Select Business and Technology College

Department of Marketing Management

Pricing Policy and Strategy
Section F

Elias Jemal - ID - 4499/12

Submission Date – Jan 15/22

Submitted to – Ins.
Suppose that firm XYZ started pre investment works on the textile manufacturing in Addis
Ababa by 2014 Ethiopian calendar and expected to start production within two years

 What could be the possible pricing objective? Why?

As a new entrant firm to the textile industry, firm XYZ is expected to go through some
objectives such as survival and price stability can be used by the firm.

Survival - put into place in situations where a business needs to price at a level that will just
allow firm XYZ to stay in business and cover essential costs. Since firm XYZ is the new entrant
to the industry and the need to stay in the business is mandatory and survival seems to be the best
possible option for the firm. For a short time, the firm’s goal of making a profit needs to be
forgotten or set aside for the goal of survival. This is only done till the firm its feet on the
ground. Once the situation that initiated the survival pricing has passed, product prices are
returned to previous or more appropriate levels.

The same scenario can be told for price stability objective. As firm XYZ is a new entrant, there
is no need to open price war among its competitors.

 What could be the possible pricing strategy between years 1 - 2 and from 3 years
onwards? Why? Justify?
i. Possible strategies that the firm should follow in the early 1st and 2nd years Stages
 Competitive Pricing:

The strategy of competitive pricing can be used when the pricing objective is either survival or
status quo. When the objective for pricing products is to allow the business to either maintain
status quo or simply survive a difficult period, competitive pricing will allow the firm XYZ to
maintain profit by avoiding price wars (from pricing below the competition) or falling sales
(from pricing above the competition).

 Price skimming

Skimming involves setting high prices when a product is introduced and then gradually lowering
the price as more competitors enter the market. This type of pricing is ideal for the firm like
XYZ that are entering emerging markets. It gives the firm an opportunity to capitalize on early
adopters and then undercut future competitors as they join an already-developed market. A
successful skimming strategy hinges largely on the market that the firm looking to enter.

 Market penetration pricing

Pricing for market penetration is essentially the opposite of price skimming. Instead of starting
high and slowly lowering prices, the firm will take over a market by undercutting its competitors.
Once the firm develops a reliable customer base, the firm can raise prices. Many factors go into
deciding on this strategy, like the firm’s business’s ability to potentially take losses upfront to
establish a strong footing in a market. It’s also crucial to develop a loyal customer base; this can
require other marketing and branding strategies.

 Product bundle pricing

This strategy is used to group several items together for sale. This is a useful pricing strategy for
complementary, overstock, or older products. Customers purchase the product they really want,
but for a little extra they also receive one or more additional items. The advantage of this pricing
strategy is the ability to get rid of overstock items. On the other hand, customers not wanting the
extra items may decide not to purchase the bundle. This strategy is similar to product line
pricing, except that the items being grouped together do not need to be complementary.

The partial cost recovery or survival objectives can be fulfilled from a product bundling
pricing strategy when products likely would have gone unsold otherwise and selling the products
at a discount allows you to recover some portion of the production cost or generates enough of a
profit to stay in business or keep from having to remove the product from market.

For example, as it has been stated on our lecture note, let’s say the firm has remaining stock of
Christmas-related items after the holidays. If the firm prefers not to store these items until next
year, the firm could put a variety of items in a small bag and sell the bag at a discounted price.

ii. Possible strategies that the firm should follow from 3rd years onwards

Here we are talking about the firm that laid the foot in the market or a firm that has been through
a lots of ups and downs and somehow strong enough to go further through difficult marketing
situations. Here are some strategies possible for the firm to follow, supposedly.
  Psychological Pricing

Psychological pricing is a marketing practice based on the theory that certain prices have
meaning to many buyers. Price, as is the case with certain other elements in the marketing mix,
has multiple meanings beyond a simple utilitarian statement. One such meaning is often referred
to as the psychological aspect of pricing. Inferring quality from price is a common example of
the psychological aspect of price. For instance, a buyer may assume that a suit produced by firm
XYZ priced at $500 is of higher quality than one priced at $300.

Products and services frequently have customary prices in the minds of consumers. A customary
price is one that customers identify with particular items. Firm XYZ tends to adjust its wholesale
prices to permit retailers to use customary pricing.

Another manifestation of the psychological aspects of pricing is the use of odd prices. We call
prices that end in such digits as 5, 7, 8, and 9 “odd prices.” Examples of odd prices include:
$2.95, $15.98, or $299.99. Odd prices are intended to drive demand greater than would be
expected if consumers were perfectly rational.

The psychological pricing theory is based on one or more of the following hypotheses:

 Consumers ignore the least significant digits rather than do the proper rounding. Even
though the cents are seen and not totally ignored, they may subconsciously be partially
ignored.
 Fractional prices suggest to consumers that goods are marked at the lowest possible price.
 When items are listed in a way that is segregated into price bands (such as an online real
estate search), the price ending is used to keep an item in a lower band, to be seen by
more potential purchasers.
 Product line pricing
Product line pricing helps make the firm more appealing across the board. Unless the firm has a
particularly narrow-use product, tailored intimately to a certain buyer personal, the more needs
the firm’s product can satisfy, the more popular it’ll be.
Wherever quality is a variable, product line pricing can be effective. Clothing is a great example:
an outlet is likely to have product lines based on the material and tailoring quality of different
items of clothing.

 Negotiated Pricing:

It is also known as variable pricing. This method is invariably adopted by industrial suppliers. In
certain cases, the product may be prepared on the basis of specification or design by the buyer. In
such cases, the price by the firm has to be negotiated and then fixed.

 Prestige Pricing:

Prestige price is one that is fixed at a higher price than the producer’s near-perfect substitute.
Prestige pricing is adopted because many customers feel that high price means high quality.
They feel that at the low price the product cannot be of good quality. Moreover, the customers
feel a high status at high price.

At high prices, the customers buy more. If prices are dropped a little bit, then customers may
bargain a little. But if the prices begin to appear cheap, they start worrying about the quality and
may stop buying.

 Sealed Bid Pricing/Competitive Bidding:

This method is followed in the case of specific job works. Firm XYZ may receive contract offers
from other big firms or Governments normally get the work done through contractors. The
contractors work out the probable expenditure and give their price offers in a sealed cover. The
lowest bidder gets the work.

C. What is the correlation and difference between price objectives and price strategy?

It can be easily understood that price objectives or goals give direction to the whole pricing
process. Determining what your objectives are is the first step in pricing. When deciding on
pricing objectives you must consider:

1. The overall financial, marketing, and strategic objectives of the company;

2. The objectives of the company’s product or brand;
 3. Consumer price elasticity and price points; and
4. The resources company has available.

Pricing objective requires a different price-setting strategy in order to successfully achieve

business goals. It requires a firm to have a firm understanding of both your product attributes and
the market. Pricing objectives align with the firm mission statement and plans for the future.
Pricing strategies are assisting tools in achieving pricing objectives.

The choice pricing strategies should align with the pricing objectives. Pricing objectives without
pricing strategies are nothing as they need to be supports with methods help achieve it.

The difference between these two is pricing objective takes vast range of definition which ranges
to companies whole pricing activities and processes but pricing strategies takes smaller range
which will be applied to a single or multiple pricing objectives but not the whole pricing process
of the company.

2. Suppose, P = 100 - 2Q

TC = 100 + Q2

i. What will be the optimum price?

Thus, the marginal revenue curve (MR) = 100 – 4Q

TC = 100 + Q2

MC = (100 + Q2)' = 2Q

MR = MC

100 – 4Q = 2Q

6Q = 100

Q = 16.7

Then substituting this value into, P = 100 - 2Q

P = 100 – 2(16.7) = 66.7

 ii. What would be the maximum output?

The profit maximizing level of output occurs where MR = MC

 = TR – TC = 66.7Q – (100 + Q2) = 1114 – 379 = 735

iii. What could be the maximum profit?

P = 100 − Q = 100 – 16.7 = 83.3

 = TR – TC = 16.7 * 83.3 – 33.4 * 16.7 = 1391- 556 = 835