Chapter 8 Pricing Decisions

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Chapter 8Pricing Decisions

• Learning objectives
• Define the term price
• Identify the factors involved in deciding on a
  price for products
• Discuss three options for setting pricing goals
• List the basic, dynamic and advanced pricing
  strategies
• Explain market-penetration and price-skimming
  strategies
• Describe the cost-plus pricing strategy and the
  mark-up pricing strategy
• Differentiate between fixed and variable cost
• Summarise the effect of the Internet environment
  on pricing strategies
• Recommend a pricing strategy for a given
  organisation

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Defining price

• Price is the value expressed in terms of Rand and
  cent.
• It is the value which is connected to products
  and services.
• The amount of money needed to obtain a product
  and the benefit or utility that goes with it.

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Meaning of price

• Price is the exchange value in a product or
  service.
• It is directly linked to the benefits and value
  that a product or service gives.
• Price decides the demand for the product and
  services, as well as the profit levels.
• The right price should answer the following
  questions
• Who is the primary target market?
• What is the market position of the organisation?
• What are the perceptions of customers about
  competing brands and products?
• What is the total cost of delivery?
• What are the sales and profit projections of the
  organisation?

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Meaning of price to consumers

• Consumers must give up some of their spending
  money to obtain a product.
• Main goal of consumers- to buy products and
  services to get the highest possible satisfaction
  of their needs.
• Consumers add value to products due to
  satisfaction of the needs they get from using the
  product or service. This is called yield value.
• Yield value- highest amount the consumer is
  willing to pay to use the need-satisfaction
  provided by the product.
• Replacement value- the amount consumers must pay
  to obtain a product.
• Consumer surplus- The extra need-satisfaction
  consumers get.

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Meaning of price to business organisations

• Organisation has to decide on prices to sell
  their products and services.
• Without prices no sale can take place.
• Prices must be set in order to exist and survive.
• Prices are critical for organisations that use
  low prices to differentiate themselves from
  competition.
• Two types of organisations
• Price-takers
• External things fix the price
• For example, the government sets fixed prices for
  petrol.
• Price-makers
• They have control over the decision of the prices
  they charge.
• For example, a cafeteria can put whatever prices
  they like on their products- chocolates, cool
  drinks etc.

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Factors involved in deciding on prices for
products

• Substitute products- availability of very similar
  substitutes influence prices.
• Complementary products- demand for a product is
  affected by the price competitors charge for
  complementary products and services that go with
  the product.
• Income of consumers- directly affects demand for
  products and services.
• Size of market- the greater the size of market,
  the greater the demand for products and services,
  e.g. Mango.
• Consumer taste- consumer likes and dislikes.
• Marginal revenue- organisations have to lower
  their prices to sell more of a product, thus each
  extra unit of a product they sell makes them less
  money than the previous unit.
• Price elasticity- demand will change if price
  changes. It is the percentage change in the
  quantity demanded when price changes, divided by
  the percentage change in price.

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Factors that affect price setting

• Organisations pricing decisions are affected by
  an organisations internal and external
  environment.
• Internal factors
• Marketing goals
• Organisational costs
• Other decisions an organisation makes
• External factors
• The nature of the market demand
• Consumer behaviour
• Competition
• Supplier activities
• Authority and government activities
• Economic conditions

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Three options for setting pricing goals

• An organisations pricing strategy depends on the
  pricing goals of the organisation.
• These goals should be in line with the goals of
  the organisation.
• Organisations choose from three main types of
  pricing goals
• Profit-oriented goals
• Sales-oriented goals
• Goals to keep things as they are

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Types of pricing goals
Pricing Goal Explanation
Profit- oriented goals Organisation wants to get a positive rate of return on its investment in producing and making its products.
Targeting the highest return on investment The organisation sets a price to make sure that it gets a specified percentage return on investment.
Getting the highest profits possible The organisation wants to earn a quick return on investments. This may, however, attract competition.
Sales-oriented goals An organisation with sales-oriented goals wants to sell a lot of its product or get a bigger share of sales compared to the share of competitors.
Selling more of the product Organisations set prices at a level that will sell more products. Organisation wants to have a certain share of the market. If an organisation prices its products and services very low to get market share, it runs the risk of not making any profit or it may start a price war against other organisations.
Increasing the market share or keeping it the same Organisations think if they can get a big market share its rate of investment (ROI) will increase. It produces as much as it possibly can, makes its prices lower that their competitors and reduce prices even more in line with the cost benefits it receives.
Goals to keep things as they are Organisations want to keep things stable or keep the existing good environment for its operations. Wants to avoid its sales going down and to keep the effects of outside influences.
Stabilising prices in the industry This goal is suitable for the standardised product of a market leader that sets prices.
Meeting the competition When there is no price leader, an organisation can deliberately price its products to meet the competition in the market place.
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The main pricing strategies

• Price is an active factor in the pricing
  strategy.
• Organisations choose to price their products at
  or near the prices of their main competitors.
• A price strategy uses the organisations
  positioning strategy to set a competitive price
  in a particular market segment.
• The freedom an organisation has to price a new
  product and to develop a price strategy for that
  product depends on the market conditions and
  other variables in the marketing mix.
• Various pricing strategies from which an
  organisation can choose will be discussed.

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Basic, dynamic and advanced pricing strategies

• Basic pricing strategies
• Marketers rely on a few basic strategies to set
  prices.
• Difficult to set prices and marketers do not have
  all the information about demand, cost and
  competitors.
• Basic strategies for setting prices consider some
  or all of the following cost, profit, value and
  competition.
• Types of basic pricing strategies
• Strategies based on COST
• Cost-plus pricing organisation decides prices by
  adding the set profit it wants to its cost.
• Mark-up pricing organisation sets prices by
  calculating product costs per unit and then
  deciding the mark-up percentage that it needs to
  cover selling costs and profits.
• Target pricing organisation sets prices to get a
  specific rate of ROI for a set amount of the
  product.
• Break-even analysis
• Strategies based on VALUE
• Demand-minus pricing
• Chain-mark-up pricing
• Price discrimination
• Strategies based on COMPETITION
• Going-rate pricing
• Leadership pricing

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Basic, dynamic and advanced pricing strategies
contd.

• Dynamic pricing strategies
• Pricing environment of the Internet encourages a
  kind of pricing strategy in which prices are not
  set but change.
• Technological and financial globalisation makes
  exchanges over the Internet particularly
  important for marketers.
• Exchanges over the Internet
• Advanced pricing strategies
• Includes ways of adjusting prices according to
  the amount of goods purchased, which are
  incentives to customers to buy more products at
  once or to buy them more often.
• Includes ways of structuring products and prices
  by combining several products into a single
  package called a bundle.
• Advance strategies that customise prices for
  various consumers, as well as strategies that
  respond to or create high demand for a product.
• Volume discount pricing
• Using a two-part pricing structure
• Bundle pricing
• Pure bundling
• Mixed bundling
• Price discrimination
• Frenzy pricing schemes

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Questions

• The marketing manager of All Gold needs to set
  prices for a new product- chutney. What are the
  factors that he must take into consideration when
  determining the price for the specific product?
  Please give appropriate examples.
• (14)
• There are two pricing strategies for new
  products. Please name them, discuss them
  theoretically and give relevant examples.
• (10)