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PRICING

THE DEFINITION OF PRICING
1. According to Kibera(1998), pricing is the value placed in on a good or service by customers at some point in time. It is a measure of what must be exchanged in order to obtain a particular good. 2. Business dictionary.com –defines pricing as “the method adopted by a firm to set its selling price .it usually depends on the firms average cost, and on the customers perceived value of the product in comparison to his or her perceived value of the product.” 3. According to kotler and Armstrong in their book principles of marketing, they define pricing the amount of money charged for a product or service or the sum of the value that customers exchange for the benefits of having or using the product or service.

IMPORTANCE OF PRICING
1. Pricing helps in regulating economic activities. 2. Pricing has a strong effect on sale, because price x quantity =total

revenue. 3. Price has a psychological impact on consumers; a higher price may mean a higher quality product. 4. Among the 4 ps price can change quickly to cope with the demand.

OBJECTIVES OF PRICING
1. Maximum current profits.

Many companies try to set the price that will maximize current profits. the estimate the demand and costs associated with alternative price and choose the price that producers maximum current profit, cash flow, or rate of return on investment.

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2. Maximum current revenue.

Some companies will set a price to maximize sales revenue; maximization requires only estimated demand function. Many managers believe that revenue maximization will led to long run profit maximization and market share growth.
3. Maximum sales growth.

Other companies want to maximize unit sales; they believe that a higher sales volume will lead to lower costs and higher long run input. They set the lowest price, assuming the market is price sensitive. This is called market penetration pricing. The following conditions fever setting a low price –  the market is highly market sensitive and a lower price stimulates more markets growth  production and distribution cost fall with accommodated production experience  a low price discourages actual and potential completion
4. Product quality leadership.

A company may aim to be the product quality leader in the market .Maytag a prime example builds high quality washing machines and prices them at roughly $100 than competitors washing machines Maytag uses the slogan “built to last longer “ and its adds feature “01 lonely” the Maytag repair man who doesn’t have enough to do. This strategy earned Maytag over 30percent return on stock holder’s equity in 1987.
5. Build a bigger market share.

A company may reduce the price to capture competitor’s market share this may be done especially when the company is entering the market
6. Meet competition.

For better competition, the marketer may match his prices with those of competitors. This may help to improve sales, market share and profit.
7. Maintain an image.

A company’s image can be affected by how it handles its pricing strategy; customers may react positively when a company is known for selling high quality products.

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8. Thus before setting 3 . costs Organizational consideration External factors Pricing decisions Nature of market and demand Competition Other environmental factors(economy. EXTERNAL FACTORS These are the factor that affects the pricing decision and they include 1. Competition 3. FACTORS AFFECTING PRICING DECISION The factors affecting pricing decisions are divided in to two categoriesa) External factors b) Internal factors Internal factors Marketing objectives Marketing mix strategy. Firms may set prices designed to enhance other products lines as well as to yield a profit on the products itself. The market and demand 2. government) A. Both consumers and industrial buyer balance the price of a product or service against the benefits of owning it. resellers. Other environmental elements 1. the market and demand set the upper limit. The market and the demand Whereas cost set the lower limit of prices. Promote new products.

prices the marketer must understand the relationship between price and demand for its product. Competitors cost prices and offers Another factor affecting the company’s pricing decisions is competitors cost and prices and possible competitor’s reaction to the company’s own pricing moves.  The products price is based on how the buyers perception of value not the sellers level of cost. Pricing decision. 3. and then the actual price is established for maximizing profit.g. Therefore:  Pricing are based on how they perceive the product value. • Analyzing the price – demand relationship Price is set based. they exchange something of value (the price) to get something of value(the benefits of having or using the product)effective. like other marking mix decisions must be buyer oriented. It also needs to learn the prices and quality of each competitors offer. • Consumer perceptions of price and value. when consumers buy a product. buyer oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that fits this value. In the end the consumer will decide whether a product price is right. a customer who wants to buy omo must compare the prices and value similar products. 2. E.  The firm must determine how demand for the product will charge over a specific period of time. Other external factors 4 . High prices are charge when demand is high and low prices when demand is low.  This is done by projecting the number of customers who will be willing to buy at various price levels. on consumer perception and demand intensity. so as to position it offer relative to the competition. A company needs to benchmark its costs against its competitors cost to learn whether it’s operating at cost advantage or disadvantage.

3.g. If the company has selected its target market and positioning carefully. this suggests charging high price. Before setting prices. a company’s short – term sales.  The government This is another important external influence on pricing decisions. They include: 1.  Social concerns This may also be taken in to account. Examples of common objectives are Survival. Economic factors such as boom or recession. INTERNAL FACTORS. and interest rates affect pricing decisions because they affect both the costs of producing a product and consumer perception of the product price and value.When setting prices the company must also consider other factors in its external environment. general motors decides to produce a new luxurious custom made car to compete with Rolls Royce custom made cars in the high-income segment . then its marketing mix strategy. The company must also consider what impact its prices will have on other parties in its environment. the company must decide on its strategy for the product. Organizational consideration. profit and goals may have to be tempered by broader societal considerations. In setting prices. market share. including price will be fairly straight forward. In addition may also seek additional objective . Marketing mix strategy. costs. Marketing objectives. 1. Companies whose major objective is survival are troubled by too much capacity.  Economic conditions: Economic conditions can have a strong impact on the firms pricing strategies. inflation. Companies have to follow government regulations when operating and the have to pay tax which is passed to the consumers. B. heavy competition or 5 . the easier it is to set prices. How resellers react to various prices? The company should set prices that give resellers a fair profit. encourage their support and help them to sell the product effectively.the clearer a firm is about its objective. 2. E. Marketing objectives.

This is where a company charges high prices to cover the high cost incurred in producing the quality products. This is a short term objective. support resellers or avoid government intervention. To keep the plant going they have to charge low prices with meet operating cost. • Costs Prices may be determined by costs of production and distribution to deliver a fair rate of return for its effort and risk. Decisions made for other marketing mix variables may affect pricing decisions.  Variable costs: . rent executive salary. Other objectives include. stabilize the market by setting the price at competitors’ levels. Current profit maximization. Costs can be divided in to two: Fixed costs: .g.    changing consumer wants.they vary directly with the level of production. This is the objectives of many companies. Marketing mix strategy. Therefore they set their prices low as possible. Prevent competitors from entering the market. 6 . in the long term a company must learn how to add value that customers will pay for. Market share leadership. or return on investment. Product quality leadership. Pricing decision must be coordinated with product design. Prices can be set to keep loyalty. distribution. cash flow. hoping to increase demand.g. and promotion decisions to form a consistent and effective marketing program. E.these are the costs that do not vary with production. 2. They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit. E. Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. They are called over head. raw materials used in making the products. It is believed that companies with the largest market share will enjoy the lowest costs and highest long – run profit. costs.

Cost . To illustrate make up pricing.plus pricing. E. competition . suppose a toaster manufacturer had the following costs: Variable cost $10 Fixed cost $300. salespeople maybe allowed to negotiate with customers within certain price ranges.000 Then the manufacturers cost per toaster is given by: 7 . Organizational considerations. break even pricing and target pricing.based approach 2. Management must decide who within the organization should set prices. In small companies prices are often set by top management rather than by the marketing or sales departments.3. Companies handle pricing in a variety of ways.based approach 3.g. pricing is typically handled by divisional or product line managers. This department reports to the marketing department or the top management. and it often approves the prices proposed by the lower – level management or salespeople.based approach 1.000 Expected units sales $50. cost . in construction companies submit job bids by estimating the total project cost and adding a standard mark up to the profit. This approach is divided in to cost . buyers . In industrial markets. In large companies. • Cost . Even so top management sets the pricing objectives and policies. Other companies have a pricing department to set the best prices or help others in setting them.Based Approach.plus pricing This is adding a standard markup to the cost of product. GENERAL PRICING APPROACHES Companies set prices by selecting a general pricing approach that includes one or more of three sets of factors they are1.

by tying the price to cost. Sellers are more certain about cost than about demand . sellers simplify pricing . price tends to be similar and price competition is minimized.plus pricing is fair to both buyers and sellers.000 = $16 50. if a toaster manufacturer charged $20 but sold only 8 = markup price . 2.0. E. Disadvantages of cost – plus pricing 1.g.they don’t have to make frequent adjustments as demand changes.000 = unit cost Now suppose the manufacturer wants to earn a 20 percent markup on sales. Markup works only if that price actually brings in the expected levels of sales. 2.Variable cost + fixed cost Unit sales Therefore $10 + $300.2) Advantages of cost – plus pricing 1. This method ignores demand and competitor prices thus not likely to lead the best price. 3. The manufacturer s markup price is given by: Unit cost (1-desired return on sale) Therefore $16 = $20 (1. If all firms in the industry use this method. Sellers earn a fair return on their investment buyers do not take advantage of buyers when buyers demand become great. Cost .

The company sets its target price based on customer perception of the product value. However measuring perceived value can be Difficult. 9 . As a result pricing begins with analyzing consumer needs and value perception. Value Base Analysis This is setting price based on buyers perceptions of value rather than on the sellers cost.then the unite cost would have been higher because the fixed cost is spread over few units. The target value and price then drive decision about design and what costs can be incurred.g. A Company might conduct experiment to test the perceived value of different product offers. Marketing must convince the buyer that the products value at that price is justifies its purchase.30.000. While in cost plus pricing it is simple to calculate the price that company wants by setting the percentage profit they want to achieve. This means the marketer cannot design a product and marketing program and then set the price. general motors which prices it’s automobile to achieve a 15 to 20 percent profit on its investment. • A company using value based pricing must find out what value buyers assign to different competitive offers. and the realized percentage markup on sales would have been lower.000 toasters instead of 50. E. While Value – based pricing reverses this process. The difference between cost based pricing and value based pricing • Cost based pricing is product driven. and sets a price that covers costs plus a target profit. totals the cost of making the product. and price is set to match consumers’ perceived value. • Break even analysis and target profit pricing Another cost. Value – added strategies. 2. The company designs what it considers being a good product.oriented pricing approach is break even pricing (or target profit pricing) this is where the firm tries to determine the price at which it will break even or make the target profit its seeking.

For suppliers of commodity products which are characterized by little differentiation and intense price competition. kotler and Armstrong : principles of marketing 2. Internet: Businessdirectory. In many cases they adopt value – added strategies.N and Waruingi : fundamentals of marketing an African perspective . they attach value. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. firms normally charge the same price. in which a firm bases its prices largely on competitor’s prices. more or less than its major competitors.com 4. This is setting price based on the prices that competitors charge for similar products. with less attention paid to its own costs or to demand. paper or fertilizer.g. Some firms may charge a bit more or less. but they hold the amount of different constant. they charge their prices when the market leader’s prices change. rather than when their own demand or costs change. Reference: 1. Competition – based pricing. kibera F. minor petrol stations usually charge a few cents less than the major oil companies. In oligopolistic industries that sell a commodity such as steel. Rather than cutting price to match competitors. E. with out letting the difference increase or decrease. One form of competition – based pricing is going – rate pricing. 3. 3. Peter cheverton :key marketing skills 10 .added services to differentiate their offers and thus support higher margins. The firm might charge the same. The smaller firms follow the leader.

11 . They are called over head. ELIZABETH FUNDI 6. Costs can be divided in to two: Fixed costs: .these are the costs that do not vary with production. JAPHET MUSYOKA 4. E. rent executive salary. • Costs Prices may be determined by costs of production and distribution to deliver a fair rate of return for its effort and risk. GRACE MUNYIVA 2. raw materials used in making the products. E. MICHAEL WEKESA .they vary directly with the level of production. HALIMA NGACHE 3. ERICK ONYANCHE 5.  Variable costs: .Group members 1.g.g.

In large companies. Many companies try to set the price that will maximize current profits. 6. IMPORTANCE OF PRICING 5. 2. According to Kibera(1998). Pricing helps in regulating economic activities. Management must decide who within the organization should set prices. Other companies have a pricing department to set the best prices or help others in setting them. a higher price may mean a higher quality product. pricing is typically handled by divisional or product line managers. they define pricing the amount of money charged for a product or service or the sum of the value that customers exchange for the benefits of having or using the product or service. Maximum current profits. pricing is the value placed in on a good or service by customers at some point in time. OBJECTIVES OF PRICING 9. This PRICING THE DEFINITION OF PRICING 1. Price has a psychological impact on consumers. In industrial markets. 12 . Among the 4 ps price can change quickly to cope with the demand. salespeople maybe allowed to negotiate with customers within certain price ranges. Companies handle pricing in a variety of ways. 7. According to kotler and Armstrong in their book principles of marketing.com –defines pricing as “the method adopted by a firm to set its selling price . 8.3. Organizational considerations. because price x quantity =total revenue. Even so top management sets the pricing objectives and policies. In small companies prices are often set by top management rather than by the marketing or sales departments. Pricing has a strong effect on sale. or rate of return on investment. cash flow. and it often approves the prices proposed by the lower – level management or salespeople.” 3. It is a measure of what must be exchanged in order to obtain a particular good. the estimate the demand and costs associated with alternative price and choose the price that producers maximum current profit.it usually depends on the firms average cost. Business dictionary. and on the customers perceived value of the product in comparison to his or her perceived value of the product.

assuming the market is price sensitive. customers may react positively when a company is known for selling high quality products. The following conditions fever setting a low price –  the market is highly market sensitive and a lower price stimulates more markets growth  production and distribution cost fall with accommodated production experience  a low price discourages actual and potential completion 12. 11. Maintain an image. Maximum sales growth. This may help to improve sales. Firms may set prices designed to enhance other products lines as well as to yield a profit on the products itself. Promote new products. This strategy earned Maytag over 30percent return on stock holder’s equity in 1987. A company may reduce the price to capture competitor’s market share this may be done especially when the company is entering the market 14. Other companies want to maximize unit sales.10. Product quality leadership. Some companies will set a price to maximize sales revenue. FACTORS AFFECTING PRICING DECISION The factors affecting pricing decisions are divided in to two categories- 13 . they believe that a higher sales volume will lead to lower costs and higher long run input. A company may aim to be the product quality leader in the market . market share and profit. They set the lowest price. Meet competition. 16. the marketer may match his prices with those of competitors. Maximum current revenue. Build a bigger market share. 15. 13. This is called market penetration pricing. Many managers believe that revenue maximization will led to long run profit maximization and market share growth. A company’s image can be affected by how it handles its pricing strategy. maximization requires only estimated demand function. For better competition.Maytag a prime example builds high quality washing machines and prices them at roughly $100 than competitors washing machines Maytag uses the slogan “built to last longer “ and its adds feature “01 lonely” the Maytag repair man who doesn’t have enough to do.

wheat. A seller can not charge more than the going price because buyers con obtain as much as they need at going price. They are four types of markets and each present a different pricing challenge. If price and profit rise. Both consumers and industrial buyer balance the price of a product or service against the benefits of owning it.g. 14 . EXTERNAL FACTORS These are the factor that affects the pricing decision and they include 4. Other environmental elements 1. No single buyer or sellers have much effect on the going market price. • Pricing in different types of markets The seller’s freedom varies with different types of markets. Thus before setting prices the marketer must understand the relationship between price and demand for its product. resellers. copper and financial securities. The market and demand 5. Competition 6. Pure competition This market consists of many buyers and sellers trading in uniform commodities e.a) External factors b) Internal factors Internal factors Marketing objectives Marketing mix strategy. Nor would sellers charge less than the market price because they can sell all they want at this price. The market and the demand Whereas cost set the lower limit of prices. government) C. new sellers can easily enter the market. costs Organizational consideration External factors Pricing decisions Nature of market and demand Competition Other environmental factors(economy. a. the market and demand set the upper limit.

monopoly The market may consist of one seller the seller may be a government monopoly. Therefore:  Pricing are based on how they perceive the product value.  This is done by projecting the number of customers who will be willing to buy at various price levels. steel) or non-uniform (e.  The products price is based on how the buyers perception of value not the sellers level of cost.g. cars. like other marking mix decisions must be buyer oriented. or a fear of government regulation.  The firm must determine how demand for the product will charge over a specific period of time. Non-regulated monopolies are free to price at what the market will bear.they are a few sellers because it’s difficult for new sellers to enter the market . on consumer perception and demand intensity. Or the price might be set to cover costs or to produce good revenue. It may set price below cost because the product is important to buyers who cannot afford to pay full cost.each sellers is alert to competitors strategies and moves. buyer oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that fits this value. d. The product can be uniform (e. when consumers buy a product. In a regulated monopoly the governments permits the company to set rates that will yield a “fair return. and then the actual price is established for maximizing profit. features. a desire to penetrate the marker faster with low prices.g. • Consumer perceptions of price and value. • Analyzing the price – demand relationship Price is set based. style and the accompanying services. A range of prices occurs because sellers can differentiate their offers to buyers. A government monopoly can set prices with different objectives. Either the physical products can be varied in quality. However they do not charge full price for a number of reasons: a desire not to attract completion.b. Pricing decision. computers). c. they exchange something of value (the price) to get something of value(the benefits of having or using the product)effective. monopolistic competition The market consists of many sellers and buyers who trade over a range of prices rather than a single market price. It can even be set quiet high to slow consumption. oligopolistic competition Market consists of a few sellers who are highly sensitive to each others pricing and market strategies. 15 . High prices are charge when demand is high and low prices when demand is low. In the end the consumer will decide whether a product price is right.” one that will let the company maintain and expand its operations as needed.

A company needs to benchmark its costs against its competitors cost to learn whether it’s operating at cost advantage or disadvantage. E. Other external factors When setting prices the company must also consider other factors in its external environment. a company’s short –term sales.g. profit and goals may have to be tempered by broader societal considerations. Economic factors such as boom or recession. They include: 1. Organizational consideration. 3. the easier it is to set prices.the clearer a firm is about its objective. encourage their support and help them to sell the product effectively. Marketing mix strategy. It also needs to learn the prices and quality of each competitors offer. In setting prices. In addition may also seek additional objective . E. Before setting prices. including price will be fairly straight forward. The company must also consider what impact its prices will have on other parties in its environment. 1. a customer who wants to buy omo must compare the prices and value similar products. D. Examples of common objectives are- 16 . this suggests charging high price.  The government This is another important external influence on pricing decisions. so as to position it offer relative to the competition. and interest rates affect pricing decisions because they affect both the costs of producing a product and consumer perception of the product price and value.  Economic conditions: Economic conditions can have a strong impact on the firms pricing strategies. If the company has selected its target market and positioning carefully. How resellers react to various prices? The company should set prices that give resellers a fair profit. Companies have to follow government regulations when operating and the have to pay tax which is passed to the consumers. INTERNAL FACTORS. market share. Competitors cost prices and offers Another factor affecting the company’s pricing decisions is competitors cost and prices and possible competitor’s reaction to the company’s own pricing moves. general motors decides to produce a new luxurious custom made car to compete with Rolls Royce custom made cars in the high-income segment . then its marketing mix strategy. Marketing objectives. 3.  Social concerns This may also be taken in to account.2. 2.g. inflation. costs. the company must decide on its strategy for the product. Marketing objectives.

and promotion decisions to form a consistent and effective marketing program. Prevent competitors from entering the market. To keep the plant going they have to charge low prices with meet operating cost. Price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. heavy competition or changing consumer wants. They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit. Marketing mix strategy. competition . It is believed that companies with the largest market share will enjoy the lowest costs and highest long – run profit.  Product quality leadership.  Market share leadership. GENERAL PRICING APPROACHES Companies set prices by selecting a general pricing approach that includes one or more of three sets of factors they are4. Prices can be set to keep loyalty. This is a short term objective. Companies whose major objective is survival are troubled by too much capacity. Cost . or return on investment. buyers . 2. distribution. hoping to increase demand. in the long term a company must learn how to add value that customers will pay for. Decisions made for other marketing mix variables may affect pricing decisionsdepartment reports to the marketing department or the top management. cost .based approach 1. This is the objectives of many companies. break even pricing and target pricing. Therefore they set their prices low as possible. Survival.  Current profit maximization.plus pricing 17 . • Cost .Based Approach.based approach 5.plus pricing.  Other objectives include. Pricing decision must be coordinated with product design. stabilize the market by setting the price at competitors’ levels. support resellers or avoid government intervention.based approach 6. This is where a company charges high prices to cover the high cost incurred in producing the quality products. cash flow. This approach is divided in to cost . costs.

0. Sellers earn a fair return on their investment buyers do not take advantage of buyers when buyers demand become great.000 Then the manufacturers cost per toaster is given by: Variable cost + fixed cost Unit sales Therefore $10 + $300. This method ignores demand and competitor prices thus not likely to lead the best price.000 Now suppose the manufacturer wants to earn a 20 percent markup on sales. = markup price = unit cost 18 .they don’t have to make frequent adjustments as demand changes.plus pricing is fair to both buyers and sellers. To illustrate make up pricing.000 Expected units sales $50. sellers simplify pricing .g. Sellers are more certain about cost than about demand . The manufacturer s markup price is given by: Unit cost (1-desired return on sale) Therefore $16 = $20 (1. price tends to be similar and price competition is minimized. 5. E.This is adding a standard markup to the cost of product. suppose a toaster manufacturer had the following costs: Variable cost $10 Fixed cost $300.2) Advantages of cost – plus pricing 4.000 = $16 50. in construction companies submit job bids by estimating the total project cost and adding a standard mark up to the profit. Disadvantages of cost – plus pricing 3. If all firms in the industry use this method. Cost . 6.by tying the price to cost.

In many cases they adopt value – added strategies. E. totals the cost of making the product.g. and price is set to match consumers’ perceived value. This means the marketer cannot design a product and marketing program and then set the price.oriented pricing approach is break even pricing (or target profit pricing) this is where the firm tries to determine the price at which it will break even or make the target profit its seeking. The target value and price then drive decision about design and what costs can be incurred. For suppliers of commodity products which are characterized by little differentiation and intense price competition. general motors which prices it’s automobile to achieve a 15 to 20 percent profit on its investment. Value Base Analysis This is setting price based on buyers perceptions of value rather than on the sellers cost.then the unite cost would have been higher because the fixed cost is spread over few units. • A company using value based pricing must find out what value buyers assign to different competitive offers.4. if a toaster manufacturer charged $20 but sold only 30. While in cost plus pricing it is simple to calculate the price that company wants by setting the percentage profit they want to achieve. 2. • Break even analysis and target profit pricing Another cost.000 toasters instead of 50. The company sets its target price based on customer perception of the product value. and sets a price that covers costs plus a target profit. Markup works only if that price actually brings in the expected levels of sales. The company designs what it considers being a good product.g. Rather than cutting price to match competitors. A Company might conduct experiment to test the perceived value of different product offers. and the realized percentage markup on sales would have been lower. Marketing must convince the buyer that the products value at that price is justifies its purchase. Value – added strategies. The difference between cost based pricing and value based pricing • Cost based pricing is product driven. However measuring perceived value can be Difficult. As a result pricing begins with analyzing consumer needs and value perception. 19 . E.000. While Value – based pricing reverses this process.

Some firms may charge a bit more or less. with out letting the difference increase or decrease. kibera F. more or less than its major competitors.g. Competition – based pricing. E.they attach value. This is setting price based on the prices that competitors charge for similar products. The smaller firms follow the leader. kotler and Armstrong : principles of marketing 6. Peter cheverton :key marketing skills 20 . The firm might charge the same. they charge their prices when the market leader’s prices change. 7. Internet: Businessdirectory. firms normally charge the same price. with less attention paid to its own costs or to demand. In oligopolistic industries that sell a commodity such as steel. 3. but they hold the amount of different constant. One form of competition – based pricing is going – rate pricing.added services to differentiate their offers and thus support higher margins. in which a firm bases its prices largely on competitor’s prices.com 8. minor petrol stations usually charge a few cents less than the major oil companies.N and Waruingi : fundamentals of marketing an African perspective . Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. paper or fertilizer. rather than when their own demand or costs change. Reference: 5.