1. Chapter 8 Pricing Decisions
Learning objectives:
Define the term ‘price’
Identify the factors involved in deciding on a price for products
Discuss three options for setting pricing goals
List the basic, dynamic and advanced pricing strategies
Explain market-penetration and price-skimming strategies
Describe the cost-plus pricing strategy and the mark-up pricing strategy
Differentiate between fixed and variable cost
Summarise the effect of the Internet environment on pricing strategies
Recommend a pricing strategy for a given organisation

2. Defining ‘price’
Price is the value expressed in terms of Rand and cent.
It is the value which is connected to products and services.
The amount of money needed to obtain a product and the benefit or utility that goes with it.

3. Meaning of ‘price’
Price is the exchange value in a product or service.
It is directly linked to the benefits and value that a product or service gives.
Price decides the demand for the product and services, as well as the profit levels.
The right price should answer the following questions:
Who is the primary target market?
What is the market position of the organisation?
What are the perceptions of customers about competing brands and products?
What is the total cost of delivery?
What are the sales and profit projections of the organisation?

4. Meaning of ‘price’ to consumers
Consumers must give up some of their spending money to obtain a product.
Main goal of consumers- to buy products and services to get the highest possible satisfaction of their needs.
Consumers add value to products due to satisfaction of the needs they get from using the product or service. This is called ‘yield value’.
Yield value- highest amount the consumer is willing to pay to use the need-satisfaction provided by the product.
Replacement value- the amount consumers must pay to obtain a product.
Consumer surplus- The extra need-satisfaction consumers get.

5. Meaning of ‘price’ to business organisations
Organisation has to decide on prices to sell their products and services.
Without prices no sale can take place.
Prices must be set in order to exist and survive.
Prices are critical for organisations that use low prices to differentiate themselves from competition.
Two types of organisations:
Price-takers
External things fix the price
For example, the government sets fixed prices for petrol.
Price-makers
They have control over the decision of the prices they charge.
For example, a cafeteria can put whatever prices they like on their products- chocolates, cool drinks etc.

6. Factors involved in deciding on prices for products
Substitute products- availability of very similar substitutes influence prices.
Complementary products- demand for a product is affected by the price competitors charge for complementary products and services that go with the product.
Income of consumers- directly affects demand for products and services.
Size of market- the greater the size of market, the greater the demand for products and services, e.g. Mango.
Consumer taste- consumer likes and dislikes.
Marginal revenue- organisations have to lower their prices to sell more of a product, thus each extra unit of a product they sell makes them less money than the previous unit.
Price elasticity- demand will change if price changes. It is the percentage change in the quantity demanded when price changes, divided by the percentage change in price.

7. Factors that affect price setting
Organisation’s pricing decisions are affected by an organisation’s internal and external environment.
Internal factors
Marketing goals
Organisational costs
Other decisions an organisation makes
External factors
The nature of the market demand
Consumer behaviour
Competition
Supplier activities
Authority and government activities
Economic conditions

8. Three options for setting pricing goals
An organisation’s pricing strategy depends on the pricing goals of the organisation.
These goals should be in line with the goals of the organisation.
Organisations choose from three main types of pricing goals:
Profit-oriented goals
Sales-oriented goals
Goals to keep things as they are

9. Types of pricing goals Pricing Goal Explanation Profit- oriented goals
Organisation wants to get a positive rate of return on its investment in producing and making its products.
Targeting the highest return on investment
The organisation sets a price to make sure that it gets a specified percentage return on investment.
Getting the highest profits possible
The organisation wants to earn a quick return on investments. This may, however, attract competition.
Sales-oriented goals
An organisation with sales-oriented goals wants to sell a lot of its product or get a bigger share of sales compared to the share of competitors.
Selling more of the product
Organisations set prices at a level that will sell more products. Organisation wants to have a certain share of the market. If an organisation prices its products and services very low to get market share, it runs the risk of not making any profit or it may start a price war against other organisations.
Increasing the market share or keeping it the same
Organisations think if they can get a big market share its rate of investment (ROI) will increase. It produces as much as it possibly can, makes its prices lower that their competitors and reduce prices even more in line with the cost benefits it receives.
Goals to keep things as they are
Organisations want to keep things stable or keep the existing good environment for its operations. Wants to avoid its sales going down and to keep the effects of outside influences.
Stabilising prices in the industry
This goal is suitable for the standardised product of a market leader that sets prices.
Meeting the competition
When there is no price leader, an organisation can deliberately price its products to meet the competition in the market place.

10. The main pricing strategies
Price is an active factor in the pricing strategy.
Organisations choose to price their products at or near the prices of their main competitors.
A price strategy uses the organisation’s positioning strategy to set a competitive price in a particular market segment.
The freedom an organisation has to price a new product and to develop a price strategy for that product depends on the market conditions and other variables in the marketing mix.
Various pricing strategies from which an organisation can choose will be discussed.

11. Basic, dynamic and advanced pricing strategies
Basic pricing strategies
Marketers rely on a few basic strategies to set prices.
Difficult to set prices and marketers do not have all the information about demand, cost and competitors.
Basic strategies for setting prices consider some or all of the following: cost, profit, value and competition.
Types of basic pricing strategies:
Strategies based on COST:
Cost-plus pricing: organisation decides prices by adding the set profit it wants to its cost.
Mark-up pricing: organisation sets prices by calculating product costs per unit and then deciding the mark-up percentage that it needs to cover selling costs and profits.
Target pricing: organisation sets prices to get a specific rate of ROI for a set amount of the product.
Break-even analysis
Strategies based on VALUE:
Demand-minus pricing
Chain-mark-up pricing
Price discrimination
Strategies based on COMPETITION:
Going-rate pricing
Leadership pricing
Pricing by competitive bidding

12. Basic, dynamic and advanced pricing strategies contd.
Dynamic pricing strategies
Pricing environment of the Internet encourages a kind of pricing strategy in which prices are not set but change.
Technological and financial globalisation makes exchanges over the Internet particularly important for marketers.
Exchanges over the Internet
Advanced pricing strategies
Includes ways of adjusting prices according to the amount of goods purchased, which are incentives to customers to buy more products at once or to buy them more often.
Includes ways of structuring products and prices by combining several products into a single package called a ‘bundle’.
Advance strategies that customise prices for various consumers, as well as strategies that respond to or create high demand for a product.
Volume discount pricing
Using a two-part pricing structure
Bundle pricing
Pure bundling
Mixed bundling
Price discrimination
Frenzy pricing schemes

13. Questions
The marketing manager of All Gold needs to set prices for a new product- chutney. What are the factors that he must take into consideration when determining the price for the specific product? Please give appropriate examples.
(14)
There are two pricing strategies for new products. Please name them, discuss them theoretically and give relevant examples.
(10)