PRICE /PRICING

OBJECTIVES

 The importance of price

 How prices are determined
 The relationship between types of costs and sales
 Different pricing strategies and their application

This is the amount of money charged for a good or service. This is the sum of value consumers
exchange for the benefit of having or using a good or service. This is the market value of a
product as it is offered in market.

It is the measure of the value exchanged by the buyer for the value offered by the seller.

Cost and profits

Cost-it’s the amount of resources usually quantified in monetary terms which is allocated to
preparing a product for offer to a market.

In other words, everything we spend on making an offering before we add the element of profit.

Profits-It’s the excess over costs in revenue.in other words, when we receive a sum of money
from sales whatever is left over when we have paid all our costs is profit.

Elements of cost

Cost accounting involves the calculations of costs of products or service.

Definitions

A product cost is defined in as the cost of a finished product built p from its cost elements
and therefore the total cost of a product/services consists of the following.

 The costs of material consumed in making the product or providing the service
 The cost of the wages and salaries (labour) of employee of the organization, who are
directly or indirectly involved in producing the product the product or providing the
service.
 The cost of other expenses apart from materials and labour costs, these includes items
such as rent and rates electricity bills, gas bills depreciation interest charges the cost
cleaning.

Direct costs and indirect costs

This is expenditure that can be economically identified with specific saleable cost unit.
 Direct costs are usually one of three types

Direct material costs-these are costs of materials that are known to have been used in making
and selling a product (or even providing a service).

Direct labour costs are the specific costs of the work force used to make a product or provide
a service .Direct labour costs are established by measuring the time taken for a job or the
time taken in direct production work.

Other direct expenses are those that have been incurred in full as a direct consequence of
making a product or providing a service or running a department such as the quality control
laboratory.

Indirect cost

This is expenditure on labour, materials or services which cannot be economically identified

with a specific salable cost unit

Functional costs

This is traditional costing system for a manufacturing organization costs are classified as
follows:

 Production or manufacturing costs

 Administration costs
 Marketing or selling and distribution costs

Fixed costs and variable cost

This is cost that is not affected by level of production

Examples include:

Direct material costs-these costs will rise as more units of a product are manufactures and so
they are variable costs that they vary with volume of production.

Sales commission- it’s often a fixed percentage of sales turnover and so is a variable cost that
varies with the level of sale (but not with the level of production)

Telephone call charges -are likely to increase if the volume of business expands and so they are
variable overhead cost, varying with the volume of production and sales.

Rental costs of business premises is a constant amount at least within a stated time period and so
it is a fixed cost that does not vary with the level of activity conducted on the premises.
Controllable and uncontrollable

Controllable costs are sometimes called avoidable costs these are costs that may be avoided if
output is lowered or particular activities not undertaken.

Uncontrollable costs-these are costs which tend to be outside the short-run control of the
business.

May fixed costs are often uncontrollable or avoidable.

Benefits of a costing system for marketers

1) The identification of profitable and unprofitable product, services, center and so on.
2) The identification of waste and inefficiency.
3) Assistance in setting prices.
4) The provision of accurate stock valuations.
5) The analysis of changes in cost, volume and hence profit.
6) Assistance in planning, control and decision machining (budgets, pricing and so on).
7) Evaluation of the effectiveness of decisions.

Factors affecting pricing decisions/factors to consider when pricing.

o Marketing objectives-a marketer must consider the marketing mix in terms of

product design, distribution and promotion in order to form a consistent and
effective marketing programs
o Cost-consider the cost of production, cost of distribution and marketing
expenses.
o Profit maximization-the management must consider profits expected before
setting the final price.
o Organizational considerations-prices must always be set by management
rather than by the marketing department/sales
o Market and demand for the product-a marketer must understand the
relationship between price and demand for the product(factors affecting
demand).
o Environmental elements-prices must take into consideration the existing
competitors prices.
o Prices of substitute goods.
o Intermediaries demands
o Suppliers-if an organization suppliers notice that prices of an organization
products are rising, they may seek a rise in price of their supplies(inputs) to
that organization
o Inflationary conditions prevailing in the country
 o Income effects of the consumers.

Importance of pricing.

1. Price is a means of regulating the economic activities i.e keeping the economy in balance.

2. Price has a considerable impact on consumer perception i.e a marketer can either increase
the price and emphasize on quality or lower the price and emphasize on bargaining.

3. Price is one of the four pcs that can be changed quickly to respond to changes in the
environment.

4. Price determines the entire marketing strategies of a company

Pricing objectives.

This gives the directions to the whole pricing process. determining what your objectives are is he
first step in pricing. when deciding on pricing objectives, you must consider.

• Overall financial, marketing and strategic objectives of the company.

• Objective of your product/brand.

• Consumer price elasticity and price points.

• Resources you have available.

SPECIFIC OBJECTIVES.

• Maximize long-run profit

• Maximize short run profit.

• Increase sales volume(quantity).

• Increase monetary sales.

• Increase market share.

• Obtain a target of return on sales.

• Stabilize market price.

• Ensure company growth.

• Maintain price leadership.

• To desensitize customers to price.

• Discourage new entrants into industry.

• Match competitor’s prices.

• Encourage exit of marginal firms from the industry.

• Survival in the market.

• Avoid government investigation/intervention.

• Obtain/maintain loyalty and enthusiasm of distributors and other sales personnel.

• To be perceived as fair by customers and potential customers.

• Social, ethical or ideological objectives.

STEPS INVOLVED IN PRICING PROCESS.

A firm must set a price for the first time when the firm develops or acquires a new product, when
it introduces its regular product into a new distribution channel/geographical area and when it
enters its bid on new contract work.

Kotler describes a six step procedure for price setting.

1. Select the price objective-ie maximum current profits, maximum current revenues and
current sales growth.

2. Determine the demand-analyse the demand curve ie demand curve is normally inversely
related to price.

3. Estimate the cost-demand sets a ceiling on price that the company can charge for its
products and the company sets the floor ie fixed/variable.

4. Analyze competitors costs, prices and offers-benchmark your costs against competitors
cost.

5. Select a pricing method ie markup ,target return, value, sealed bid etc.

6. Select the final price-pricing methods narrows the price range from which the company
must select its final price.in selecting the final price, the company must consider additional
factors including psychological pricing, influence of other marketing mix elements on price,
company policies and objectives, pricing policies and objectives and legal constraints.

METHODS OF PRICING/DETERMINING PRICE LEVELS.

1.Cost-based pricing.
Mark-up pricing-this involves adding a standard markup to the product cost .markups are higher
on seasonal items, slower moving items and items with high sewerage and handling costs. A
high mark up however may be disadvantageous if competitors prices are low.ie hotels peak
mostly in holidays.

Advantages of high mark up.

• It is advantageous in that sellers can determine their costs more easily and hence by
basing their prices on cost, they simplify the pricing task.

• Where all firms use this pricing method, prices tend to be similar hence price competition
is minimized.

• Most people feel that pricing method is fair to both buyers and sellers.

Target return pricing-

The firms determine a price that will yield its target rate of return on investments. If the firm
doesn’t reach expected unit sales ,the marketer can prepare a break even chart to learn what
would happen at other sales levels based on different prices. The manufacturers will then use
different prices and estimate the probable impact on sales volume and profits.

Value based pricing.

1. Perceived value pricing-companies based their price on customer perceived value. They
see the buyers perception of value and not the sellers cost as the key to pricing e.g. a car
manufacturer may price his car at a million while his competitor charges 90,000.he may explain
the difference due to longer warranty of the car,superior services,superior durability etc. the
customer will be convinced that such a car operating costs will be lower and hence buy the more
expensive car.

2. Value pricing-companies charge a low price for low quality goods and a high price for
high quality goods. The price must reflect a high value offer to customers.

Competition based pricing.

a) Going rate pricing-the firms basis its price largely on competitors prices. Smaller firms
follow the leader changing their prices only when the market leaders change theirs rather
than when their own demand or costs change. Some firms may charge a slight premium
or a slight discount but they preserve the amount of difference to minimum.
b) Sealed bid pricing-this is where a company submits sealed bid for jobs. The firm bases its
price on expectations of how competitors will price and for a firm to win a contract, it has
to submit the lowest price bid, however it cannot price below costs and neither can it
compromise on quality, hence a firm will bid a price that will maximize the expected
profits in the long –run.
 Pricing strategies
This are defined as long plans and they are not limited, compared to ways of establishing prices.

1.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. Such high prices are charge for luxuries such
as Conrad Cruises, Savoy Hotel rooms, airplnes etc

2.Penetration Pricing

The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was used by France Telecom and Sky
TV.

3.Economy Pricing

This is a no frills low price. The cost of marketing and manufacture are kept at a minimum.
Supermarkets often have economy brands for soups, spaghetti, etc.

4.Price Skimming

Charge a high price because you have a substantial competitive advantage. However, the
advantage is not sustainable. The high price tends to attract new competitors into the market, and
the price inevitably falls due to increased supply. Manufacturers of digital watches used a
skimming approach in the 1970s. Once other manufacturers were tempted into the market and
the watches were produced at a lower unit cost, other marketing strategies and pricing
approaches are implemented.

Premium pricing, penetration pricing, economy pricing, and price skimming are the four main
pricing policies/strategies. They form the bases for the exercise. However there are other
important approaches to pricing.

5.Psychological Pricing

This approach is used when the marketer wants the consumer to respond on an emotional, rather
than rational basis. For example ‘price point perspective’ 99 cents not one dollar

6.Product Line Pricing

Where there is a range of product or services the pricing reflect the benefits of parts of the range.
For example car washes. Basic wash could be $2, wash and wax $4, and the whole package $6.

7.Optional Product Pricing

Companies will attempt to increase the amount customer spend once they start to buy. Optional
‘extras’ increase the overall price of the product or service. For example airlines will charge for
optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.

8.Captive Product Pricing

Where products have complements, companies will charge a premium price where the consumer
is captured. For example a razor manufacturer will charge a low price and recoup its margin (and
more) from the sale of the only design of blades which fit the razor.

9.Product Bundle Pricing

Here sellers combine several products in the same package. This also serves to move old stock.
Videos and CDs are often sold using the bundle approach.

10.Promotional Pricing

Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).

11.Geographical Pricing

Geographical pricing is evident where there are variations in price in different parts of the world.
For example rarity value, or where shipping costs increase price.

12.Value 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 e.g. value meals at
McDonalds.

Reactions To Price Changes.

Price cut may have many meanings ie,

• Product about to be replaced by newer models

• fault in the product

• the sellers are abandoning the segment ,so they want to do away with the stock as fast as
possible.

• reduction in quality.

Price increase on the other hand may have many meanings ie

• the product is so hot ie has become unobtainable, so better buy it soon,

• Improved value etc.