, because he bought it at a 5-star resort which was a couple hundred meters down the beach, you will also consider that to be a good price, even though the same product at the same temperature will be consumed by you. So this is the idea of a fair price. What do we consider in our mind to be fair? In part, depends where have you acquired, amoungst other things, as to what is the place that actually sold you the product, right? So, besides the cost and the value that we create for consumers, competitor prices and another behavioral reference points that consumers may have us to how to set the price. It's also important to determine, and perhaps most importantly, what is the ultimate objective of why you're trying to set a certain price structure or different price structure? As an example, let's look at these two possible objectives. A company may have the objective to skim the market in which case you will set a very high price. For example, in introductory product offers, a particular case is that of the Wii console, which launched around 280 Euros when it first launched, and a month later the console had dropped in price to 179. Okay that is called skimming the market which is there is a pent up demand for the product of people that cannot wait for a month they will the first ones to get the console and they're willing to pay up to a hundred euros more than the predicted estimated price of the product months down the road. But additionally you may have decided that you just want to see penetrate the market and facilitate trial. So if you're following a penetration strategy, you may decide to go with a lower price. Because maybe your objective is to facilitate the trial, for example, as we discussed before. Or simply to not erase the awareness of other would-be competitors. In which case, you may decide to start with a lower pricing point for your product or service. Okay? So with this in mind, let's take into account what are the different steps that you will follow to try to actually determine your price? First of all, you will begin with the objectives, as we have just discussed. Skimming the market, or penetrating the market, or many other strategic or financial objectives that your management committee may have set for yourselves will determine, first of all, what should be the price strategy. Second, you will try as best as you can to estimate the demand and the elasticity, meaning what is the overall estimated demand size for your product and how are people going to respond to a one percent change in the price of your product or service? Obviously, you need to estimate the cost. Because you can, in principle, as a general rule of pricing, not price below the total cost of the products. Analyze the market and the competitive offers. Because these will certainly be reference price points for the product or service and the pricing of the product or services that you will offer. And finally, select an approach to pricing. We have talked about too, value pricing or a better map approach. But there are many other possibilities. Including, having to submit a tender, meaning bidding for a contract for example. Certain profitability or financial targets, etc. [MUSIC]
