PRICING

• Price can be defined as the amount of money

that customer have to pay for the product.
• Pricing is the process of determining a price
for a product (good or service)
• A price may given different names, for
instance, interest, salary, wages, rent, service
charges etc

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 Importance of price
• It has the following importance to the society:
i. Major determinant of demand
ii. Quality indicator
iii. Determinant of revenue and profitability
iv. A competitive tool
v. A promotional tool

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 Pricing Objectives
• In setting prices, marketers should always
consider various objectives. Pricing objectives
are overall goals that describe the role of price
in an organizations long-range plans.
• There are various pricing objectives and they
include the followings;

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• Macro Pricing Objectives
• With this objective prices are set in order to attain
price stability/control, managing income policy and
achieving real distribution of incomes to individuals.
• Market Oriented Objectives
• Market oriented objectives includes;
– Improving or maintaining market share
– Market penetration
– Market skimming/price makers

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• Competition Oriented Objectives
• With this objective the firm intend to meet or
prevent competition using price. For small
firms it is appropriate to follow the leader
while for large firms is it appropriate to
prevent competition using price.
• Finance Oriented Objectives
• With this objective firms set prices for profit
maximization, return on investment and cash
flow purposes.

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• Promotional And Image Building Pricing
Objectives
• Prices are set in order to promote the product or
to build the image of the organization. In building
the image prices are set that will convey the status
of the firm
• Survival Pricing Objective
• With this objective profit is less important than
survival, thus a company set prices that enable it to
operate and survive.

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 Pricing objectives

Survival
Emphasise Profit
quality/brand

Follow ROI
competition

OBJECTIVES
Market
Entry barriers share

Cash flow
Status quo

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 PRICE DETERMINANTS
• Decisions regarding setting of prices is determined by
the following factors:
– Pricing objectives; different objective = various
prices
– Demand for the product; The high the demand the
higher the price and vice versa
– Cost of the product; high cost will be reflected in
high prices
– Level of competition; the higher the competition
the lower the price
– Pricing Policies; various policies = various prices

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 – Other Parts of the Marketing Mix; product,
promotion and distribution
– Supply environment;
– Characteristics of Buyer
– Macro environmental Factors; political,
legal, economic factors etc

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 Pricing methods
• These are the methods used to assign values/prices
to the products/services
• There are three commonly used pricing methods;
– Cost oriented pricing methods
– Demand oriented pricing methods
– Competition oriented pricing methods

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 Cost oriented pricing methods
• In this method a firm determine price by
adding a amount of money or parentage to
the cost of a product.
• Cost oriented methods include:
– Cost plus pricing method
– Mark up pricing method
– Variable pricing method
– Break even analysis and target profit pricing
method

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• Cost Plus pricing method
• This is a pricing method in which the seller’s cost are
determined (usually during or after a project is
completed) and then a specified amount or
percentage forecast is added to the seller’s cost to
set the price.
• This method is inappropriate when production costs
are unpredictable
• Mark-up pricing method
• This method involves setting price by adding a fixed
percentage to the cost of the product, or to invested
capital.

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• Variable cost pricing Method
• In variable cost pricing method the price is set in
such a way that the revenue obtained enables the
firm to recover all its varied costs.
• Variable costs are costs which vary with the level of
production and sales e.g. raw materials and labour
costs.
• However variable cost pricing method is not long run
pricing strategy for the firm. In the long run the firm
must recover all of its costs if it is to survive.

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• Break-even analysis and target profit pricing
method
• In this method, the firm set prices that will
enable to produce the profit is seeking or to
cover the cost of production without any
profit (break even)

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 Demand Oriented Pricing Methods

• Demand oriented pricing methods include;

– perceived value :prices set at that value
which is perceived by buyer. E.g. during
auction sales the buyer offer the price
based on his/her perception of the value of
the product

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• Differential pricing methods
• This method enable the firm to set different prices to
different customer segments while there is no
significant differences in cost of producing the
product.
• The method is practiced when the market has
several distinct segments each has different elasticity
of demand for the product in question.

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 Competition Oriented Pricing Methods
• There are two common competition oriented
pricing methods.
• These include;
• Going-rate pricing method; In this method,
the firm bases its price largely on competitor’s
prices with less attention paid to its own costs
or demand.

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• Sealed-bid pricing method; This method is
used when the firm bid for job, tenders,
purchases etc. the firm bases its price on
expectations of how competitors will price
rather than on a rigid relations to the firm’s
costs or demand
• The firm focus to win the contract, thus want
to set the price lower than other competitors.
• However, there is a certain level beyond which
the firm cannot set its price.

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 PRICING POLICIES
• In setting prices, the firm must have price
policies governing various aspects of the price
structure. The policies include discounts and
allowances, geographic price policies, pioneer
pricing policies, product mix pricing policies,
promotional pricing policies, psychological
pricing policies and discriminatory pricing
policies.

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• (a) Price discounts and Allowances:
• Most firms will modify their basic price to reward
customers for various acts such as early payments of
bills, volume purchases, buying off season etc.
• These price adjustments constitute discounts and
allowances. They include;
– Trade discounts ( to middlemen by producers)
– Quantity discounts
– Cash discounts
– Seasonal discounts

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• (b) Geographic pricing policies
• Involve the process of deciding how to price products
to customers located in different parts of the
country.
• They include;
• FOB point of production pricing policy;
The seller quote the selling price at the factory or
other point of production, and the buyer pays the
entire cost of transportation.
Distant customers incurs high costs.

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Uniform delivered pricing policy
• In this policy, the same delivered price is quoted to
all buyers regardless of their locations. This is used
when transportation costs are a small part of the
seller’s total costs
Zone Pricing Policy
• Seller’s market is divided into broad geographical
zones and uniform delivered price is set within each
zone.
• The price is usually high in more distant zones from
the production point.

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Basing point pricing policy
• This policy allow the seller to designate some city as a
basing point and charge all customers the
freight/transportation cost from that city to the
customers location regardless of the city from which the
goods are actually shipped.
Freight-absorption pricing policy
• With this policy, the seller absorb all or part of the actual
freight charges in order to get the business

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• (c) Pioneer pricing policies
• Two important pioneer pricing policies include;
– Market skimming pricing; this involve setting a
price that is high in the range of expected prices.
This strategy is suitable for new products
– Market penetration pricing; this involve setting
initial lower price to reach the mass market
immediately

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(d) Product Mix pricing policies
• These include; product lining pricing, optional pricing,
captive-product pricing and by-product pricing.
• Product-lining pricing policy
The firm sets a limited number of prices
for selected groups or lines of products
e.g. various styles and brands of a product
may be sold at the same price level.

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• Optional-product pricing
Companies offer optional product along with
Main product. The optional product can be
priced high to make independent profit or
low to catalyze the sales of the main product
e.g. In restaurants, liquor (optional product)
is offered in addition to meal (main product)
• Captive-product pricing
A captive product is the one which must be used with the
main product. E.g. LCD lens/bulb, Operating system and
Hardware etc Captive product is usually priced high because
is a complement to make independent profit.

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• By-product pricing policy
• In this pricing, the company seek a market for
its by-products and accept any price that
covers more than the cost of storing and
delivering the by-products.
(e) Promotional pricing policies
• Promotional pricing polices include: Leader
pricing, special event pricing, superficial
pricing.

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Leader pricing policy
• In leader pricing few products are priced below the usual
mark ups or below costs with expectation that sales of
regularly purchased products will rise and increase sales
volume and profits. Product sold at less than cost, they
are price leaders.
Special event pricing policy
• This policy emphasize price discounts and advertising
during seasonal or special situations such as holidays,
Christmas, Eid, Easter, trade exhibitions etc

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• Superficial discounting
• Superficial or psychological discounting is
another promotion-pricing technique where
the seller puts an artificially high price on a
product and offers it at substantial savings;
for example, “Was Tshs. 350,000/=, Now is
Tshs.300, 000/= or 50,000 = 45,000

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 (f) Psychological Pricing Policies
• Psychological pricing is designed to encourage purchases
that are based on emotional reactions rather than on
rational responses. They include: Odd pricing and
prestige pricing
• Odd pricing
Odd pricing involves setting prices at odd amounts such
as Tshs.99, 975, Tshs. 49 etc.
This pricing strategy is commonly used at retail level and
they believe it will result into larger volumes than prices
at even amounts.

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 • Prestige pricing policy
• In prestige pricing, prices are set at an
artificially high level to provide prestige or a
quality image. It is used when a higher price
is consistent with buyer’s attitudes toward
the expected cost of a product.

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