MODULE 3 PRICING POLICY

THE NATURE AND IMPORTANCE OF PRICE MODULE 3 The meaning of the price: (The Concept “Price”) (definition) I. Can be expressed value in terms of rand and cents. II. Price is, therefore the value which is connected to products and services and is the amount needed to obtain such a product and the benefit. Downloaded from hlayiso.com 1

THE NATURE AND IMPORTANCE OF PRICE (a) The meaning of the price from the consumer  Price is the amount of money paid for a certain product or service  Price must be “fair” - that means the consumer must regard it to be proportionate to the value received. (b) Price from the viewpoint of the firm/business  Price must allow the firm to make profit.  Profit is the difference between total income and total costs.  Competitor’s actions play a role in the determination of price, as well as whether the firm is a price taker or price maker.  Price is the largest regulator of the economic process and Downloaded influences the division offrom hlayiso.com production factors. 2

THE DEVELOPMENT OF A PRICING STRATEGY  Price strategy of a company is the way/procedure that is followed to determine a basic price. FIVE STEPS FOR FINAL PRICE DETERMINATION I. Analyse the factors that influence the price strategy II. Formula the price objectives III. Determine the basic price IV. Make adjustments to the basic price V. Determine the final price Downloaded from hlayiso.com Copyright (c) 2007 John Wiley & Sons, Chapter 9 Inc. 3

2.1 Analyse the factors that influence the price strategy 2.1.1 External factors 1. Nature of demand (elastic & inelastic) 2. Consumer behaviour 3. Competition 4. Actions by suppliers 5. Actions by authorities (government) 6. Economic conditions 7. Social considerations 2.1.2 Internal factors 1. Costs 2. Organisational factors Downloaded from hlayiso.com 3. Other elements of the marketing mix 4

Psychological pricing comprise of six strategies: 1. Traditional pricing:  Prices are maintained at the same level over a long period of time.  Costs increases does not lead to higher prices- instead, other measures are taken examples quality is lowered; or less expensive packaging  Examples are: sweets and magazines 2 Prestige prices:  Is used as a measurement of quality or prestige.  -Prestige pricing is an approach where premium prices are set, in order to create a perception of Downloaded from hlayiso.com high quality. 5

Psychological pricing comprise of six strategies- Cont.. 3. Odd-number (add-even) prices  The consumers regard prices ending with odd numbers, considerably lower than a round figure, say R100-00 eg R99-99  The consumers tend to buy more of odd-ended priced product, because of the illusion of lower prices. 4. Reference prices  A reference price is a price that consumer carry in their minds and refer to when making a purchase decision  It can be formed by noting current prices, assessing Downloaded from hlayiso.com the buying situation, as well as prices from the past. 6

Psychological pricing comprise of six strategies- Cont.. 5. Skimming price strategy:( used in the introductory phase of PLC)  The marketer sets a high price for the product , He aims at obtaining maximum income for fewer sales, but at higher prices This strategy can be implicated if:NB I. If the product is an innovation, and marketer has little knowledge of the new product II. The demand of the product is inelastic. III. The product is quality product and image support the high price IV. Few competitors exists V. The cost of the product Downloaded is unknown from hlayiso.com VI. The potential demand is unknown Chapter2 7

Psychological pricing comprise of six strategies- Cont.. 6 Market penetration pricing: ( used in the introductory phase of PLC)  The market sets a low price for the new product.  The aim is to attract a large number of buyers, thus obtaining a large market share. This strategy can be used if: NB I. If the market is highly price sensitive II. If there is a strong possibility of potential competition III. The penetration pricing is more risky than skimming pricing, because large volume are produced and marketed. IV. If the product proves to be a failure, the firm can experience heavy losses. Downloaded from hlayiso.com V. Therefore penetration pricing is mostly used by large firms and is regarded as a long -term . strategy 8

PRICE DIFFERENTIALS BASED ON THE GEOGRAPHICAL LOCATION  The marketer must take the geographical locations of his customers into account when determining the final price.  Transport costs and physical distribution models will influence price.  The marketer decides whether to charge all customers the same price, irrespective of locations or to implement different prices. Downloaded from hlayiso.com 9

FIVE geographical price differentials are distinguished: 1. Free-on-rail (free-on-board) pricing:  This is a geographical pricing strategy in which goods are placed free-on board (f.o.b) and the customer pays freight from the marketer’s location.  Prices are quoted for delivery from the marketer’s location. He therefore charges the same price to all customers, regardless of their geographical location 2 Freight-absorption pricing  This strategy is characteristic when the seller pays for delivering of the products to the buyer.  The marketer can use this strategy when he is anxious to do business with a specific customer Downloaded in a certain from hlayiso.com geographical area 10

FIVE geographical price differentials are distinguished:(Cont...) 3. Uniform delivered pricing  This strategy is also called freight equalisation pricing or postage stamp pricing.  It is a geographic pricing strategy in which the marketer charges the same price to all customers, regardless of their location.  The total transporting costs are estimated and an average transport cost per order is build into cost price  This strategy is disadvantageous to customers close by, whereas customers located far away benefit from it. Downloaded from hlayiso.com 11

FIVE geographical price differentials are distinguished:(Cont...) 4 Zoning pricing  It is a geographical pricing strategy in which the company sets up different zones or regions  All customers within a particular zone pay the same price  -Prices vary from region to region. The more distant the zone from the supplier, the higher the price 5. Base-point pricing  Is a geographical pricing strategy in which the seller designates a certain place as a basing point.  All customers are charged prices that includes the transport costs from the base-point to the customer’s locationDownloaded from hlayiso.com 12

Discount and allowances: Five types of discounts are distinguished: I. Quantity discounts; II. Trade discounts; III. Cash discounts; IV. Seasonal discounts; V. Promotional discounts. Downloaded from hlayiso.com 13

7.1Quantity discounts It is a price reduction to buyers who buy large volumes. Two types are identified: Cumulative discounts and Non-cumulative quantity discounts. Cumulative discounts:  The word cumulative means to increase quantity by adding one after the other this type of discount is granted on the amount of products brought over a specific time period.  The seller’s objectives is to establishes a long tem relationship with the buyer. Non-cumulative quantity discounts.  The aim of this discount is to encourage large orders, the larger the order the bigger the discount granted.  This type of discount is therefore granted per single order.Downloaded from hlayiso.com 14

 Trade discounts  they are also called functional discounts.  It is a price reduction offered by the manufacture (seller) to channel member in order to compensate them for functional(activities) performed.  Manufacturer may offer different discounts to different channels, depending on the functions they perform.  Cash discounts  cash discounts is a price reduction to buyers for paying their bills promptly  Seasonal discounts  it is a price reduction to buyers who purchase merchandise or service out of season.  Hotels and holidays resorts may offer lower prices during the off-peak season.  Seasonal discounts enables the manufacture or service Downloaded from hlayiso.com provider to keep production steady throughout the year 15

 Promotional discounts  is paid to the middlemen to reward them for advertising the firms products as well as conducting other promotional activities.  the allowance can be permanent of for special promotions  It can be on the form of free products, special price offers - products made available at a lower price than normal price. Downloaded from hlayiso.com Chapter 2 16

Other pricing adjustments:  Differential pricing/Segmented pricing  it is a pricing strategy whereby different prices are charged for the same product.  the difference in prices in not based on differences in costs  It can take on several forms:  Customer-segment pricing: different customers pay different prices.  Location pricing; theatres vary their seat prices because of audience preferences for certain locations.  Loss leaders(leader prices)  prices are set at less than cost price in order to increase store traffic, in the hope that customers will also buy other normally priced products.  usually well-know brands are chosen as loss leader and the “special offer” is advertised aggressively. Downloaded from hlayiso.com 17

Other pricing adjustments (Cont....  Bait pricing  occurs when a retailer offers a product at a very low price. The aim is to lure customers into the shop.  the retailer then tries to sell the customer another higher priced product than the one advertised.  if the customer insists on buying the originally advertised product, it will most probably be “out of stock”.  Price adjustments  Before reaching its final price, however, a firm must take into consideration factors that can cause a deviation from the basic price. These factors include discounts granted, deviations according to the geographical location of the buyer and the phases of the products life cycle.  One price strategy  The seller charges the same price to all customers who buy the Downloaded same quality of from goods under hlayiso.com the same conditions. Chapter 2 . 18

Other pricing adjustments: Cont..  Flexible (variable) strategy  Similar customers may pay different prices when buying the same quantities of the same product. THE END!!! Downloaded from hlayiso.com 19

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