Ethiopian Business Development Services Network (EBDSN)

 Managing Prices

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Marketing home  I  Problems  I  Strategies
Product Development  I  Tenders  I  Promotion

 

Managing Prices

 

 

 

 

Competitive Strategy 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.

 

Competitive Advantage

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 competitive edge:

  • offering broad and different product ranges, as compared to the products of opponents;

  • fixing attractive prices that could be best achieved by producing at lower costs;

  • having a retail shop in the busiest sites with an empowered sales staff;

  • having chain stores can build a competitive advantage by creating convenience to buyers. However, this approach needs to consider how to employ low overhead costs;

  • 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 recreational activity;

  • presenting a more superior and improved quality of products is an important source of beating the competition;

  • using a 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 worthy image;

  • presenting 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;

  • providing 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;

  • availing 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;

  • efficient 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 insufficient sales

  • handling. Regardless of whether products are bought via ground logistics or telephone, speed is a very important issue in attaining a competitive edge;

  • having unique and convenient packages can give an advantage over the other competitors who give less attention to the packaging aspect of the product;

  • exhibiting better management and suggesting fine-tuned judgements;

  • focusing 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 market.

  • Companies 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]

Many 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 opportunities.

  • Price is 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:

  • calculate costs of operation separately from family expenses;

  • refer to the enterprise’s profit objective ;

  • study if the product is unique or is available in the vicinity;

  • find out 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 individuals:

  • the insurance; share holders; the bank; creditors.

 

Price testing  [top]

Setting price without prior testing of its impact on sales is risky. It is therefore much safer to test the effect of the price on:

  • demand; competition; movement of market shares; acceptability of the product; quantity of sales.

The method therefore needs to be tested at a modest level before spending time and resources. Such trials can give the company an opportunity to:

  • understand potential reactions of customers; evaluate if the pricing approach will pay off;

  • earn how the domestic market works; discover competitors’ reaction.

It is much better not to launch a new product before testing
and considering a good price choice for the buyers.

 

Market testing for price setting can consider different steps as illustrated in the following table:

  • setting prices;

  • performing promotional programs;

  • interviewing relevant buyers;

  • collecting data and information;

  • seeing competitive reactions;

  • analysing results;

  • revising prices.

When testing 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.

 

Price Comparison  [top]

Buyers are 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 to:

  • bad mouth the competitor’s product quality versus its price;

  • disparage the competitor’s costing structure;

  • underestimate the 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:

  • promising quick delivery;

  • providing assistance in transporting or moving matters;

  • including maintenance service for a period of time;

  • supplying additional spare parts and auxiliary goods.
     

Specific Pricing Strategies  [top]

Pricing unique Products

The 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 unique products.

Customers 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.

However, 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.

In some 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.

From the 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 Products

For the 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 price.

In most 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.

 

If the price for the quality of the product is appropriate, then there
is a good chance of the product achieving repeated purchases
.

 

Considering 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 Mode

The prices 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:

  • tourist 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 consumption.

 

Time based Pricing Strategy

The demand 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 discounted. 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 Methodology

The strategy 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 Scheme

Most 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 decision.

 

Captive Pricing

This 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 high Stock

A price 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:

  • market situation and competition; characteristics of products;

  • cost of maintaining high stock as compared to the benefit gained by selling at a reduced price;

  • advantages that can be obtained by clearing the store area.

Although stock holding is important in domestic sales (depending on the type of product), products stocked for longer periods can incur the following problems:

  • high carrying cost; high insurance charge; danger of damage; risk for obsolescence.

Bundle Pricing as a popular Method

Some 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

Before 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

The price 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 high Availability

The method 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 locality;

  • preference to purchase from which the buyer has propinquity relation.

This type of pricing strategy is more appropriate for products such as:

  • first aid effects; food products; medicinal products; baby need; cigarettes;

  • beverages especially alcoholic drinks.

Discount Pricing

Price 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.

 

The 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.

It is 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.

The 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:

  • the sales 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;

  • some buyers are large quantity purchasers, in which case they usually ask for a discount directly at the sales transaction;

  • the sales person can be more aware of temporary competitionin which case his decision on prices can be valid;

  • in some instances, giving certain discount authority to the sales person is an incentive by itself;

  • customers 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."

The disadvantages of delegating sales people in a shop to give discounted prices are:

  • if the incentive is based on the sales quantity, then the sales people will be tempted towards making more discounts than necessary;

  • in some instances, such delegations could lead to dishonesty and a lack of integrity;

  • some purchasers who know that the sales person has the authority to make discounts, may continue to pressurise the person to further reduce the price;

  • some sales people lacking negotiating skills may end up giving too low prices that yield too little profits.

Pricing Tactic by decreasing Package Size

Whenever 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.

 

Customary Pricing

Some 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 of Return

The system 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:

  • competitor’s price;

  • breakeven level;

  • commission to agents;

  • expected profit at satisfactory rates of return.

 

Pricing for Products with minor Defects

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:

  • study if the law permits the sale of such a category of products in its defective condition;

  • check the fairness and safety of the products with minor defects in connection to consumers rights when selling;

  • investigate the possible reaction of potential buyers;

  • examine the possible liabilities the company has to shoulder in the event of the defective products causing material damage.

However, if 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?

 
 
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Checklist for Managing Prices

 

  Market/Business Analysis

  • Who are the competitors?

  • At what price level do competitors sell the products?

  Pricing

  • Is there a viable accounting system, which gives information on your costs?

  • What are the costs per product unit?

  • Did you consider all pricing methodologies for different products?

  • Which pricing strategies are the adopted ones?

  • Is there any need to set alternative pricing strategies for products and services?

  • Discuss the advantages and disadvantages of setting increased
    and as well decreased prices.

  • Did you test the new pricing strategy?

 

 

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