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Pricing

It refers to attaching a monetary value to a product. It also refers to the amount the product is
expected to be worth. It is a process of attaching value to a product.

The Role of Pricing/Pricing Objectives

1. Profit maximization – for more privately-owned organizations, profit remains an order riding
objective. In economic theory of firms, profits are maximized when marginal costs are equal to
marginal revenue.

2. To achieve a target level of profits – some firms may just seek to obtain a certain level of
profits rather than the maximum level of profits.

3. To increase the market share – some firms seek to increase their market share even to the
extent of sacrificing short term profits, for example, use of penetration pricing strategy where
low prices are charged even if it is below the cost of production.

4. Sales revenue maximization – some firms may set prices at a low range so as to maximize
sales especially if they seek an early recovery of cash.

5. To fulfill social responsibility – pricing is a vital component of the marketing mix. Pricing can
be used to add value to a product. Pricing also guarantees the quality of the product. Some
marketers say that buying the cheapest is not always the best policy but you have to buy a quality
product.

6. Profit margin – this is pricing to maximize profit on each unit sold. This objective is seen in
skimming based on the assumption that buyers are still prepared to purchase the goods despite
the high price, for example, demand is inelastic.

7. Risk minimization – firms in the short run may set prices to minimize risks and maximize
survival.
8. To fail competition – prices may be set to meet competition or to drive out competition, for
example, use of penetration pricing.

Pricing Strategies

(a) Customer-Oriented Pricing.

This is pricing based on demand for the product and customers perception on the value rather
than the costs of production.

1.1. Penetration Pricing Strategy

It is where relatively low prices are set and strong promotion takes place in order to achieve high
volume of sales. By introducing the product at a low price, the firm can penetrate deep into the
market.

As volume increases the price is raised. This strategy can only be used in market segments
where consumers are price sensitive. It can also be used in a market with stiff competition.

Advantages of Penetration Pricing Strategy

1. Low prices help fight competition.

2. It allows for growth of market share due to increased volume of sales.

Disadvantages of Penetration Pricing Strategy

1. It is only suitable when the firm possess the capacity for high sales volumes and when a low
price generates sufficient sales to compensate for low profit margins.

2. If the product has a short life cycle, penetration does not provide sufficient time to cover
research and development costs.

3. Due to low prices, customers might position the product as of low quality.

1.2. Skimming Pricing Strategy

This is whereby firms change high prices for a product at early stages and then reduce it with
time. As the product becomes more acceptable and volume of sales increases the firm will be
able to benefit from economies of scale and can therefore afford to reduce prices. It is usually
used when firms are selling a highly differentiated product with many unique features. This can
be used in market segments where consumers are not price sensitive (inelastic) and are of high
quality.

Advantages of Skimming Pricing Strategy

1. It allows for early recovery of research and development costs.

2. A high profit margin on each unit sold reduces the need to sell a large volume.

3. It helps in product positioning as high prices are usually associated with quality.

Disadvantages of Skimming Pricing Strategy

1. It can lead to product failure as it can suffer from competition.

2. If consumers are aware of the firm’s strategy, they can delay purchases waiting for the times
when the product becomes cheaper.

1.3. Perceived Value Pricing

It is used in markets where demand is known to be inelastic. It is when the price will be chosen
to position the product in the market as quality is informally assessed by the price charged. It is
important to charge a price that is consistent with the image of the product.

1.4 Price Discrimination

If the market is segmented, it is possible to charge different prices to different segments of the
market. The price discriminator will charge higher price in a segment where demand is inelastic
but reduce the price for the segment where demand is elastic.

B . Cost-Based Pricing
There are variations on the theme of cost-based pricing, but in essence, it involves the addition of
a profit element to the cost of production. The basic idea is that firms will assess their costs per
unit and then add an amount on top of the calculated costs.

1.3. Markup Pricing

It is usually used by retailers who add a percentage markup on the prices charged by suppliers or
wholesalers. The size of the markup depends usually upon a combination of factors such as level
of demand for the product, age and stage of the product in the life cycle and number of suppliers.

2.2. Target Pricing

It is whereby a company decides upon a price that would give a required rate of return at a
certain level of output.

1.4. Full Cost/Absorption Cost Pricing

It is whereby a company attempts to calculate a unit cost for the product and then add an agreed
profit margin.

Disadvantages of Full Cost Pricing

1. It ignores demand and the price elasticity of demand.

2. It ignores the competitive situation.

3. Can result in underpricing or overpricing.

2.4. Marginal Pricing

It is a pricing method based on variable costs only and ignores fixed costs. This is mainly used
in service industries which suffer from daily fluctuations.

Competitor Oriented Pricing

The prices charged are neither related to costs of production nor to customers’ demand but to the
price charged by competitors. Most of the marketing managers charge prices which are slightly
above or below the prices charged by competitors. Where there is stiff competition, some firms
may engage in price wars in a bid to survive in the market.

1.5. Destroyer Pricing

It is a pricing strategy whereby a firm embarks on aggressive price cutting so as to eradicate

rivals. N.B.: Penetration pricing can also be mentioned in context of competition-oriented
pricing.

Psychological Pricing

It is a pricing strategy used by an organization to capture the minds of consumers, for example,
$4.99 instead of $5.00. Customers may be tempted that the prices are reduced yet they are not.

Loss Leading Pricing

This is a strategy whereby other products are sold at a loss so as to tempt customers into the shop
knowing that profits would be recovered on the other items in the shop.

Economic Pricing

It is whereby very low prices are charged for the products in order to cover advertising and
manufacturing costs. Some of these products may be sold as loss leaders. It is used in the dog
stage. Pricing Policies Single Pricing Policy Flexible pricing policy This involves the charging of
the same price for the same product in different market. This involves the charging of different
prices for the same product in different.

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