UNEC – International

School of Economics

Pricing on the World Market

Lecture 1:The essence of price
and pricing
Content
 Preface
 Price and pricing concepts
 Functions of prices
 Objectives of price and pricing
 The content and structure of pricing
 Pricing decisions
 Price setting process
 Conclusion
 Preface

 In the modern stage of development of world

economy, trade relations between countries
are increasing very swiftly.
 Price stands out as one of the major
indicators in the world economy and world
market.
 That’s why countries try to adapt their policy
to the processes which occur on the world
market.
 Preface
 In the conditions of development of market
economy, succeed of each enterprise and
company depends on correctly opted strategy
and tactics of pricing.
 At the present, prices on the world market are
influenced by complex economic, political,
physiological and social factors.
The Essence of Price
 Price – is the cost or value of a good or
service expressed in monetary terms.
 Price – is the proportion of exchange of
commodity into the money.
 Price – is the amount of money that one pays
for something.
 Price – is the amount of money charged for a
product or service.
 Value – is the amount of labor included in the
commodity.
 The Essence of Price
 Prices define all major directions in the economy.
 Prices impact on formation of consumer prices,
structure of consumer expenditures, formation
of governmental budget and others.
 Prices serve as a major instrument of competition.
 Price formulates an essential basis of commercial
transactions.
 Overall, “price” means a sum of money for which
a seller wants to sell its commodity (selling price
or asking price), and a buyer is ready to purchase
it (buying price or bid price).
 Prices and modern economy
 Prices play a key role in the modern economy in
terms of directing decision making in the allocation
and distribution of the scarce resources to various
production, marketing and consumption activities.
 Successful companies deliberately build a strong
pricing infrastructure that underpins and sustains
pricing excellence.
 Prices usually confused with the concept of cost. In
general, price is something that a buyer pays to
acquire products from a seller.
 Cost of production concerns the seller's expenses in
producing a product being exchanged with a buyer. 
 The Concept of Pricing
 Pricing – is the process of formation,
movement and use of prices for goods and
services.
 Pricing is one of the major and central
elements of market economy.
 It stands out as a crucial instrument for
guidance of market.
Objects and subjects of pricing
 Objects of pricing are products for production
and technical purposes, consumer goods and
services.
 Subjects of pricing are government bodies,
enterprises and physical entities.
 Functions of Prices
 The essence of price and its role in the
economy is defined by its function. There are
the following major functions of prices:
 Measurement. By this function of price is
defined the amount of money that consumers
pay and sellers get. Through measurement
function one can calculate cost of products,
wages of workers and so on.
Functions of Price
 Contrasting. Based on this function one can
compare and contrast the value and utility of various
kinds of products. Through comparison of prices, one
gets an opportunity to distinguish between expensive
and cheap products.
 Discount. Expressing of the product’s value in terms
of money. On the basis of this function is calculated
the following indicators:
 quantitative: GDP,GNP, trade turnover, trade
balance;
 qualitative: rentability, labour productivity, capital
productivity.
Functions of Price
 Stimulating. The essence of stimulating
function of price is expressed in its
maintaining or constraining impact on the
production and consumption of different kinds
of commodities.
 Price has stimulating effect on producer
through the gained profit.
 Based on prices, it can be stimulated the
quality of product, improved scientific and
technological development and so on.
Functions of Price
 Allocating. Through this function, prices participate in the
distribution and redistribution of national income among various
spheres of economy.
 Rationing. This function plays a crucial role in the leveling out
of demand and supply.
 Transmission. Prices transmit information to various actors in
the market thus enabling them to make informed decision on
what and when to buy and sell.
 Socializing. Variation of prices impact on the structure and
quantity of consumption of goods and services.
 Controlling. Price stands out as an instrument of recording and
controlling of expenses and movement of material and physical
resources.
 Foreign economic. The price acts as an instrument of trade
transactions, external payments, mutual settlements between
countries.
Functions of Price
 Signaling. This function of price is associated
with the shift in demand and supply curves.
 If prices are rising because of high demand
from consumers, this is a signal to suppliers
to expand production in order to meet the
required demand.
 If there is excess supply in the market, the
price mechanism will help to eliminate a
surplus of a good by allowing the market
price to fall.
The process of pricing decision
 A pricing decision process is a challenging
process, which requires the collection and
analysis of information regarding company's
business goals and cost of its structure,
customer’s preferences and needs, as well as
competitor’s pricing and strategic intent.
 Whereas a good pricing decision can improve
profits dramatically, a poor one can invoke a
competitive response that quickly devolves into
a price war that destroys profits for all
participants. 
The process of pricing decision
 While making pricing decisions marketers have
to take into account a range of factors. Some of
these are internal to the company, such as:
 marketing objectives and strategy;
 cost of its structure;
 product differentiation;
 product life cycle;
 corporation philosophy and ethics;
 organizational issues.
The process of pricing decision
 Besides internal aspects of pricing decisions,
there can be also underscored the following
external factors.
 the development of market;
 the pattern of supply and demand;
 the nature and level of competition;
 the behavior of customers;
 legislation, political initiative, and social norms;
 target return investment;
 channel intermediaries.
The process of pricing decision
The process of pricing decision
 In general, an effective process of pricing
decision:
 should be value based;
 should be efficient to execute;
 should has measurable outcomes;
 should be fair and equitable to all customers;
 should be linked to other business processes.
 World Class Pricing
 World Class Pricing is the aspiration of excellence in
the execution of the pricing process.
 In general, it requires an elaboration of management
system to ensure an optimal pricing decision process
with respect to customers.
 The maximization of profit is impossible without price
optimization, which requires linking of changes to the
various processes, technology, and company culture.
 Pricing optimization model
 Price optimization models are calculations used by companies
on how demand varies at different price levels. These data is
then combined with information on costs and inventory levels
in order to recommend prices that will improve profits of the
company.
 Price optimization models help companies to determine:
 Initial price optimization. Works with a stable base of long
life-cycle products. E.g. grocery stores, office-supply store
and so on.
 Promotional price optimization. E.g. newly introduced
products, products bundled together in special promotions
and others.
 Markdown/discount price optimization. Companies sell
short life-cycle products subject to fashion trends and
seasonality. E.g. airline industry.
Pricing objectives
 Pricing objective is the initial step in the
process of pricing.
 Price is an element of marketing mix. In
general, pricing objectives are defined in
terms of their role within the named marketing
mix strategy.
Pricing objectives
 Whilst pricing objectives vary from firm to
firm, they can be classified into six major
groups:
 profitability;
 volume;
 competition;
 prestige;
 strategic;
 relationship.
 Profitability objectives
 Commercial enterprises and its management
strategy are judged by their ability to produce
acceptable profits.
 Prudent managers are fairly likely to take the
strategic view when making pricing
decisions.
 These profits may be measured in monetary
values and/or as a percentage of sales
and/or as a percentage of total capital
employed.
 Profitability objectives
 Managers will not necessarily seek to maximize
profits in the short-term at the expense of long-
term objectives.
 For instance, profits may be low, or even
negative, during a period when the company is
seeking to penetrate a new market. Again,
heavy investments in capital equipment
and/or R&D may adversely affect short-term
profitability of an enterprise, but are likely to
provide a foundation for longer term
commercial success.
Volume objectives
 On occasion, pricing decisions of managers
have more to do with sales maximization
than profit maximization.
 In these cases, organizations set a minimum
acceptable profit level and then set out to
maximize sales subject to this profit
constraint.
Volume objectives
 Another volume-related pricing objective is
the maximization of market share.
 The organization's specific goals may be
either to maintain its share of a particular
market or to increase its market share.
 There is frequently a positive relationship
between high market share and profitability
since the additional volumes help to lower
unit production costs.
Competitive objectives
 As with any other marketing decision, pricing
decisions should take into account the current
behavior of competitors and seek to
anticipate the future behavior of those
competitors.
 In particular, a company will wish to anticipate
competitors' likely reactions if the pricing
strategies and tactics, which they consider
are actually implemented.
Competitive objectives
 Going-rate pricing. Although pricing is the
effective instrument for gaining a differential
advantage over competitors, a price move is
easily imitated.
 In certain cases, if competing firms in the market
allow pricing to be the chief basis of competition,
the profitability of the whole industry can suffer.
 Competitors may attempt to promote stable prices
through focusing upon product/service strategies,
promotion and distribution, i.e. non-price elements
of the marketing mix.
Competitive objectives
 Anti-competitive pricing. On occasion, a
firm will price its products with a view to
discouraging competitors from entering the
market or to force them out of the market.
 It can be achieved through the maintaining
relatively low prices and profit margins.
Prestige objectives
 Prestige objectives are not related with
profitability or volume objectives. These
involve establishing relatively high prices to
develop and maintain an image of quality and
exclusiveness that appeals to status of
conscious consumers.
 Such objectives reflect a recognition of the
role of price in creating the image of an
organization and its products or services.
 
Strategic marketing objectives
 Price stabilization. Overall, the objective of
stabilizing prices is met in the same way as
that of removing price as the basis of
competition.
 The company will seek to maintain its own
prices at or around those of competitors.
 The aim is not to negate price as a possible
marketing advantage, but to narrow the range
of price differentials and fluctuations.
 
Strategic marketing objectives
 Supporting other products. Pricing deci-
sions are often focused upon the aim of
maximizing total profits rather than
maximizing profits which is obtained from any
single product within the portfolio.
 
Strategic marketing objectives
 Maintaining cash flow. Many businesses fail
not so much because there is an inadequate
demand for their products and services, but
due to cash outflows running ahead of cash
inflows.
 Much of a company's trade will be on the
basis of credit rather than cash sales. The
pricing mechanism can be used to manage
cash flow.
 
Strategic marketing objectives
 Product positioning. The category into
which a product is placed by consumers, and
its relative standing within that category, is
referred to as its position within the market.
 The same product can hold different positions
depending upon which segments of its
market are under consideration.
 To take an example, “Hodzeko”, a brand of
fermented milk marketed in Zimbabwe.
 
Strategic marketing objectives
 The named product is popular among low-
income groups who perceive it to be a cheap
relish to flavor their staple food of maize
porridge.
 The product is also purchased by consumers
in the higher income groups, among whom it
is used as a substitute for soured cream in
baking.
 These varying perceptions of the product can
allow differential pricing according to the
position within the market.
Relationship objectives
 Commercial companies have several important
publics with which they must establish and
maintain relations conductive to a positive
operating environment.
 These publics mentioned above are sometimes
termed stakeholders and include such diverse
groups as consumers, members of the channel
of distribution, suppliers, the general public,
shareholders and government.
 Stakeholders are those individuals or groups
who affect and/or are affected by the operations
of organization.
Relationship objectives
 Channel of distribution members. The
interests of all participants in the channel of
distribution for the organization's products
have to be taken into consideration when
making pricing decisions.
Suppliers&Distributors
 A supplier is someone who provides products,
commodity or services to consumers, usually via
distributors. Suppliers can also be manufacturers,
processors, packagers, wholesalers, dealers, and
merchants who deal in particular products and
merchandise.
 A distributor is someone who distributes the goods
directly to the stores or other businesses that sell to
consumers. A distributor is any organization that
purchases products from a supplier. A distributor acts
as an intermediary between producers and
consumers.
 Relationship objectives
 Suppliers. Just as the organization should take into
account the interests of its distributors, so it must be
concerned about the welfare of suppliers.
 Japanese automobile manufacturers have
revolutionized supplier-manufacturer relations around
the world.
 North American and European car manufacturers
traditionally operated a system of having would be
component suppliers tender each time a new model
was ready for mass manufacture.
Relationship objectives
 In contrast, Japanese manufacturers tend to develop
long-term relationships with component suppliers
who have provided a satisfactory service in the past.
Work is rarely put out to open tender.
 Japanese philosophy sees the component supplier
as an extension of its own business.
 Suppliers to Japanese automobile manufacturers
enjoy a measure of security which enables them to
plan for a longer period ahead and encourages them
to invest in new technologies.
 General Motors, for instance, has now adopted the
Japanese approach to supplier relations.
 Relationship objectives
 General public. A general public has an interest in
the activities of commercial organizations even if they
do not buy or use the organizations' products or
services.
 The public will, for instance, be concerned about the
state of business ethics within an organization and
with issues such as the impact that an organization's
activities have on the environment, the extent to
which the organization contributes to the local
community (e.g. charitable works and contributions).
Relationship objectives
 Government: Governments often take a keen
interest in the prices charged, particularly if the
product is a staple food.
 This is true even where organizations have been
freed from government control over prices,
because the price of basic foods is a politically
sensitive issue in most countries.
THE PRICE-SETTING PROCESS

 The first step in the process is to set an initial

price window defined by a price ceiling and floor
for each segment.
 The second step in this process involves
determining the amount of differential value to
be captured with price.
 The final step is to communicate new prices to
the market. 
The price setting process
The price setting process
 Price window is set for each segment and is
defined by the ceiling, the highest allowable
price point, and the floor, the lowest allowable
price point.
 One begins the price setting process by
establishing the price window for each segment
and then, in step two, narrow that window
based on strategic objectives for the segment
and potential customer responses to the new
prices.
The price setting process
 In both cases, the price ceiling is determined by
the economic value created for customers.
 If the price were set higher than the economic
value, then customers would be better off buying
the competitor’s product even though they might
very much want (need) some of the differentiated
value of your offering.
 The pricing setting for non-profit
organizations
 For nonprofit organizations the pricing decisions are particularly
challenging process. They have a social rather than a for profit
objective function.
 In this regard, non-profit organizations should obey a legal
restriction not to distribute possible financial surpluses to
those who control the organization's assets, and they have
the opportunity to receive donations. 
 To take an example, cultural nonprofits often price seats for
events in theatres, auditoriums and stadiums. While
nonprofit organizations may not earn a "profit", by its definition,
it is the case that many nonprofits may desire to maximize net
revenue through the activities mentioned above.
 The pricing setting for non-profit
organizations
 A behavior of non-profit organizations, such as educational institutions,
charities and industry trade groups, also have setting prices.
 One of the most common pricing faults made by both for-profit and
nonprofit business companies is going with a straight cost markup
pricing strategy. Using such a strategy can lead to errors on either side,
pricing too high and in this way discouraging purchases, or pricing too
low and leaving potential profits unrealized. 
 Efforts should be made to determine the value that customers place on
what you’re selling, either through surveys or by comparing prices of
similar products offered by other nonprofits. 
 Different versions of products and various membership plans for
supporting the organization can be realized to develop a pricing
structure. For instance, many museums offer both inexpensive
paperback books with pictures of their art and also larger, more
expensive, hardback coffee-table versions of such books for a
substantially higher price.
Summary
 Nowadays, prices on the world market play an
important role.
 By analyzing prices, market players take crucial
decisions with regard to the formulating price
policy and strategy.
THANK YOU FOR ATTENTION!