PRODUCT PRICING
Product pricing refers to establishing a selling price for a product
The basic rules of pricing are:
i) All prices must cover costs and profits.
ii) The most effective way to lower prices is to lower costs.
iii) Review prices frequently to assure that they reflect the dynamics of cost,
market demand, response to the competition, and profit objectives.
iv) Prices must be established to assure sales.
Prices are generally established in one of the following ways:
1) Cost-Plus Pricing
Many manufacturers use cost-plus pricing. The key to being successful with this
method is making sure that the "plus" figure not only covers all overhead but generates
the percentage of profit you require as well. If your overhead figure is not accurate, you
risk profits that are too low. The following sample calculation should help you grasp
the concept of cost-plus pricing:
Cost of materials 5000.00
+ Cost of labour 3000.00
+ Overhead 4000.00
= Total cost Ksh12000.00
+ Desired profit (20% on
3000.00 sales)
Ksh15000 is
the required
sales price
2) Demand Pricing
Demand pricing is determined by the optimum combination of volume and profit.
Products usually sold through different sources at different prices--retailers, discount
chains, wholesalers, or direct mail marketers--are examples of goods whose price is
determined by demand. A wholesaler might buy greater quantities than a retailer, which
results in purchasing at a lower unit price.
The wholesaler profits from a greater volume of sales of a product priced lower than
that of the retailer. The retailer typically pays more per unit because he or she are unable
to purchase, stock, and sell as great a quantity of product as a wholesaler does. This is
why retailers charge higher prices to customers. Demand pricing is difficult to master
because you must correctly calculate beforehand what price will generate the optimum
relation of profit to volume.
3) Competitive Pricing
Competitive pricing is generally used when there's an established market price for a
particular product or service. If all your competitors are charging $100 for a
replacement windshield, for example, that's what you should charge. Competitive
pricing is used most often within markets with commodity products, those that are
difficult to differentiate from another. If there's a major market player, commonly
referred to as the market leader, the company will often set the price that other, smaller
companies within that same market will be compelled to follow.
To use competitive pricing effectively, know the prices each competitor has established.
Then figure out your optimum price and decide, based on direct comparison, whether
you can defend the prices you've set. Should you wish to charge more than your
competitors, be able to make a case for a higher price, such as providing a superior
customer service or warranty policy? Before making a final commitment to your prices,
make sure you know the level of price awareness within the market.
If you use competitive pricing to set the fees for a service business, be aware that unlike
a situation in which several companies are selling essentially the same products,
services vary widely from one firm to another. As a result, you can charge a higher fee
for a superior service and still be considered competitive within your market.
PRICING STRATEGIES
Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach
is used where a substantial competitive advantage exists. Such high prices are charge
for luxuries.
Penetration Pricing
The price charged for products and services is set artificially low in order to gain market
share. Once this is achieved, the price is increased.
Economy Pricing
This is a no frills low price. The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands for bread, milk, etc.
Price Skimming
Charge a high price because you have a substantial competitive advantage. However,
the advantage is not sustainable. The high price tends to attract new competitors into
the market, and the price inevitably falls due to increased supply. Manufacturers of
digital watches used a skimming approach in the 1970s. Once other manufacturers were
tempted into the market and the watches were produced at a lower unit cost, other
marketing strategies and pricing approaches are implemented.
Premium pricing, penetration pricing, economy pricing, and price skimming are the
four main pricing policies/strategies. They form the bases for the exercise. However
there are other important approaches to pricing.
Psychological Pricing
This approach is used when the marketer wants the consumer to respond on an
emotional, rather than rational basis. For example 'price point perspective' Ksh 99 and
not Ksh 100.
Product Line Pricing
Where there is a range of product or services the pricing reflect the benefits of parts of
the range.
Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to buy.
Optional 'extras' increase the overall price of the product or service. For example
airlines will charge for optional extras such as guaranteeing a window seat or reserving
a row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where the
consumer is captured. For example a razor manufacturer will charge a low price and
recoup its margin (and more) from the sale of the only design of blades which fit the
razor.
Product Bundle Pricing
Here sellers combine several products in the same package. This also serves to move
old stock. Videos and CDs are often sold using the bundle approach.
Promotional Pricing
Pricing to promote a product is a very common application. There are many examples
of promotional pricing including approaches such as ‘Buy One Get One Free’
Geographical Pricing
Geographical pricing is evident where there are variations in price in different parts of
the world. For example rarity value, or where shipping costs increase price.
Value Pricing
This approach is used where external factors such as recession or increased competition
force companies to provide 'value' products and services to retain sales.
MARKETING
Marketing is defined by the American Marketing Association as "the activity, set of
institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large
The Chartered Institute of Marketing defines marketing as "the management process
responsible for identifying, anticipating and satisfying customer requirements
profitably.
A market is defined as a group of customers with the authority and ability to purchase
a particular product or service that satisfies their collective demand
Marketing Functions
There are universal functions performed in marketing:
Buying: (Raw material to produce goods and services and to purchase finished goods
or services as retailer or wholesaler to sell them again for final customers and
consumers) It is a function that ensures that product offerings are available in sufficient
quantities to meet customer demands.
Selling: The function to be performed to sell the products/services/idea to satisfy
customer needs or wants by using advertising, personal selling and sales promotion to
match goods and services to customer needs.
Transporting: Function related to create the availability of product or services. It is used
for moving products from their points of production to location convenient for
purchases. Storing: Warehouses are used to store the products for further distribution.
Standardizing and grading: To provide more quality products and services without
variation in the quality. Ensuring that product offerings meet established and grading
quality and quantity control standards of size, weight, and other product variables.
Financing: Providing the financial resources to carry out different promotions of
products and providing credit for channel members (wholesalers, retailers) or
consumers.
Risk taking: Marketer takes a risk specifically when any new product is introduced in a
market because there are equal chances of success and failure. Dealing with uncertainty
about consumer purchases resulting from creation and marketing of goods and services
that consumers may purchase in the future.
Obtaining Market information: Successful Marketing is no accident it involves the
conduct of marketing research. This helps the managers to evaluate the potential
demand, sales, buying power of the intended market.
The Marketing Process
Under the marketing concept, the firm must find a way to discover unfulfilled customer
needs and bring to market products that satisfy those needs. The process of doing so
can be modeled in a sequence of steps: the situation is analyzed to identify
opportunities, the strategy is formulated for a value proposition, tactical decisions are
made, the plan is implemented and the results are monitored.
THE MARKETING PROCESS
Situation Analysis
Marketing Strategy
Marketing Mix Decisions
Implementation & Control
Situation Analysis
A thorough analysis of the situation in which the firm finds itself serves as the basis for
identifying opportunities to satisfy unfulfilled customer needs. In addition to
identifying the customer needs, the firm must understand its own capabilities and the
environment in which it is operating.
The situation analysis thus can be viewed in terms an analysis of the external
environment and an internal analysis of the firm itself. The external environment can
be described in terms of macro-environmental factors that broadly affect many firms,
and micro-environmental factors closely related to the specific situation of the firm.
The situation analysis should include past, present, and future aspects. It should include
a history outlining how the situation evolved to its present state and an analysis of trends
in order to forecast where it is going. Good forecasting can reduce the chance of
spending a year bringing a product to market only to find that the need no longer exists.
If the situation analysis reveals gaps between what consumers want and what currently
is offered to them, then there may be opportunities to introduce products to better satisfy
those consumers. Hence, the situation analysis should yield a summary of problems and
opportunities. From this summary, the firm can match its own capabilities with the
opportunities in order to satisfy customer needs better than the competition.
There are several frameworks that can be used to add structure to the situation analysis:
5 C Analyses - company, customers, competitors, collaborators, climate.
Company represents the internal situation; the other four cover aspects of the
external situation
PEST analysis - for macro-environmental political, economic, societal, and
technological factors. A PEST analysis can be used as the "climate" portion of
the 5 C framework.
SWOT analysis - strengths, weaknesses, opportunities, and threats - for the
internal and external situation. A SWOT analysis can be used to condense the
situation analysis into a listing of the most relevant problems and opportunities
and to assess how well the firm is equipped to deal with them.
Marketing Strategy
Once the best opportunity to satisfy unfulfilled customer needs is identified, a strategic
plan for pursuing the opportunity can be developed. Market research will provide
specific market information that will permit the firm to select the target market segment
and optimally position the offering within that segment. The result is a value
proposition to the target market. The marketing strategy then involves:
Segmentation- Market segmentation is the identification of portions of the
market that are different from one another. Segmentation allows the firm to
better satisfy the needs of its potential customers. The basis of consumer
markets segmentation are: Geographic, Demographic, Psychographic,
Behaviourist that of industrial markets include: Location, Company type,
Behavioural characteristics
Targeting (target market selection)
Positioning the product within the target
market
Value proposition to the target market
Marketing Mix Decisions
Detailed tactical decisions then are made for the controllable parameters of the
marketing mix. The action items include:
o Product development - specifying, designing, and producing the first units
of the product.
o Pricing decisions.
o Distribution contracts.
o Promotional campaign development.
Implementation and Control
At this point in the process, the marketing plan has been developed and the product has
been launched. Given that few environments are static, the results of the marketing
effort should be monitored closely. As the market changes, the marketing mix can be
adjusted to accommodate the changes. Often, small changes in consumer wants can be
addressed by changing the advertising message. As the changes become more
significant, a product redesign or an entirely new product may be needed. The
marketing process does not end with implementation - continual monitoring and
adaptation is needed to fulfill customer needs consistently over the long-term.
