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10.1 PRICING PRODUCTS AND PRICING DECISIONS
Price is the amount of money charged for a product or service by the seller. Price is the only
element of the marketing mix that produces revenue, all the other elements are cost
factors.
Throughout most history, prices were set by negotiation between buyers and sellers. This
is also called dynamic pricing charging different prices to different customers. Today
most prices are fixed prices i.e. one price is set for all buyers.
Price goes by many names a few of which include:
a) Rent for apartment
b) Fees for tuition
c) Fare for taxi
d) Rates for utilities
e) Interest for money borrowed
f) Toll for use of driveway
g) Salaries for white collar jobs
h) Wages for blue collar jobs
i) Commission for sales persons services
10.4.1 PRICING STRATEGIES
The price strategies often change as a product passes through different stages in the PLC.
For new products, companies normally face an uphill task while coming up with the price
for the first time. Two of the commonly adopted strategies include:
i) Market skimming strategies
ii) Market penetration strategies
Market Skimming Strategies
Market skimming pricing is the setting of a high price for a new product to skim maximum
revenues layer by layer from the segments willing to pay a high price. The company gets
few customers but more profitable sales. An example companies that practice market
skimming strategies are: Nokia and Sony.
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Market skimming strategies are workable only if the following conditions hold:
i) The product quality and image must support its higher price.
ii) Enough buyers must want the product at that price.
iii) The cost of producing the few units must not exceed the target revenue
iv) Competitors should not be able to enter the market easily and undercut the high
price
Market Penetration Strategies
Market penetration pricing is the setting of a low price for a new product in order to attract
a large number of buyers and a large market share. Example of firms that have ever
practiced market penetration include Coca-Cola and Dell.
The low price is geared at penetrating the market quickly and deeply. The high sales
volume results in falling costs allowing the company to cut its price even further.
Several conditions must be met for this strategy to work including the following:
i) The market must be highly price sensitive so that a low price generates more
market growth
ii) The production and distribution costs must fall as sales volume increases
iii) The low price must help keep away competition.
10.4.2 Six Step Procedure for Price Setting
1) Selecting price objective
2) Determining demand
3) Estimating costs
4) Analyzing competitors price
5) Selecting price method
6) Selecting the final price
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10.4.3 FACTORS TO CONSIDER WHEN SETTING PRICES
There are two factors to consider in pricing:
(i) Internal factors
(ii) External factors
INTERNAL FACTORS
Internal factors include company’s marketing objectives, marketing mix strategy, costs and
organizational consideration.
1. Marketing Objectives
The company’s marketing goal could be survival, current profit maximization
(Maximize market skimming), market share leadership, or product quality
leadership.
Companies set survival as their objective if they are troubled by too heavy
competition, and changing consumer needs to keep a plant going in this case, the
company sets low prices hoping to increase demand.
A company with current profit maximization as is objective, will choose a high price
that maximizes current profits, cash flow or return on investment. It uses skimming
strategies in every new market segment that it opens up.
To obtain market share leadership, firms set prices as low as possible e.g Coca-Cola.
Such firms employ rapid penetration strategies to optimize on there representation
in the market.
To attain product quality leadership, a firm charges high prices to cover the high
performance quality and high cost of research and development. The firm
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differentiates its product clearly exemplifying the unique qualities of their product.
They position their products as superior products relative to competition e.g. Safari
Park Hotel
2. Marketing Mix Strategy
Companies often position their products on price and then tailor other marketing
mix decisions to the prices they want to charge.
There are five product mix pricing situations including:
a) Product Line Pricing - Is the setting of price steps between various product
lines. The basis of product line pricing could be the difference in cost,
customer evaluation of different features and competitors prices e.g. EABL
sets the price of Alvaro as different from price of Guinness and Pilsner based
on consumer evaluation.
b) Optional Product Pricing Many companies offer to sell optional or
accessory products along with their main product. They therefore price the
optional products with the main product. e.g. a motor vehicle seller might
offer to sell the car with alloy rims and CD changer as optional products. The
seller set optional prices for the rims and CD changer
c) Captive Product Pricing Companies may decide to make a separate
product that must be used along with the main product e.g. razor blade and
cartridge, printer and cartridge film and camera etc. HP for instance is said to
make very low margins with its printers but very high margins with its
cartridges.
d) By Product Pricing - Is the setting of a price for by products in order to
make the main product’s price more competitive. For example by producing
meat, petroleum and agricultural products, there are often by products.
Using by product pricing the manufacturer will seek a market for these by
products and should accept any price that covers more than the cost of
storing and delivering them.
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e) Product Bundle Pricing Is the combination of several products into a
bundle and offering them at a reduced price e.g. fast food restaurants may
bundle chips, chicken and Soda at one reduced price.
3. Costs
Companies always want to charge a price that covers all costs of producing,
distributing, selling and delivering the product at a fair rate of return. The following
types of costs must be remembered:
(a) Fixed cost (overheads) are costs that do not change with production
or sales levels e.g. rent, interest, salaries etc.
(b) Variable cost are costs that vary directly with the level of production
e.g. wages, raw materials cost etc.
(c) Total cost - Is the sum of the fixed cost and the variable costs
Marketers make considerations for all the costs (total costs) of making a product
after which a mark up could be used to arrive at the final selling price. Costs must be
minimized for a firm to be competitive in its pricing.
4. Organizational Consideration
- Management must decide who sets the price in the company.
- In smaller companies, top management sets the price rather than marketing
and sales departments.
- In larger companies, prices are set by product or brand managers and
approved by top management.
- In industrial markets, sales people are allowed to negotiate with customers
within certain price range. Even so, management sets the pricing objectives
and policies.
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EXTERNAL FACTORS
These are factors often out of control of the company and may include; Estimated demand,
type of competitive markets and other environmental elements.
1. Estimated Demand
Demand is the quantity of commodity that consumers are willing and able to buy at a given
price over a given time period.
Price elasticity of demand refers to how responsive demand is to a change in price. Some
products are price elastic others are price inelastic.
In markets with elastic demand the marketer must be aware that a slight increase in price
is followed by a big drop in quantity demanded. While in markets with inelastic demand,
the marketer charges high prices to optimize profitability.
2. Type of Market
Sellers pricing freedom varies with the type of markets as follows:
(a) Pure competition under this structure, the price is given by the market
forces of demand and supply and sellers take it as the market decides.
Marketers efforts of sales promotion, prices change and advertising play no
role in influencing demand, they only create awareness.
(b) Monopolist The firm in this market is the largest single seller. The firm sets
the price and is in full control of its demand curve. It can set a high price to
maximize profits or set a low price to maximize on sales revenue.
(c) Monopolistic competition The firms in this market are the price setters;
however each firm is keen to watch the competitors prices and set theirs as
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close as possible to that of competitors. Aggressive marketing campaigns i.e.
advertising and strong branding reduces the impact of any price difference
between firms.
(d) Oligopolistic competition Each seller is free to set prices on the similar but
differentiated products. A price increase by one firm is not necessarily
followed by a rival firm.
3. Other External Factors
a) Competitors Costs, Prices and Offers
Firms must benchmark their products, costs and prices with those of competitors in
order to know if they are operating at a cost advantage or disadvantage. A firm then
decides what price to offer to counter competition.
b) Economic Conditions
Economic trends such as recession and boom would affect the price charged.
Economic variables like interest rate would equally impact on prices.
Pricing Approaches/Methods
1. Cost based pricing Adding a standard mark up to the cost of the product to get the
final selling price. Also called mark up pricing.
Mark up pricing = Unit cost
(1-Desired % return on sales)
2. Perceived value pricing Also called positioning above competition. Price based on
the perceived value of the product by the customer and company. Mostly used in
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product positioning e.g. for upper markets, marketers charge higher prices and for
low markets lower prices.
3. Competition based pricing Also called positioning below competition Setting
prices based on the prices that competitors charge for similar products.
4. Breakeven analysis pricing Setting price to break-even on the costs of marketing
the product.
Break even point in units = Total fixed Cost
(Selling Price-Average variable cost)
5. Sealed bidding price: Based on customers proposals.
6. Target return pricing - This is a price that would help yield a target return on
Investment. Formulation for getting this is given as
TRP = unit costs + Desired returns % capital invested
Unit sales
10.4.4 OTHER FACTORS CONSIDERED BEFORE ADOPTING A PRICE
There are a number of considerations to be made when charging customers after
determining the base price of a product.
1) Price discounting
i) Cash discount
ii) Quantity discount
iii) Functional discount/trade
iv) Seasonal discount
2) Promotional pricing
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i) Loss leader pricing
ii) Cash rebates
iii) Low interest financing for purchase of products
3) Discriminatory pricing
i) Resident or non-resident
ii) Geographical location of customer
iii) Age or gender
iv) Time pricing i.e. day or night rate
v) Product image pricing
4) Psychological pricing strategy
i) Quality and brand value consideration
ii) Impact of price or other parties i.e. dealers and distributors, sales people, suppliers
iii) Competitor’s price
10.2ACTIVITY
A manufacturer of metal containers has the following costs and sales expectations
Vrriable cost per unit Ksh 20
Fixed costs Ksh 2 Million
Expected unit sales 50,000
Invested capital Ksh 10 Million
Mark-up 20%
Expected return on investment 40%
Required
(i) Determine two alternative prices for each unit produced and sold
Which pricing method would yield greater results?

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