Look around and you will see that everything has a value attached to it. If you move from one location to the other with a commercial vehicle, you pay a fare. If you go to a stadium to watch a match you pay a gate fee and if you borrow money from your bank, you pay an interest. When you make a call on your phone you pay a rate per second or minute. Each time you need to satisfy one need or the other, you need to incur one cost or the other to satisfy such needs.
This article will give you the opportunity to know how prices of products and services are determined.
Definition of pricing and pricing objectives
Pricing: This is one of the traditional 4Ps of marketing, it is the most dynamic element of the marketing mix in the development of marketing strategies. It is also one of the major tools with which organizations compete in the market place. The sensitivity of pricing is so enormous that organizations must waste no time before responding appropriately to price change so as not to be sent out of the market. While the other marketing mix strategies spend money, pricing generates income for the organization. It is often the measure of the value or quality of the product. The price must not be too low so as not to indicate low quality, and yet it must not be too high such that it will send consumers away to seek for alternative products whose prices are reasonable and affordable.
The first step in the determination or living price for a product is to determine the objective(s) the organization intends to achieve. Pricing objective is the way or manner in which organization determine the end result of the marketing of its products. The short of long run end results the organization intends to attain will guide what price it will fix for its product(s). Most often organizations may have several pricing objectives over time, and it must formulate these objectives clearly before developing an overall pricing strategy. Kotler & Keller noted that the clearer a firm’s pricing objectives, the easier it is to set price’. Organizations have different objectives, popular among the objectives according to Nichels are;
- Achieving a target return on investment or profit
- Building traffic: the aim of this is to build a large customer base for example, when supermarkets advertise and sell some selected products at or below cost to attract people to the store.
- Achieving greater market share
- Increasing sales
- Creating an image furthering social objectives
According to Kotler & Keller, a company can pursue any of the five major objectives through pricing:-
Survival objective: A price charge to enable the company to continue to exist in the market place. It is usually low price.
Maximum current profit: If the product is relatively new in the market without a very close subtitute, it may be wise for the producer to pursue this object before more producers discover the market.
Maximum market share: Maximizing the market share assumes high volume sales will lead to lower unit cost and higher long-run profit. This pricing objective will work better under the following conditions (a) the market is highly price sensitive and a low price stimulates market growth; (b) production and distribution costs fall within accumulated production experience and (c) a low price discourages actual and potential competition.
Maximum market skimming: It is a system where organizations set high price and slowly lower it over time. The following conditions support market skimming pricing, (a) large number of buyers have high current demand; (b) the unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic bear; (c) the high initial price does not attract more competitors to the market; (d) the high price communicates the image of superior product
Product quality leadership: It is a way by which organization charges a higher price so 35 to project the product as having the best quality.
Other objectives: Non-profit organizations may pursue other objectives that are socially oriented e.g. government owned educational institutions, government agencies that provide social amenities such as power, water and communication will usually have different objectives.
You have been told difference objectives for setting product’s price, can you list any six?
1. Achieving a target return on investment or profit
2. Building traffic: the aim of this is to build a large customer base for example, when supermarkets advertise and sell some selected products at or below cost to attract people to the store.
3. Achieving greater market share
4. Increasing sales
5. Creating an image furthering social objectives
Steps in Setting Price
When a company develops a new product, there is need to set the price for the first time. There are a number of steps that organizations need to take in order to come up with appropriate price. Kotler and Keller identified six stages of setting price for a new product:
Stages of setting price
Stage 1 Selecting the pricing objectives
Stage 2 Determining demand e.g. Sales forecast, price sensitivity etc.
Stage 3 Estimating costs e.g. Fixed and variable costs.
Stage 4 Analyzing competitors’ cost prices and offers
Stage 5 Selecting a pricing method
Stage 6 Selecting the final price
Pricing policy is the guiding philosophy or course of action designed to influence and determine pricing decisions in the organization. Pricing policy sets the guidelines for achieving pricing objectives. In general, pricing policy should address key issues like:-
Introduction of new products
Government pricing regulations
Implementation of pricing objectives
Pioneering pricing Policies
There are different types of pricing policies namely:
Pioneer Pricing: It is a process of setting the base price for a new product. The base price can be set high to recover development costs quickly or to provide a reference part for developing discount prices to different market segment
Price skimming: It is a pricing policy where an organization charges the highest possible price that a buyer who mostly desires the product pays.
Penetration price: It is a price set below the prices of competing brands in order to penetrate a market and produce a larger unit sales volume
Psychological Pricing policy
It encourages purchases based on emotional feeling rather than rational responses. It is used most often at the retail level.
Odd-even pricing: It is a pricing method that tries to influence buyers perceptions of the price or the product by ending the price with certain numbers e.g. N4999.
Customary pricing: This is a pricing system where the products are priced primarily on the basis of tradition. E.g. bride price differs from culture to culture in Nigeria. While some culture price it so high, other cultures price low.
Prestige pricing: These are prices that are set at an artificially high rate to provide prestige or a quality image. It is used when high price is associated with high quality e.g. different classes of travellers in an aircraft.
Price lining: It is a system used in pricing when an organization sets a limited number of prices for selected groups in lines of merchandize
Professional pricing: Pricing used by people who have great skill or experience in a particular field of activity e.g. an upcoming musician will be cheaper than a musician that had already made a name.
Promotional pricing: Pricing related to the short term promotion of a particular product e.g Price leader, special event pricing and experience curve pricing
The pricing methods can be broadly classified into three namely:
Cost Based Pricing: It is a method whereby a monetary amount or percentage is added to the cost of the product. It involves calculations of desired profit margin
Cost plus pricing: It involves adding a standard mark-up to the cost of product e.g. if after calculating the cost of production, overhead and other costs are assumed to be N5,000, if the expected mark up is 25%, the selling price will be m N5,000.00 + 25% of N5.000 = N6.250
Mark-up pricing: It is also similar to cost plus, except that it is often used by retailers. Retailers add a given percentage to the cost of items purchased for resale. The mark up varies from retailer to retailer. It is different from cost plus in that (a) retailers can price based on market intuition’; (b) retailers have ways to sell off unsold stock e.g. during festive season/period.
(a). Market skimming (new product pricing strategy) – prices are set high initially when a new product is introduced to the marketplace with a view to gradually lowering its price as the product moves through the stages of the Product’s Life Cycle (PLC) The objective of market skimming is to enable the firm to recover product development and marketing costs early in the PLC. Firms focusing on profit objectives in developing their pricing strategies often set skimming prices for new products.
When to use market-skimming pricing: Market-skimming pricing only makes sense under certain conditions such as:
1. The product’s quality and image must justify its higher price.
2. Demand is likely to be price inelastic.
3. The product is unique enough to be protected from competition by patent, copyright, or trade made.
4. An organization wants to recover costs quickly.
5. There is a realistic perceived value in the product or service.
(b). Market-penetration pricing – (or new product pricing strategy) – Prices are set low initially when a new product is introduced to the marketplace in order to attract large numbers of buyers and increase market share. is the opposite of skimming pricing strategy high sales volumes result in falling cost which in turn, allows the company to further lower where its prices. Market-penetration pricing can also discourage competitors from entering the market. The firm ‘first to market’ with a new product has an important advantage. Experience has shown that a brand first to market is often able to maintain dominant market share for a long time. Penetration pricing may also act as a barrier to entry for competitors. Prices may be so low that competitor may not be able to compete.
When to use Market-Penetration Pricing: Certain conditions favour penetration pricing:
(a) The offering is not unique or protected by patents, copyrights, or trade secrets
(b) Competitors are expected to enter the market quickly,
(c) There are no distinct and separate price market segments
(d) There is a possibility of large savings in production and marketing costs if a large sales volume can be generated
(e) The organization’s major objective is to obtain a large market share,
(c). Customer-based pricing (value based pricing) – (i) Value based pricing is where a product’s price is actively dependent upon its demand. This method of pricing allows companies to take advantage of highly demanded products by charging more. A good example is how soft drinks and refreshments are generally expensive at major sporting events. Housing also costs more in the urban centres as a result of high demand. Rationale: Customers generally do not know your margins or costs. Customer assessments of value are based on their personal gains and losses provided by competing alternatives. It is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is “pay for performance” pricing for services, in which you charge on a variable scale according to the results you achieve.
(ii) Internal Reference Prices: Sometimes consumers’ perceptions of the customer price of a product depend on the internal reference price. Based on past experience, consumers have a set price or a price range in their mind that they refer to in evaluating a product’s cost. In some cases, marketers try to influence consumers’ expectation of what a product should cost by employing reference-pricing strategies. A price might be compared to a competitor’s price listed in an advertisement or a higher-priced version of the same or different brand, Two results are likely. If the prices (and other characteristics) of the two products are fairly close, the consumer will probably feel the product quality is similar. This is called an assimilation effect. If the prices of the two products are too far apart, a contrast effect may result in which the customer equates it with a big difference in quality. Consumers make price-quality inferences about a product when they use price as a cue or an indicator of quality. If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-price product is the higher-quality product.
You have learnt a number of pricing methods, can you briefly explain the customer-based pricing method to your friends.
Alternative Pricing Strategies
Price bundling: A firm may sell several products that consumers typically buy at one time. Price bundling means selling two or more goods or services as a single package for one price.
Captive pricing: It is a pricing tactic a firm uses when it has two products that work only when used together. The firm sells one item at a very low price and then makes its profit on the second high-margin item. For example, the telecommunication companies sell their sim cheap with the aim of gaining when customers buy air-time.
Psychological pricing: Setting a price is part science, part art. Psychological aspects of price are important for marketers to consider. An example of this is Odd-Even Pricing. Marketers have assumed that there is a psychological response to odd prices that differ from the responses to even prices. Habit may also play a role. Some prices are set at even numbers because of necessity. Lottery tickets and admission to sporting goods are two examples. Many luxury items use even Naira prices to set them apart.
Premium pricing: Use a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists.
Value based pricing: This approach is used where external factors such as recession or increased competition force companies to provide ‘value’ products and services to retain sales.
Geographical pricing: is evident where there are variations in price in different parts of the world, or variation in price in different regions or states of the country.
Loss leader: This is an item you sell at or below cost in order to attract more customers who will also buy high-profit items. This is a good short-term promotion technique if you have customers that purchase several items at one time.
Other factors influencing the price of a Product
In addition to the various ways of determining the price of a product, the factors summarized below must also be taken into consideration in the determination of the price of commodity. They are:-
i. Cost of manufacturing and distribution
ii. The nature of the product and the demand for it
iii. Availability of substitute
iv. Price for immediate profit or the future
v. Existence of government restriction on price
vi. Price of competitors selling similar products
vii. Psychological attitude of the buyers
viii. Other marketing variables
Pricing Administration and Control
Price administration and control have to do with how the base price is adjusted to meet certain market conditions. The conditions that may warrant the adjustment include the following:-
Sales made in different quantities
Sales made under different policies of credit and collection
Sales made to buyers in different geographical location
The possibility of competitors adjusting prices
Discounts: The organization can use the different discount systems to adjust and manage the price of the organization’s products. These discount systems include:
Quantity Discount: encourages buyers to purchase large quantities so as to enjoy some kind of rebate in price.
Cash Discount: These are Price reductions given to buyers who pay bills within a stipulated period. In other words, it exists when prompt payment or cash payment results in a price reduction to the buyer. Discounts are based on cash payments or cash received within a stipulated period.
Trade Discount or Functional Discount: Payment to intermediaries for the performance of various marketing activities depending on their sequence in the distribution system. Intermediaries perform vital roles like – providing time and place utility for a product. A trade discount is usually stated in terms of a percentage or certain of percentage off the last price.
Promotional Discounts: These are reductions from the last price, which are offered by sellers as payment to intermediaries for carrying out promotional activities locally i.e. within the geographical location of the seller.
Seasonal Discount: It is usually allowed on goods that are seasonally demanded so as to counteract the slack periods of demand for such products.
Allowances: A type of reduction from the list price to achieve a desired goal. Trade in allowance, for example, is price reduction given for turning in used item when purchasing a new one.
Explain how quality discount is different from cash discount? A seller gives the buyer quantity discount because such buyer buys in bulk, while cash discount is given because the buyer made all its purchases by paying immediately
You have learnt in this module pricing strategy. It is one of the 4Ps of marketing. It explained pricing objectives and stages of fixing price for a product. The module further explained pricing policy and methods. It also listed other factors that determine the price of a product. Finally, the unit explained different discounts system as method of administering and controlling the price by the marketing organization.