towards Profitability [top]
It is only
after studying competition that a firm can plan the pricing strategy
effectively. The subject of competition is a key point in pricing. In a
competitive situation, an enterprise needs to capture any changing demand.
During market entry competition may or may not be severe. But after
succeeding in entering the market and the business starts to grow, it can
face high competition from new marketers. When there is a large market
challenge, the firm has to be strategic and has to carry out research, in
order to overpower competition. One unfortunate fact that can be observed in
certain Ethiopian companies is that they have no time and sufficient budgets
to conduct research connected to competition. But the least they can do is
to involve sales people to get competition-related information. Sales men
are in constant contact with different buyers and certainly hear much about
competition. This can save time and provide many advantages. The other
option, particularly for enterprises with sufficient resources, is to hire a
consultant who has specific business know-how and experiences. Qualified
consultants can update a firm with the necessary information on competition
in a short period of time. In addition, the firm can contact certain people
who know the industry well, as every market place has external experts.
Competitiveness at a domestic level is seen in terms of opportunities a firm
can have, which other enterprises may find difficult to attain. Planning and
implementing appropriate strategies can improve the competitiveness of an
enterprise in various ways. A firm needs to examine and evaluate its
strengths, weaknesses and its present market share, in order to visualize
the factors that give it an edge over its competitors. Competitive
advantages can be gained and conceived by different means and different
sources. The following may provide valid bases and tools for achieving a
broad and different product ranges, as compared to the products of
attractive prices that could be best achieved by producing at lower costs;
retail shop in the busiest sites with an empowered sales staff;
chain stores can build a competitive advantage by creating convenience to
buyers. However, this approach needs to consider how to employ low
maintaining entertainment facilities is a means of obtaining more
advantages over competitors. Such facilities offer convenience and ease
during shopping and nowadays it is greatly valued by customers as a
a more superior and improved quality of products is an important source of
beating the competition;
well-known brand could be a means of creating a competitive advantage.
However, the brand has to be valued by customers in order to build up a
high-tech and fashionable products can give competitive benefits. Although
technological innovation and fashionable products can give advantage,
customers who do not find such things of value could resist the high
prices that result from this;
unique products (buyers can accept the cost-plus for the added advantage
they get from the product.) Buyers who are not sensitive to prices that
are worth compared to other products may give this issue more weight. In
fact such buyers take costs into consideration, meaning that they want to
get the best for their money and as a result become loyal to those
products that are the most cost effective;
various sales facilities such as return and guarantee facilities. This may
require good budgeting and planning, but if applied it can result in good
advantages related to gaining a larger share of the market;
and fast selling services provide an important competitive advantage over
rivals because speed by itself is of value to buyers. Nowadays, customers
seek quick services. They get frustrated with delayed orders, and
Regardless of whether products are bought via ground logistics or
telephone, speed is a very important issue in attaining a competitive
unique and convenient packages can give an advantage over the other
competitors who give less attention to the packaging aspect of the
better management and suggesting fine-tuned judgements;
on a given market niche is one factor that can be an essential factor in
competition. In this case, buyers achieve an advantage, simply due to the
fact that the companies can respond faster to consumers in the niche
with a competitive edge can out-strategize their opponents and win the
‘battle’ within an industry effectively.
Dealing with Pricing in
Micro and Small Enterprises (MSEs) [top]
entrepreneurs managing small enterprises express their view that it is
easier for them to develop new products and focus on product strategies
rather than to look into pricing aspects of market. As is obvious, focusing
on product development and modification is important, but that does not
replace the need for looking at price aspects of the market. It is true that
the issue of pricing is felt as a painful venture, but we need to look into
certain laborious and troublesome issues, in order to reach a higher level.
By avoiding some difficult jobs, a firm may lose a large profit
understood as the value customers pay to acquire a product. It is an
important factor in selling. A basic principle is that the relationship
between the price of a product and the value it gives to customers has to
be fair and proper. Customers know how much they have to pay for their
commodities and, therefore, are interested in comparing the value they
attained by the product to what they paid for it.
In order to
carry out a sound pricing strategy, some facts on marketing and simple
accounting have to be prepared. The firm needs to:
costs of operation separately from family expenses;
the enterprise’s profit objective ;
the product is unique or is available in the vicinity;
if the plan is to satisfy a certain niche of market or if a plan is still
to be defined.
A micro firm
needs to have basic accounting practice. Keeping the enterprise’s
financial records separate from family accounts creates a good basis for
planning the pricing strategy. Even if it is a home business, keeping
records accurately is important in setting prices.
If the firm
believes that keeping records is a waste of time and space, in addition to
having difficulty in setting the price, this can result in chaos and bad
relationships, especially with regard to the following organizations and
price without prior testing of its impact on sales is risky. It is therefore
much safer to test the effect of the price on:
therefore needs to be tested at a modest level before spending time and
resources. Such trials can give the company an opportunity to:
much better not to launch a new product before testing
and considering a
price choice for the buyers.
testing for price
setting can consider different steps as illustrated in the following table:
performing promotional programs;
interviewing relevant buyers;
collecting data and information;
seeing competitive reactions;
different products for price setting aims, some products can be more price
sensitive compared to others. In most cases commodities such as medicinal
products could be low or non-price sensitive. In contrast some lavish
consumable products can be more price sensitive.
likely to compare prices of similar products. Some intense buyers even
compare product prices of one and the same firm in different locations.
Selected buyers base their purchasing decision on prices only.
Some of the
common blunders that are made by some enterprises are that they fail to
differentiate the true relationship between the so-called ‘existing product’
and ‘substitute product’.
A firm can
positively stress its product’s advantages over that of competitors, but if
it belittles competitors, especially over the media, these may back fire on
the firm, buyers can discredit the firm and confidence is lost. In addition,
during price comparisons and explanations to the buyer it is inappropriate
the competitor’s product quality versus its price;
disparage the competitor’s
competitor’s pricing system.
When a firm
compares prices of competitors, checking the unit price only is insufficient
because all terms and conditions of sale have an impact on the price. A
quotation with a reduced unit price does not necessarily make a seller
stronger. In many instances a competitor’s high price quotation can be
justified for reasons such as:
providing assistance in
transporting or moving matters;
including maintenance service
for a period of time;
supplying additional spare
parts and auxiliary goods.
Pricing unique Products
definition of uniqueness should be based on the customer’s needs. Some
buyers expect and look for distinct products with unique colours, designs
and features. There are certain categories of consumers who want to purchase
accept a higher price for unique products, but only if they value and accept
the uniqueness. The increase of price to be made has to be equivalent to the
difference it provides customers with, as compared to that of competitors.
Product uniqueness could confuse some enterprises because it does not take
the features of the product into account, but rather the buyer’s
requirements and recognition of its exceptionality as well as the potential
of the product to satisfy this group of people. If buyers do not perceive
the product as being unique, then a higher price cannot be considered
because buyers will not recognize the reason for the additional charge.
such distinct products, which are not in market, are mostly manufactured on
order at a considerably higher price. This type of pricing strategy may lead
to only a small percentage of buyers.
instances the high price in itself may be one factor to classify the product
as being unique. It may seem contradictory, but there are buyers who
perceive high priced products as being unique. They prefer to buy products
with higher prices, with the assumption that the product will be bought and
owned by very few high-income groups only. To this type of buyers the high
price is a sign of pride and it gives them a sense of worth.
sales point of view, this approach needs to consider the fundamental
importance of appropriate promotion. It is necessary to publicize the
uniqueness of the product to different potential consumers.
Pricing for Quality
price to be acceptable to buyers the product has to prove its quality in
appearance and precision. Based on the awareness and vision of customers, if
quality is upgraded, then the seller has the opportunity of increasing the
cases the product’s quality is only tested by the customer when it is tried
out at home or elsewhere. This is because most products cannot be tested at
the point of purchase. Therefore, the high price should prove to the buyer
that the product’s quality is consistent throughout its entire life cycle
and not only during the purchase time.
price for the quality of the product is appropriate, then there
is a good
the product achieving repeated purchases.
all the advantages of producing quality products, investment in quality
improvement is always useful.
If an enterprise has
confidence in the quality of the product it sells, then it can give a
‘Quality Guarantee’ to its buyers. Customers value guarantees towards
quality assurance because they aim at obtaining products that are
equivalent to the value they pay.
Location focused Pricing
of products sold in places where there is a high frequency of people can be
higher because the situation of moving buyers is different compared to
stationary buyers. Examples include:
products sold in tourist areas and churches can be more expensive compared
to the same product sold in other shops;
food products and beverages
in airports can be more expensive compared to other places. People in
airports are on the move and consumption cannot be postponed, therefore,
the seller can use this advantage to sell at a higher price;
higher prices may be charged
for products with no alternatives in a given area and within a pressured
time. Whereas lower prices may be paid for the same product which is
available in other areas and where there is no need for immediate
Time based Pricing
for seasonal products is time-based. During the high season, the price of a
product becomes elevated, and as soon as the season ends the price is
For instance during the rainy
season, it is obvious that raincoats, umbrellas and winter shoes will be in
greater demand and as a result of that the price rises. When the season
comes to an end the price will drop. In some retail shops products are even
removed from the shop at the end of the season until suitable weather
conditions return. This situation is also common in small shops around
Merkato (market place) in Addis Ababa as well as other localities, where
they only have a small area to display the products.
In conclusion, when the
demand for a product peaks, prices rise higher; however, buyers will
certainly still buy them at that price.
Bulk Purchase Pricing
of undercutting the ruling price aims at achieving a higher volume of sales,
but with lower profits from each product unit. Pricing that considers volume
purchasing is a policy matter to consider. This strategy is mostly applied
in large supermarkets and chain stores.
Payment based Pricing
enterprises prefer to charge a lower price for cash payments as compared to
sales on credit. Such a pricing strategy may be more effective to those
business organizations that enter the market at a late stage.In some cases
when the products are of high value, a market study may reveal that the
quantity to be sold will be lower, if the sale is carried out on a cash
basis. In such events, the alternative of selling on credit can be
considered, in which case a higher price can be charged. The objective of
credit sales is obviously to stimulate sales and simultaneously to make
profit. The marketing and finance fellow managers have to consider this
issue together with the company goals and objectives. The issue of
allocating higher prices for credit sales requires a solid financial
strategy considers the price of the major product with a view to future
sales and in relation with the complementary product. It predetermines the
role of the complementary product throughout the entire life cycle of the
main product. This option is not easy. It requires considerable planning and
experience. Since pricing is dependent on many factors, enterprises need to
make a comprehensive study of consumers’ response on this choice of price.
An enterprise can
stretch out its profit objectives on the price of the main and complementary
products. The price of the main product is minimized with the assumption
that the sales turnover of the complementary product will be fast because of
its consumption nature. For instance, the purchase of a computer ink-printer
may be repeated only after a long period, while purchase of the ink refill
may be bought more frequently. A similar case is evident when purchasing
toothbrushes and toothpaste. A buyer purchases a toothbrush only once in a
while, whereas he buys toothpaste more frequently. Similar cases are the
purchase of razor and the respective blades, computer and software, camera
and films. Therefore, this theme considers a secondary revenue outcome.In
the event that the enterprise also sells complementary products separately
at high prices, the sales turnover of the complementary products could be
slow. Consequently, the potential sales of the key products may well be
depressed. Therefore, the enterprise has to be aware of its customer’s
reaction to the prices of the corresponding product.
Pricing Method to reduce
decrease can be suggested for products available in high stock. In the event
that demand does not match the supply, short-term time customized reduced
prices can be used to clear inventory. If appropriately applied, the
decision can merely avoid an ‘over-stocked warehouse syndrome.’ Before
proceeding to allocate reduced prices for products available in high stock,
the following points have to be considered and analysed:
situation and competition;
characteristics of products;
maintaining high stock as compared to the benefit gained by selling at a
that can be obtained by clearing the store area.
stock holding is important in domestic sales (depending on the type of
product), products stocked for longer periods can incur the following
Bundle Pricing as a
customers call for and are enthusiastic to buy products as a package. This
choice allocates a reduced price for every increase in the quantity of a
bundle. The enterprise should calculate and set the maximum price reduction
that it can afford.
Selling in bundle can bring
positive price elasticity provided the decreased price is valued by
customers versus the advantages they can profit from by buying in bulk. It
can also be organized by selling the first product at full price and the
second one then at a discounted price. It is an indirect price incentive to
customers. The primary focus of this strategy lies in sales maximization by
selling in large quantities, with the objective of attaining higher profits
in the long-term. If the market reveals that selling in a bundle decreases
the sales quantity, then this strategy is no option.
Market Penetration Pricing
announcing the actual market penetration price, intending to enter the
market on a large basis, some market factors have to be examined. After
setting market penetration price and once started selling, continuous market
survey should be done to assess market movement and consumers reaction. In
the event the survey result justifies an increase of price, the addition has
to be equivalent to the product’s value to consumer versus competitive
products.This approach requires careful assessment and analysis because if
low prices are allocated, then the profit margin of the enterprise can
suffer. In addition, many micro and small enterprises may lack cash to
sustain their businesses for some time.
Pricing for Products
requiring quick Delivery
for shorter delivery time could be higher due to extra cost. Therefore in
most cases higher price for urgent delivery is justified and buyers are
willing to pay more money to get the product on time. When quoting higher
price for delivering faster, there are many costs that will be involved. It
is advisable for firms not to assume that the buyer understands the extra
costs that will be incurred with quick delivery. It is better to explain to
the customer why the costs are higher compared to the regular delivery.
Pricing for Products with
focuses on selling fewer products at a higher price. It focuses on the fast
selling products by displaying them in the front shelf. This provides easy
access to buyers who purchase for emergency purposes. Besides it gives
preference to purchase from which the buyer has personal relation such as
friendship. The high price that this choice poses is paid for:
availability whenever needed; handiness of quick service;
accessibility in a near by
preference to purchase from
which the buyer has propinquity relation.
This type of
pricing strategy is more appropriate for products such as:
discounting is one approach that can be a means of encouraging people into
purchasing, especially those on board of buying. Using a reduced price as an
incentive can work better when applied after completion of buyers'
requirements. Besides, this approach can be applicable when there are newly
developed products or when a rapid technology change exists. Discounted
allowances can be carried out in various different ways. One choice would be
to allow reduced prices for specific products for a longer period of time.
The other option would be to discount prices of all products, but only for a
very short time. Some people only buy because products are on ‘sale’. But
some people do not only want to see prices cut, they also attach importance
to the realisation of delivery promptness and quality prerequisites.
Therefore, in such instances the price strategist has to simultaneously
consider the buyer’s requirements.
wider the price gap between the regular and the reduced, the more buyers
are attracted into purchasing. In fact, sometimes there are
buyers who search for low prices
even with bizarre standards.
sometimes hard to make new claims about existing products. But, a price
reduction program provides an excuse and opportunity to say something new
about a product and to bring products once again back to the display site.
responsibility of offering a reduced price can be divided among the various
sales authorities within the retail or wholesale shop, whereas a larger
percentage discount can be limited to the authorities at a higher level.
Allowing discounted prices requires more vigorous handling, honesty and
integrity. Delegating the sales force to offer reduced prices has advantages
and disadvantages. The advantages include:
person has direct contact with the buyer, and he sees buyer’s situation in
accepting or rejecting price therefore his decision can be more correct;
buyers are large quantity purchasers, in which case they usually ask for a
discount directly at the sales transaction;
person can be more aware of temporary competitionin which case his
decision on prices can be valid;
instances, giving certain discount authority to the sales person is an
incentive by itself;
feel confident to see that the sales person has some level of authority on
pricing rather than saying, "I have to consult my manager/supervisor."
disadvantages of delegating sales people in a shop to give discounted prices
incentive is based on the sales quantity, then the sales people will be
tempted towards making more discounts than necessary;
instances, such delegations could lead to dishonesty and a lack of
purchasers who know that the sales person has the authority to make
discounts, may continue to pressurise the person to further reduce the
people lacking negotiating skills may end up giving too low prices that
yield too little profits.
Pricing Tactic by
decreasing Package Size
there is a need to decrease the packaging size of the product, customers
need to be informed. If consumers feel cheated, it may result in an
unfavourable reputation with negative consequences on sales. Public outcry
is the most dangerous and worse case scenario in marketing.
However, the strategy of
decreasing packaging size can also be appreciated by buyers, since they will
trust the relation between what they consume and what they paid for. The
strength of this strategy lies in its capacity to convince consumers that no
waste of material was used for the money they paid for.
enterprises manufacture products that are already introduced into the
market, yet that might be new to that particular firm. Such companies find
it difficult to introduce a price profitable enough for their companies and
also acceptable to potential buyers, due to them being familiar with
equivalent products. Besides, the fact that these companies have new
investment costs makes it difficult to sell at lower price. The cost of
introducing new products is relatively high. For products that have already
entered the market the firm might be obliged to set the same price as
competitors because consumers have been paying that price for a longer
period of time. If the firm aims at selling the product at higher price,
then it could be difficult to find buyers easily, although there could be
buyers who enjoy trying out new products. On the other hand, if it starts at
lower price it could face problems with competitors.
Pricing for increased Rate
focuses on a minimal profit and covering the costs of the investment with
less risk. This approach may have some pros and cons in relation to price
wars. Enterprises that are cost-oriented can apply satisfactory rate of
return method of pricing strategy. However, cost pricing is not a measure of
market value, since it may not consider the product’s value to the customer.
In setting a price that provides satisfactory margins the following costs
and market factors should be considered:
Pricing for Products with
Before outlining the pricing
approach that should be followed in relation to products with small defects
it should be mentioned that sellers have to know beforehand what the
country’s law states with respect to the sale of such products. Please note
that this issue does not by any means refer or relate to dangerous or unsafe
products or to imported second-hand or defective products. The topic implies
to products with small defects such as a missing button on a dress, defects
in packaging material, slight colour changes of the thread, petite defect in
the zip etc.
Since the main subject of this
section is how to price products with minor defects, some points that should
be considered in pricing decisions will be considered in the following. An
enterprise needs to:
the law permits the sale of such a category of products in its defective
fairness and safety of the products with minor defects in connection to
consumers rights when selling;
investigate the possible reaction of potential buyers;
the possible liabilities the company has to shoulder in the event of the
defective products causing material damage.
the price is not low and attractive, the buyer’s preference could shift
towards buying a new product at a higher price, unless a shortage of supply
exists and purchasing power is low. The only advantage customers get from
buying such products is the low price. Why should they otherwise prefer to
purchase goods with deficiencies?
Checklist for Managing
there a viable accounting system, which gives information on your
are the costs per product unit?
you consider all pricing methodologies for different products?
pricing strategies are the adopted ones?
there any need to set alternative pricing strategies for products and
Discuss the advantages and disadvantages of setting increased
and as well decreased prices.
you test the new pricing strategy?