What is pricing?
Pricing can be defined as the monetary value or equivalent of a good or service.
Bernhart (1990) defined price as the value that one puts on the utility that one pays for goods and services.
Utility received can be any of the four; place, time, form and possession.
Price can be formally defined as the amount of money neede to acquire a given quantity of goods and services.
What are Pricing objectives;
- To ensure a fair profit (ROI)
- To enhance sales and increase market for the firm’s product.
- Competitive reason: price is regarded as a major tool used in competition for firms to compete favorably, they must be able to adjust to prices to always achieve the organizational objective at a given time.
Maximum cash flow: to recover invested cash as much as possible.
What are the methods of price setting?
Mark-up pricing: In this method, a pre-determined percentage (mark-up) is added to cost of the product. Example. Cost- #4,000, mark-up= 10%m price = #4,400.
Target return pricing; Pricing is done to achieve pre-determined rate of return on investment capital.
It is calculated based on a standard volume;
Pr = DVC + F/X + Rk/X
Pr = selling price,
F = fixed price,
DVC = Direct unit Variable Cost
X = Standard unit-volume,
R = Profit rate desired,
K = Capital (total operating asets) employed.
Let us do an illustration of target return pricing with the following data;
Unit material cost = #20
Unit labor cost = #10
DVC = #30
Target rate of return , R. = 20%
Capital employed, K = #2 million
Fixed cost = #600,000
Standard unit volume = 50,000
Pr = 30 + #600,000/50,000 + 20$ of 2,000,000/50,000
= #30 + #12 + #8
Pr = #50.
If 50,000 units of a product are sold at #50 per unit, the rate of 20% on invested funds is assured.
Break-even analysis pricing;
This determines the number of units required to generate the Naira sales to equal the Total fixed and variable costs at a specific price. At the BEP, there is neither profit nor loss.
BEP = Fixed costs/Sales revenue – variable cost.
An example of this is price leadership. Price leadership is a situation that exists where the dominant company within an industry influences the price charge by other companies. The other companies follow the price set by the leader.
There are two examples of this. The first is,
Perceived value pricing.
This sis a method which prices are set by companies using the perception of consumers; value of their products. The consumer places a value on the product based on the intensity of promotion, the nature of sales outlet and the packaging.
The second is Price Quality Relationship Strategy; This pricing concept holds that buyers associate high quality with high price and low quality with low price. Companies with high quality products will price high and vice versa.
Pricing strategies are:
Skimming pricing strategy; This strategy uses a high price to introduce a new product. It aims at the cream class to create a batter image for the product and fast recovery of developmental investment.
Customers appropriate for skimming pricing strategy are;
Customers who are insensitive to price increase,
Customers who derive psychological satisfaction for being the only users of a product. Examples include mobile and smart phones.
Customers who perceive substantial benefit in the product since there are no immediate substitutes.
The low penetration pricing strategy;
This strategy introduces a new product into the market using low prices initially. It is aimed at realizing high sales volume quickly and the entire target market. A company which adopts this pricing strategy realizes the following;
Achieves high market share as soon as possible,
Achieves high sales volume quickly,
Achieves economic of sales resulting from increase demand. Large scale production is also achieved.
Low penetration pricing strategy can be used when;
- Low prices would greatly attract large volumes of sale.
2. The market is price sensitive,
3. Where a company would benefit from large scale economy through increased demand.
Firms which follow a traditional approach in this strategy do not changing prices. They would rather size or quantify than change price. Customary pricing is largely used in the confectionery market, examples are sweet, bread nd others.
Price leadership; Financial strength, high quality products, innovativeness and promotional efforts can give a company leadership in pricing in an industry. Consequently, the company can set price for others to follow.
Prestige pricing; This is used to create a very high language for the product. Many people believe that a good product must bear a high price. Some automobiles are examples.
WHAT ARE PRICING POLICIES”
Pricing policy; Pricing policy is a decision that guides a company on pricing approach to a destination effect on who bears the cost of transportation of goods.
Types of Pricing Policy.
The types are;
- Geographical pricing policy; this is concerned with the decision on who should bear the cost of transportation or the cost of distribution of goods during shipment. Geographical pricing policy is a competitive edge to motivate the buyer,
- Free On Board (F.O.B); when F.O.B price is quoted on a product, it means that the buyer would bear the cost of transportation. The title to the product is transferred as soon as the productis loaded or moved on board.
- Uniform delivered pricing; this refers to a situation where a firm sells the product at the same delivered price to all buyers, irrespective of location, sellers retain title until goods are delivered. In Nigeria, coca-cola and other soft drinks are distributed to retailers at this pricing policy. This type of pricing is divided into four units:
Single zone, Multiple zones, Freight Absorption pricing and, Base point pricing.
Single zone pricing; buyers pay the same delivered price for the product in their country or geographical area. The spatial distance from the buyers’ location and cost of transportation are not reckoned.
Multiple zone pricing; in multiple zones pricing, the market is divided into two or more geographical zones. To each zone the – changes base but price across zone differ from one to the other because of the cost of transportation, degree of competitiveness and demand.
Freight Absorption Pricing; freight absorption pricing takes place when a firm in an industry decides to charge the same price as the competitor nearest to the firm practicing the freight absorption policy. It does this by absorbing the freight which the buyer would hav paid for transporting the goods.
Base Point Pricing; this is commonly used by undifferentiated products such as petroleum products, cement, steel and others. In base point pricing, a base price is charged as the base point and from that point a freight which is equal to the distance is charged. For example, UNICEM may decide to designate Calabar as a base point; any delivery from Calabar would be charged base freight/
What are they?
Discounts are deductions made from the actual price of a product. There are five types of discounts;
Quantity discount; the amount of discount is calculated based on the size of order. This encourages buyers to nuy more. The more the quantity purchased, the more the discount allowed.
Cash discounts; this is done by offering a product at reduced price to the buyer who pays within a stated period.
Two variables are considered here, the amount bof the reduction and the period covered. For example, a bill may be quoted as #1,000, 4/10 net 30.
Trade discount; trade discount are ways of motivating channel intermediaries, wholesalers, retailers and agents . trade discounts specify the amount of reductions from the list of each channel member.
For example, a company may decide to quote its trade as; #500 on 20/15/5. This means that the manufacturer price is #500, the 20 is the percentage of the suggested reduction of the retail price for the retailer.
The next number, which is 15 percent is for wholesalers to retailers, then wholesalers closest to the manufacturer get 5 percent.
Author – Ezekiel Maurice Sunday.(PhD)