Ibrahim Sameer

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Nature of Pricing You pay rent for your apartment, tuition for your education, and a fee to

your dentist or physician.

As marketers we are interested in the role of price in the buyer-seller

relationship. The buyer views price as a cost that is paid in return for a

series of satisfactions.

The seller sees price as a means of cost recovery and profit.

Price is not necessarily the most important factor in the buying

decision.

This is the only element in the marketing mix that brings in the

revenues. All the rest are costs

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Nature of Pricing (cont…) When companies attempt to plot a demand schedule, or

demand curve, for a product, they must consider elasticity

of demand. This describes the sensitivity of consumers to

changes in price. A product has elastic demand when small

price changes greatly affect levels of demand. Inelastic

demand is relatively insensitive to price changes.

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Nature of Pricing (cont…) Examples of elastic and inelastic demand.

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Pricing Objectives The first stage in the pricing process is to establish the objectives the company

wishes to achieve. Some of the pricing objectives include the following:

Return on Investment

A basic pricing objective is to achieve a target return-on-investment from net

sales.

When costs have been established, the company decides the percentage profit

it wants to achieve.

To achieve this objective the company is likely to be a market leader and less

vulnerable to changes in the market place than competitors.

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Pricing Objectives (cont…) Improvement in Market Share

Improvement or maintenance of market share is a market-based

pricing objective.

Maintenance of market share is a key to survival, and price

carries much of the burden of responsibility.

When measuring success, it is relatively easy to establish the size

of the total market, and estimate market shares of individual

companies operating in the market.

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Pricing Objectives (cont…) Maintaining Price Stability

Some products can be promoted and priced as prestige items, most firms have

little or no influence over the general level of prices.

Price adjustments are usually made in response to changing market conditions.

During the introduction and growth stages of a new product, price plays a less

significant role.

When the product matures, price wars are usually fought. Increases in market

share can be achieved by cutting prices, but this should be avoided, as the only

winners are end customers.

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Pricing Objectives (cont…) Growth in Sales

Some organization use pricing technique to boost

their sales. They do this by reducing the price of the

product.

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Pricing Objectives (cont…) Profit Maximization

Most companies have an overall pricing objective of

profit maximization.

Market conditions usually make it impossible to

maximize profits on all products, in all markets,

simultaneously.

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Steps in Price Determination Pricing should be consumer orientated as the customer is the person who finally

decides whether or not the product is purchased. A number of steps should be

followed:

Identify the potential consumer or market

The purpose is to focus the planner’s mind on the market from the outset. It

prevents price from being viewed as separate from other marketing mix elements.

Demand Estimation

Ideally it should provide the company with a schedule of predicted demand levels at

differing prices. This establishes the position and slope of the demand curve. The

price a company can charge will vary from market to market.

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Steps in Price Determination (cont…)

Anticipating competitors reaction

The nature of a competitor’s pricing structure is difficult to ascertain.

Manufacturers and consumers can easily compare selling prices, but

this does not give any insight into competitive pricing structures.

When products are easily imitated and markets are easy to enter, the

price of competitive products assumes major importance. Even when

products have substantial distinctiveness, it is not usually too long

before other companies enter the market.

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Steps in Price Determination (cont…)

Market share & Cost analysis

If a company seeks a large market share, prices will have to be

competitive. Production capacity should be sufficient to meet demand

that anticipated market share might create.

The company should established whether or not a potential market is

attractive and practical from a basic assessment of costs. If the market

is promising, a more detailed cost analysis should do. The likely level of

demand should have been estimated for varying levels of output.

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Steps in Price Determination (cont…)

Market share & Cost analysis (cont…)

Application of Break even analysis:

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Steps in Price Determination (cont…)

Profit Calculation

The determination of price and profit is a practical and not

an academic exercise. Marketing practitioners should

recognize that profit is the only means of survival for a

company and price is the major tool through which profits

can be realized.

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Price Selection Techniques Some pricing techniques pay less attention to demand,

concentrating on cost, whilst others put emphasis on the other

elements of the marketing mix.

Break Even Analysis Related to Market Demand

We begin with the premise that at too high a price there will be

no demand, whilst at too low a price the company will make

losses. The company must, therefore, choose a price that is

acceptable both to itself and to the market place.

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Price Selection Techniques (cont…)

Cost Base Price Selection Techniques

It is easy for a firm to arrive at an accurate

estimation of the cost of producing a unit of

production. Cost-plus pricing takes the cost of

production and adds an amount that will provide

the profit the company requires.

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Price Selection Techniques (cont…) Psychological Pricing

Consumers tend to believe that price is an indication of quality

and use this perceived quality to enhance the image of their

lifestyles.

Designer clothes’ are an example of prestige products and their

perceived value is greater than cost considerations. Consumers

see value in exclusivity and the ability to show that they are able

and prepared to pay high prices for fashionable items.

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Price Selection Techniques (cont…)

Psychological Pricing (cont…)

Demand for prestige goods produces a curve as shown

below:

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Price Selection Techniques (cont…)

Going Rate Pricing

Some companies price their products according to the

going rate.

When companies collectively apply this technique, prices

are stabilized and price wars are avoided.

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Pricing Strategy A company’s ability to formulate pricing strategies reflects its

willingness to adapt and modify price according to the needs of

customers and market conditions.

Discounting

If customers buy products in large quantities, they may reasonably

expect to be charged a lower price. The seller may offer discounts

voluntarily, to encourage large orders.

Manufacturers also offer discounts to encourage sales of a new product

or accelerate demand for products whose stocks are high.

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Pricing Strategy (cont…) Discounting (cont…)

A discounting strategy might be applied to payment terms.

It is common in industrial marketing to offer a percentage

discount to firms who settle their monthly account

promptly.

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Pricing Strategy (cont…) Zone or Geographic Pricing Strategies

A company should take competition and local conditions

into account before deciding a price level. Even within the

country of manufacture, customers in some areas may be

charged a price that reflects additional delivery costs.

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Pricing Strategy (cont…) Market Skimming & Market Penetration Strategies

Market skimming implies that a company will charge the

highest price the market will bear. For skimming to be

successful, the product must be distinctive enough to

exclude competitors who may be encouraged to enter the

market by the high prices that a company is able to charge

in the earlier stages.

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Pricing Strategy (cont…) Market Skimming & Market Penetration Strategies

Market penetration is when a company has a high production

capacity that must be utilized quickly, and it is particularly

appropriate to the marketing of a new product. A penetration

strategy relies on economies of scale to allow high levels of

production at a price low enough to attract the greatest number

of buyers to the market as early as possible.

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Pricing Strategy (cont…) Discriminatory Pricing Strategies

Where markets are easily segmented, companies can

charge different prices to different segments, even though

the product on offer is basically the same. This is called

price discrimination.

A popular form of discrimination is the many discounts

offered to children, students, and older persons for what

are similar services offered to the general public.

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Past Paper Review June 2008 / Q3

(a) Explain the role of price as part of the marketing mix

and describe four ways in which price may be used. (10

marks)

(b) Identify and briefly explain five factors that an

organization should consider when setting a price for a

product or brand. (15 marks)

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Past Paper Review (cont…) Answer (a)

Price is part of the marketing mix: Price, Product, Promotion and Place and is the

only part of the marketing mix that generates revenue for the organization. Price

from the customer’s point of view represents the perceived value of a product or

service. Price therefore plays many roles as part of the marketing mix and some are

described below:

Price is the tool organizations use to generate a profit for the organization by setting

a price higher than costs incurred by the organization in developing and selling the

product. The total cost of a product is made up of direct costs which are the costs

involved in making the product such as materials and indirect costs such as salaries,

rent etc., profit and price.

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Past Paper Review (cont…) Pricing strategy allows an organization to consider the market influences when

setting a price for its products. Market influences such as competitor pricing,

distribution channel mark-up will affect the price an organization can charge

for its products. This type of pricing is called market orientated pricing as it

considers market influences as well as cost.

Price is used by an organization to assist in the positioning of its products

against competitors. If an organization has a strong brand position it will be

able to charge a higher price, but price can also be used to help communicate

the position/perceived quality of a product, for example even though a perfume

probably has similar costs incurred in its production, different prices are

charged to communicate quality and image to its customers.

Price can be used as a promotional tool to encourage purchase; an example

would be where organizations offer discounts to customers.

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Past Paper Review (cont…) Answer (b)

Corporate objectives: The revenue an organization wishes to achieve will affect

the price it wishes to charge.

Market status/product life cycle: For example, a product in the introduction

stage may charge a higher price to recover the costs incurred in its development.

Positioning/branding: The market position compared with competitors will affect

the price charged, e.g. a strong branding position can demand a higher price.

Product range: If a product is part of a range of products the price charged for the

rest of the range will influence the price.

Competitors: The price competitors charge will need to be considered when

setting price to ensure the organizations product is not uncompetitive priced.

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Past Paper Review (cont…) Distribution channels: Will need to make a mark-up on the products they

sell and therefore this will affect the final price.

Price elasticity: The demand for a product will affect the price a customer is

willing to pay. If a product is price elastic, demand is greatly affected by the

price level.

Costs: The cost of a product is made up of direct and indirect costs and in

order to make a profit costs will need to be recovered plus a surplus.

Other elements of marketing mix: The price set must be consistent with

other elements of the marketing mix, for example if a product is distributed via

an exclusive high-class distribution outlet such as Harrods a higher price can be

charged. 30

Past Paper Review (cont…) June 2009 / Q – 5

(a) Explain what is meant by the following pricing terms:

(i) Cost orientated pricing

(ii) Demand orientated pricing

(iii) Competitor orientated pricing (10 marks)

(b) Explain, using examples, the following pricing strategies:

(i) Penetration pricing

(ii) Price skimming

(iii) Differential pricing (15 marks)

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Past Paper Review (cont…) Answers (a)

(i) Cost Orientated Pricing

This is where the major consideration in setting price levels is the costs

involved in manufacturing the product. The organization will calculate

these costs first and then ‘add on’ their required profit margin to create

the selling price. In order for cost orientated pricing to be effective, the

market would normally need to be less price-sensitive with products

differentiated by means of other added benefits.

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Past Paper Review (cont…) (ii) Demand Cost Orientated Pricing

This is where price levels reflect the value of the product as perceived

by the customers. The perception of the product is influenced by

factors such as brand positioning strategy, added benefits such as

service support, etc. In general it can be assumed that a high demand

means the organization can charge a high price and vice versa, however,

in terms of luxury goods (such as sports cars), although demand is

relatively low in terms of volume, the demand by the niche market is

high and therefore a premium price can be charged.

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Past Paper Review (cont…) (iii) Competitor Cost Orientated Pricing

This type of pricing considers and sometimes follows competitor

pricing activities. This is usually found in markets where there are few

suppliers or direct competitors, and consumers can easily switch

between competitors, e.g. the petrol market. Competing organizations

generally are aware of their competitors’ prices and set their own

accordingly. It is unlikely that an organization will reduce a price, as

their competitors will just follow suit, resulting in a loss of profit

margins for all concerned. Similarly, organizations are unlikely to raise

their prices, as consumers will just switch products/brands.

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Past Paper Review (cont…) (b) Answers

(i) Penetration Pricing

This pricing strategy is used when a supplier wishes to achieve a large volume of

sales within a target market in order to gain a large market share, thus having the

advantages of being able to gain cost savings through achieving economies of scale

(but also possibly being able to eliminate or reduce competition within the market).

With price penetration strategy, prices are set at a low level in order to stimulate as

much demand as possible; and therefore profit margins tend to be low, making this

a long-term strategy. An example of a market where penetration pricing is used

would be food items where organizations will need to achieve a high volume of sales

in order to make their profit through low costs, achieved by economies of scale.

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Past Paper Review (cont…) (ii) Price Skimming

Price skimming strategy is where prices are set high to attract a small segment of the

market where the perceived value of the product/brand is also high; an example of this

would be in the clothing market where brands such as Armani are priced very high to

appeal to a small section of AB social class adults. Price skimming is also used in markets

that are highly innovative and require a large investment in research and development;

and therefore manufacturers will need to set prices high to recover costs as soon as

possible. Innovators will pay the premium price, as having the most up-to-date

technology is important to them; and slowly the price will be reduced to attract more

consumers. An example of this can be seen in the computer gaming market, where new

products such as the Nintendo Wii are launched with a premium price; however, this

does reduce over time. The advantage of price skimming is that profit margins are high

and also a high price can sometimes be used to reinforce a high quality brand image.

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Past Paper Review (cont…) (iii) Differential Pricing

Differential pricing is where organizations charge different prices for the same

product/service that is offered to different market segments. An example of

this is the travel industry where there are peak (high) rates at certain times of

the day when demand is high and consumers have little choice but to travel;

and then, during the day, prices are reduced (off-peak) to attract other travelers

who are more price-sensitive and for whom travel is not a necessity (such as

families and old age pensioners). In order for differential pricing to work

effectively, the different segments of the market must be clearly distinguishable

and have very different needs and demands; otherwise the policy will fail and

consumers will change their behavior to take advantage of the lower price

levels.

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Q & A

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