CHAPTER ELEVEN
ELEMENT OF PRICE
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
1. Define price
2. State the objectives of pricing
3. Identify the pricing process
4. List and explain new product pricing strategies
5. List and explain existing product pricing strategies.
PRICE DEFINED
Price, in marketing sense, is the exchange of a firm or seller’s product with customer’s money. Price can be defined as the monetary value that a manufacturer or seller is ready to accept in exchange for its products.
General Pricing Objectives
i. Survival: All companies have ‘survival’ as their major objective. In pursuing this objective, prices are fixed to cover variable costs and some fixed costs. This way, a company can remain in business. In worst situations, companies should be able to at least fix prices to cover variable cost.
ii. Maximizing profit: Since profit is the excess of total revenue over total cost, companies usually fix prices not only to cover the unit cost of producing a given product but to enable them earn profit.
iii. Market leadership: Companies intending to pursue market leadership usually set their prices low, especially if the product has elastic demand. Three conditions favour setting a low price:
i. When the market is highly price sensitive, and a low price stimulates market growth;
ii. When production and distribution costs fall with accumulated production experience; and
iii. When a low price discourages actual and potential competition (Kotler and Keller, 2006:406).
iv. Product-quality leadership: Companies pursuing product leadership usually fix higher prices for their products or services. Since it costs a lot to produce a product or service with a high quality, companies charge higher prices in order to cover their high cost of providing quality. There’s a common saying in Nigeria that “good thing na money kill am.” Companies that fix higher prices usually have higher income earners as their target market. Higher income earners are insensitive to prices.
Specific Pricing Objectives
1. Prices can be set low by a company to prevent, survive and beat competition.
2. Prices can be set low to make customers more loyal to the company. Oliver (1997:392) cited in Peighambari (2007:18) define customer loyalty as:
A deeply held commitment to re-buy or re-patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior.
3. A company producing two or more products with complementary demand can reduce the price of one product to stimulate more demand for other products.
Process of setting price
Several factors need to be considered in setting price. For convenience, these factors are arranged sequentially and should be adhered to by entrepreneurs while setting prices:
1. Selecting the firm’s pricing objective;
2. Estimating the firm’s demand;
3. Estimating the firm’s total cost (i.e. fixed and variable cost);
4. Analyzing the competitors’ costs, prices, and offers;
5. Select a pricing method; and
6. Fixing the final price.
Setting prices for a new product
Depending on the nature of the product and market, an entrepreneur can set prices for his/her new product(s) in two ways: market-skimming pricing and market-penetration pricing.
1. Market-Skimming Pricing: If an entrepreneur enters a market with a product that is entirely new to the market (e.g. an invention), he/she can afford to set higher prices. For example, when MTN entered the Nigerian telecom market in 2001, it offers a new product to the market – GSM services – at a very high price. Sim packs or lines were sold at N30,000; recharge cards at N1000 and above, and calls billing was based on minutes and not seconds. If a customer makes call for just one second, he still pays for one minute.
This method of pricing a new product is only attractive if there is high entry barrier into the market. That is, where the entrepreneur enjoys legal monopoly or where the cost of entry into the business and exit from the business is very high. Again, the commodity that is offered for sale must be a necessary good. For example, communication offered by MTN is a necessary good.
2. Market-Penetration Pricing: If an entrepreneur enters a market with an existing or familiar product, he/she can charge a lower price than the competitors are charging for their products. By so doing, the entrepreneur can snatch away the customers of the competitors. For example, before Globacom entered the Nigerian telecom market in 2003, there were three GSM operators - MTN, Econet (now Eltel), and M-tel. To attract customers and penetrate deeper into the GSM market within short period of time, Globacom started per second billing which is far lower than the competitors’ per minute billing. The effect was large customer defection from MTN, Econet and M-tel to Globacom.
This method of pricing a new product is only attractive if the consumers are highly sensitive to price changes so that a lower price can attract them and induce them to buy more. Also, the production, distribution and promotion cost must fall as sales increases.
Pricing strategies for existing products
Firms may not maintain a single price for their existing products for the whole target markets. Factors such as geographical location of each target market, market-segment requirements, delivery frequency, product accompanying services and other factors force the entrepreneur to charge different prices for one product sold in different markets.
The pricing strategies for existing products are geographical pricing, price discounts and allowances, price discrimination, cash rebates, and price cues. These are explained below:
1. Geographical pricing: While using geographical pricing, entrepreneurs charge different prices for a product that is offered to different segment markets. The entrepreneur may need to charge lower prices to market segments situated close to the entrepreneur’s factory or store, and higher prices to distant customers or market segment in order to cover the higher cost of transportation.
2. Price discounts and allowances: Discount refers to the amount of money (in percentage) that is taken off the usual cost of a product or service. An entrepreneur may permit buyers to pay prices lower than the fixed price of a product to encourage early payment for their products sold at credit, increase purchases and off-season buying. However, discount increases sales volumes but erodes entrepreneurial profit.
3. Cash rebates: Unlike price discounts, rebates offer cash-winning-products to consumers to encourage purchase without necessarily cutting the stated list price.
4. Price discrimination: In a market where price determination through haggling/negotiation/bargaining is the norm, the entrepreneur can sell one commodity to different buyers at different prices. This is very common in the open-markets in Nigeria.
5. Price cues (psychological pricing): Retailing entrepreneurs who operate supermarkets often use this type of price cues. This pricing strategy stresses that listed prices should end in an odd number. A product priced at N399 instead of N400 is regarded by buyers as a price in the range of N300 and not in the range of N400. Also, prices that end with “9” give the impression of a discount, and thus encouraging increased purchase.
6. Dynamic pricing: This is a practice in which company products vary frequently based upon demand, market segment, and product availability. In other words, higher demand for a company’s product usually attracts higher prices, and vice-versa. Similarly, high-income market segments are usually insensitive to price increment and therefore, can afford to pay higher price as compare to low income market segments. Yet, product scarcity due to interrupted supply of inputs may influence a company to hike product prices which is in line with the doctrine that low supplies of goods and service forces prices up.
SELF-ASSESSMENT QUESTIONS
1. a. Define price
b. List and explain the general objectives of pricing
c. List and explain the specific objectives of pricing
d. Identify the pricing process
2. List and explain new product pricing strategies
3. List and explain existing product pricing strategies.