PRICING

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MEANING OF PRICING

Price is the sum or amount of money at which a thing is valued, or the value which a seller sets on his goods in the market; that for which something is bought or sold, or offered for sale; equivalent in money or other means of exchange; current value or rate paid or demanded in the market or in barter; cost.

Pricing is the process of determining what a pro ducer will charge in exchange for its products. Pricing is the process of assigning a monetary value to goods and services by a firm. OR Pric ing is the process adopted by a firm in setting the selling price of its products.

PRICING STRATEGIES IN MARKETING

1. Market penetration pricing strategy

2. Market skimming pricing strategy

3. Satisfactory rate of return

4. Product line pricing

5. Discriminatory pricing strategy.

6. Psychological pricing strategy.

7.Competitive based pricing

8. Predatory pricing strategy.

9. Mark-up pricing strategy

10. Target return/profit pricing

11. Differential pricing strategy.

12. Geographic pricing strategy

Explanation of Four Pricing Strategies

i. Premium pricing: This means setting the price of a product artificiallyhigh to encourage favourable perceptions among buyers. People associate a higher price with higher quality, which is why some people would be willing to pay that price.

ii. Penetration pricing: This means set the price of a product artificially low to gain a good market share, and then increasing the price.

iii. Economy pricing: This means keep ing the price of a product as low as possible. This includes lowering the cost of its production and limiting the to Im amount you spend on promoting it.

iv. Price skimming: This is a pricing strat egy where businesses set a high cost for a product initially, and then lower it over time.

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, channel decisions and promotion.

Pricing can be difficult to get right. We do not know exactly how much the other party is prepared to pay, but we need customers in order to sustain and grow our businesses. So, how do we ensure money is not left on the table, yet we still make the sale?

Too many businesses have been lost because they priced themselves out of the marketplace. On the other hand, too many businesses and sales staff leave “money on the table”. One strategy does not fit all, so adopting a pricing strategy is a learning curve when studying the needs and behaviours of customers and clients. needs and

1. Cost-plus Pricing

This is the simplest pricing method. The firm calculates the cost of producing the product and adds a percentage (profit) to that price to give the selling price. This method, although simple, has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. After all, customers are not too bothered on what it costs to make the product; they are interested in what value they derive from the product.

The term ‘cost-plus pricing’ is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach being covered. cost-plus pricing may lead to products that are ot priced un-competitively.

2. Price Skimming

Skimming involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition – usually due to some technological features. Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market. Good examples e of price skimming include innovative electronic products such as the Apple iPad and Sony – PlayStation 3.

There are some other problems and challenges ere are so with this approach. Price skimming as a strategy cannot last for a long time, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone or iPad).

Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming.

A final problem is that by price skimming, a firm may slow down the volume or growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.

3. Premium Pricing

Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favourable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction.

For example, as consumer, you are standing in front of the shelves and you are given the choice of products A, B and C at prices all relatively the same. Then there is product D. Product D is priced a little bit higher.

4. Penetration Pricing

Penetration pricing is when you set a relatively low initial entry price, hoping people will switch from a higher priced vendor. Companies working on how to gain market share tend to use penetration pricing. Penetration pricing has been a popular pricing model for Internet companies, reasoning if they build the audience, they will figure out how to make money later. So long as customers place some value on the service, then the company should build their customer base quickly.

There are obvious problems with acquiring customers on a low-price basis. The customers you have are price-sensitive and will likely become non-customers the minute someone else lowers their price, or you increase your price.

You are still vulnerable to competitors who offer something better, who are more efficient, or have more venture capital to blow through. Even if you set a low price, they can still undercut you.

5. Geographical Pricing

Geographical pricing sees variations in price in different parts of the world, for example, rarity value, or where transportation costs increase price. In some countries, there is more tax on certain types

of product which makes them more or less expensive, or legislation which limits how many products might be imported again, raising price. i Some countries tax inelastic goods such as alcohol or petrol in order to increase revenue, and it is noticeable when you do travel overseas that sometimes goods are much cheaper or expensive.

Summary of Pricing Strategies

i. Cost-plus pricing method/markup pricing strategy: With this method, the firm calculates the cost of producing the product and adds a percentage profit to get the price.

ii. Geographical pricing: With this method, different prices are set for same product in different locations.

iii. Prestige pricing: This is used to create a high image for a product by pricing it high. For most people, a high-quality product must be associated with high cost.

iv. Customary pricing: This is where firms are rather traditional in their approach to prices. Such firms would adjust the products in terms of size and content rather than changing the prices..

v. Promotional pricing: It is setting a lower price for certain products so as to encourage customers to buy the product.

vi. Target rate-of-return: The price is set by adding a desired return on investment to the cost of product.

vii. Premium pricing: This is setting the price higher than competitors during the introduction of the product. Skimming strategy.

viii. Market penetration: It is setting price lower than competitors to attract buyers.

ix. Psychological pricing: The price is set so as to encourage customers to buy a produc on the basis of emotion than logic. gour

x. Price lining: This is setting different prices for products within a specific group.

xi. Price leadership strategy: This is setting a product price at a level of the market leader’s price.

xii. Loss leader pricing strategy: This is setting a price below cost so as to attract prospective buyers to buy other products in the shop.

xiii. Competitive bidding pricing strategy: This is setting a price at the lowest offer of a bidder in relation to other bidders.

PRICE DETERMINANTS

1. Ability to pay: This is the ability of a consumer to pay for a particular product vlavil or service. It is an important factor that dowa organisations must put into consideration 25ing before setting the price of a product or obro service. hem ning osrod no gripho

2. Competition: If there is a strong competition in a market, customers are faced with a wide choice of whom to buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service But customers will certainly be mindful of what is a reasonable or normal price in the market.

Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors.

3. Profit maximisation: Maximising profits is said to be the objective of all firms. Management of an organisation should also not forget that they need to make profit from selling a product which is the main reason while the organisation is set up.

Importance of Price to a Producer

(i) Raising of revenue-Price plays a piv otal role in the marketing of goods and services as it attracts revenue for the business.

(ii) Sales Volume – Price can be used to increase the volume of sales.

(iii) Product Value-Price can be used determine the value of the product to the customer.

(iv) Corporate Image-Price can be used to build an image for the company.

(v) Product Quality-Price gives a percep gointion of quality a customer is likely to re ceive.

(vi) Prevention of Competition-Price can be used to prevent competitors from en tering the market.

(vii) Market Share – It can be used to in crease the company’s market share. (viii) Inducement-Price can be used to in duce customers to purchase more of the company’s products.

(ix) Price helps the producer in marketing planning and analysis.

(x) It helps the producer to compare be tween producing a product and outsourcing the product to another com pany.

(xi) Profitability – It can be used to increase profitability.

REVISION QUESTIONS

 

1. What is pricing?

2. Explain the following pricing strategies:

(a) Cost-plus pricing

(b) Price skimming

(c) Premium Pricing

(d) Penetration Pricing

(e) Geographical Pricing.

3. What are price determinants?

4. Explain pricing in detail (WASSCE June, 2016).

5. (a) What is pricing? (b) List and explain the four elements of marketing mix.

6. List and explain any four pricing strategies.

7. Explain four pricing strategies

(i) Premium pricing (ii) Penetration pricing

(iii) Economy pricing (iv) Price skimming

(WASSCE June, 2019).

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