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Pricing Decisions

Pricing decisions in Procurement

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Vincent Ndale
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10 views

Pricing Decisions

Pricing decisions in Procurement

Uploaded by

Vincent Ndale
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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TOPIC 4

PRICING DECISIONS:
Approaches to pricing
• Demand based pricing; in this approach price is seen as the major factor determining
the level of sales of a product. It assumes that the seller knows the quantity that will be
demanded at different prices. Generally the demand for a product will rise if its price
is reduced. Demand is inelastic if price changes have little impact in the level
demanded
• Cost based pricing; when using this approach price is determined according to the
costs of providing products and services. The most common method is known as cost
plus. Here both fixed and variable costs of a product are determined and a percentage
is added to these costs to arrive at the final selling price. The benefits of cost plus
pricing include;
- it is easy to calculate because its formula based i.e. cost+ markup=SP
- unit costs of each product sold are recuperated

Volume of sales
determines total
production cost

Production cost
Demand determines
determine unit
sales volume
production cost

Unit price influences Unit cost determine


demand unit price

Example
A business makes only one product and the fixed costs are 100,000 and the variable cost
is 5,000 per unit of product made. The business has resources to make 100 units of the
product and decides that a 5% return on cost will give it a sufficient profit. What price
will the business sell the product at?
• Competitive based; this approach focuses on what competitors are doing. This
involves identification of the level at which competitors are pricing. The company then
pitches its prices around the ballpark figure. For a example a company may price as
slightly lower levels than competitors to gain market share, alternatively a company
may price slightly higher levels than competitors to communicate to customers that its
product is of higher quality
• Market based pricing; from a marketing perspective costs, demand and demand are
essential factors to consider when pricing products and services, however marketer
should consider other additional factors which include;
- Organizational objectives
- Customers
- Brand image
- Stage in the PLC
- PEST factors
- Positioning
Illustration of market based approach

Select the target market

Select the brand image

Device other marketing


mix elements

Select the pricing


strategy

Determine pricing
tactics

Select a specific price

Pricing strategies
• Premium pricing; this strategy is based on providing a high quality product or service
in a relatively high price. This approach is pursued by many companies including
Mercedes Benz. Customers accept premium prices because they fell assured of the
quality they are buying
• Economy pricing; this strategy is based offering low prices
• Penetration pricing; this pricing strategy is usually associated with the introduction
stage of the PLC. It’s based on offering lower prices to gain a large share of the market.
As the product enters later stages in the PLC prices may be increased
• Price skimming; like penetration pricing this strategy is associated with introductory
stage of the product lifecycle. This pricing strategy is based on using high prices to
recover the costs of product development. Prices are then decreased later in the PLC
Pricing tactics
• Psychological; this tactic is used to encourage customer to respond to emotional rather
than rational needs. The most common form of psychological pricing is the use of 399,
999.
• Geographical pricing; companies will often vary their prices based on geographical
locations. For instance a
• Off-peak pricing; customers are often charged lower prices if they buy products or
services off peak. E.g. transport is cheaper during non rush hours
• Bulk discounts; customers are often given discounts if they buy products in bulk
• Loss leaders; some companies will sell products at a loss to encourage customers to
buy more products from them.
• Discriminatory pricing; this involves charging different prices to different customers
eg rail and air transport

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