The first stage, setting pricing objectives, is critical because pricing objectives form a foundation on which the decisions associated with subsequent stages are based. The second stage, assessing the target market's evaluation of price, tells a marketer how much emphasis to place on price and may help determine how far above or below the competition the firm can set its prices. Understanding how important a product is to customers in comparison with other products, as well as customers' expectations of quality, helps marketers assess the target market's evaluation of price. In the third stage, a marketer considers the demand curve and the price elasticity of demand . If demand is elastic, a change in price causes an opposite change in total revenue.
Inelastic demand results in a parallel change in total revenue when a product's price is changed.
Analysis of demand, cost, and profit relationships the fourth stage of the process can be accomplished through marginal analysis or breakeven analysis. Marginal analysis combines the demand curve with a firm's costs to develop an optimum price for maximum profit. To do marginal analysis, marketers must first calculate fixed costs , average fixed cost , variable costs , average variable cost , total cost , average total cost , and revenue. Marginal analysis is only a model. It offers little help in pricing new products before costs and revenues are established.