1.0 INTRODUCTION
Price is an important element of the marketing mix. It can be used
as a strategic marketing variable to meet competition. It is also a direct source
of revenue for the firm. It must not only cover the costs
but leave some margin
to generate profit for the firm. However, price should not be so high as to
frighten the customers. Price is also an element, which is highly perceptible
to customers and significantly affects their decisions to buy a product. In
general, price
directly determines the quality to be sold. That is why electric
fans are sold at lower prices and hotels reduce their tariffs during off-season
periods to attract customers. This note examines pricing policies and some
strategies adopted by company executives.
2.0 OBJECTIVES
At the end of this note,
you should be able to:
·
state the factors affecting the pricing decision
·
state the importance and role of cost in pricing
·
identify the different methods used in pricing
·
explain how pricing can be used to achieve the objectives at each stage
of the products life-cycle
·
state the difference in pricing of customer and industrial
products
·
outline how pricing can help position a product in relation to other
competing products.
3.0 MAIN CONTENT
3.1 Determinants of Pricing
Pricing decisions are
usually determined by cost, demand and competition. We shall discuss each of
these factors separately. We take demand first.
(a) Demand The popular ‘Law of Demand’ states that “the higher the price; the
lower the demand, and vice versa, other things remaining the same”. In season,
due to plentiful supplies of certain, agricultural products, the prices are low
and because of low price, the demand for them increases substantially.
You can test the validity of this law yourself in your daily life.
There is an inverse relationship between price and quantity demanded. If price
rises, demand falls and if the price falls, the demand goes up. Of course, the
law of demand assumes that there should be no change in the other factors influencing
demand except price.
If any one or more of the factors, for instance, income, the price
of the substitutes, taste and preferences of the consumers, advertising,
expenditures, etc. vary, the demand may rise in spite of a price rise, or
alternatively, the demand may fall in spite of a fall in price. However, there
are important exceptions to the law of demand. There are some goods, which are
purchased mainly for their ‘snob appeal’. When prices of such goods rise, their
snob appeal increases and they are purchased in larger quantities; therefore,
their demand falls.
Diamonds provide a good example. In the speculative market, a rise
in price is frequently followed by larger purchases and a fall in prices by
smaller purchases. This is especially applicable to purchases of industrial raw
materials. More important than the law of demand is the elasticity of demand. While
the law of demand tells us the direction of change in demand, elasticity of
demand tells us the extent of change in demand.
Elasticity of demand refers to the response of demand to a change
in price. It is necessary for the
marketer to know what would be the reaction of the consumers to the change he
wishes to make in the price. Let us take some examples. Smokers are usually so
addicted to smoking that they will not give up smoking even if prices of
cigarettes increase. So also the demand for salt or for that of wheat is not
likely to go down even if the prices increase.
Another example of inelastic demand is the demand for technical
journals, which are sold mainly to libraries. On the other hand, a reduction in
the price of television will bring in more than a proportionate increase in
demand. Some of the factors determining the price-elasticity of demand are the
nature of the commodity, whether it is a necessity or luxury, extent of use,
range of substitutes, urgency of demand and frequency of purchase of the
product.
The concept of elasticity of demand becomes crucial when a
marketer is thinking of lowering his price to increase the demand for his
product and to get a larger market share. If the increase in sales is more than
proportionate to the decline in price, his total sale proceeds and his profits
might be higher. If the increase in sales is less than proportionate, his total
sales proceeds will decline and his profits will definitely be less.
Thus, knowledge of the elasticity of demand for his products will
help a marketer to determine whether and to what extent he can cut the price or
pass on the increase in cost to the consumer. It may also be noted that the
price elasticity of demand for a certain commodity and the price elasticity of
demand for a certain brand of that commodity may be radically different. For
example, while cigarettes as such, may be highly inelastic, the price
elasticity of demand for ‘Capstan’ or ‘Charms’ may be highly elastic. The
reasons for these are weak brand loyalty and the availability of substitutes.
Competition The degree of control over prices, which the sellers may exercise,
varies widely with the competitive situation in which they operate. Sellers operating
under conditions of pure competition do not have any control over the prices
they receive. A monopolist, on the other hand, may have some pricing
discretion. The marketer; therefore, needs to know the degree of pricing
discretion enjoyed by him. Let us take up each of these cases individually.
Fig. 1: Pricing under Perfect Competition
DD=Demand Curve
SS=Supply Curve
E = Point of Equilibrium
In pure competition, all that the individual seller can do is to
accept the price prevailing in the market i.e. he is in the position of a price
taker. If he wants to charge a higher price, buyers will purchase from other sellers.
And he need not charge less since he can sell his small supply at the going
market price.
Under a monopoly, a single producer has complete control of the
entire supply of a certain product. Railways and telephones are examples of monopoly.
The main features of a monopoly are (i) there is only one seller of a particular
good or service and (ii) rivalry from the producers of substitutes is so remote
that it is almost insignificant. As a result, the monopolist is in a position
to set the price himself. Thus, he is in the position of a price setter.
However, even in the case of a monopolist, there are limits to the
extent to which he can increase his prices. Much depends on the elasticity of demand
for the product. This, in turn, depends on the extent of availability of
substitutes for the products. And in most cases, there is rather an infinite
series of closely competing substitutes.
Even railways and telephone organizations must take into account
potential competition by alternative services – railways may be substituted by motor
transport and telephone calls by telegrams. The closer the substitute and
greater the elasticity of the demand for a monopolist’s product, the less he
can raise his price without frightening away his customers. The high price of
oil has led to the development of alternative sources of energy, such as solar
energy.
Monopolies are constantly reducing due to the following reasons:
·
shifts in consumer demand
·
continuous process of innovation and technological developments leading
to development of substitutes
·
lack of stimulus to efficiency provided by competition
·
entry of new competitors Intervention by governments.
Oligopoly is a market situation characterized by a few sellers,
each having an appreciable share in the total output of the commodity. The automobile,
cement, tyre, infant food, dry batter, tractor, cigarette, aluminium and razor
blade industries provide examples of oligopolies. In each of these industries,
each seller knows his competitors individually in each market.
Each oligopolist realizes
that any change in his price and advertising policy may lead rivals to change
their policies. Hence, an individual firm must consider the possible reactions
of the other firms to its own policies. In such cases, there is a strong
tendency towards close collaboration in policy determination in regard to both
production and prices. Thus, oligopolists follow the philosophy of ‘live and
let live’.
Oligopolistic industries
are usually characterised by what is known as price leadership – a situation
where firms fix their price in a manner dependent upon the price charged by one
of the firms in the industry, called the price leader. The price leader has
lower costs and adequate financial resources, a substantial share of the market
and a reputation for sound pricing decisions. Price leaders with the strongest
position in the market may often increase their prices with the hope that
competitors will follow suit. Price followers may delay raising their prices in
the hope of snatching a part of the market share away from the leader.
Monopolistic competition is a market situation, in which there are
many sellers of a particular product, but the product of each seller is in some
way differentiated in the minds of consumers from the product of every other
seller. None of the sellers is in a position to control a major part of the
total supply of the commodity, but every seller so differentiates his/her
portion of the supply from the portions sold by others, that buyers hesitate to
shift their purchases from his/her product to that of another in response to
price differences. At times, one manufacturer may differentiate his/her own
products.
For example, a blade manufacturer may manufacture more than 25 brands
of blades. This differentiation of products by each manufacturer by giving
it a brand name gives him some amount of monopoly if he is able to create
goodwill for his products and he may therefore be able to charge higher prices
to some extent. Still, his product will have to compete with similar products
of other manufacturers, which puts a limit on his pricing discretion. If he
charges too high a price, consumers may shift their loyalty to other competing
suppliers. You can find it out yourself by going to the market, to see that a
large number of consumer goods like toothpaste, soap, cigarettes; radios, etc.
are subject to a large degree of product differentiation as a means of
attracting customers.
As long as a consumer has an impression that a particular product
brand is different and superior to others, he/she will be willing to pay more
for that brand than for any other brand of the same commodity. The differences,
real or illusory, may be built up in his or her mind by
(a) recommendations by friends,
(b) advertising and
(c) his own experience and observation.
The producer gains and retains his customers by
(a) competitive advertising and sales promotion,
(b) the use of brand names, quite as much as by
(c) price competition.
Product differentiation is more typical of the present day
economic system, than either pure competition or monopoly. And, in most cases, an
individual firm has to face monopolistic competition. It tries to maintain its
position and promote its sales by either
·
changing its price and indulging in price competition, or
·
intensifying the differentiation of its product, and /or
·
increasing its advertisement and sales promotion efforts.
There is a popular belief that costs determine price. It is
because the cost data constitute the fundamental element in the price setting
process. However, their relevance to the pricing decision must neither be underestimated
nor exaggerated. For setting prices, apart from costs, a number of other
factors have to be taken into consideration. Demand is of equal, and in some
cases of greater importance than costs. An increase in price is possible, even
without any increase in costs.
Very often, price determines the cost that may be incurred. The
product is tailored to the requirements of the potential consumers and their capacity
to pay for it. For example, radio manufacturers in India realized that if they
had to capture the mass market prevailing in India, they had to price it low,
which could be done only by reducing the cost – reducing the number of wave –
bands in the radio. And now a single wave band radio is available at about
N100.
If costs were to determine prices, why do so many companies report
losses? There are marked differences in costs between one producer and another.
Yet the fact remains that the prices are quite close for a somewhat similar
product. This is the best evidence that costs are not the determining factor in
pricing. Price decisions cannot be based
merely on cost because it is very difficult to measure costs accurately. Costs
are affected by volume, and volume affected by price. The management has to
assume some desired price and volume relationship for determining costs. That
is why costs play even a less important role in case of new products as
compared to existing products.
It is not possible to determine costs without having an idea of
what volumes or numbers can be sold. But, since there is no experience of
volumes, costs and prices, one starts with the going market price for similar
products. All this discussion does not purport to show that costs should be
ignored altogether while setting prices. Costs have to be taken into consideration.
In fact, in the long run, if costs are not covered, manufacturers will withdraw
from the market and supply will be reduced which, in turn, may lead to higher
prices.
The point that needs emphasis is that cost is not the only factors
in setting prices. Cost must be regarded only as an indicator of the price,
which ought to be set after taking into consideration the demand, the
competitive situation, and other factors. Costs determine the profit
consequences of the various pricing alternatives. Cost calculations may also
help in determining whether the product, whose price is determined by its
demand, is to be included in the product line or not.
3.2 Pricing Methods
After discussing the various considerations affecting pricing
policies, it would be useful to discuss the alternative pricing methods most commonly
used. These methods are:
·
Cost–plus or Full–cost pricing
·
Pricing for a rate of return, also called target pricing
·
Marginal cost pricing
·
Going rate pricing, and
·
Customary prices.
The first three methods are cost-oriented, as the prices are
determined on the basis of costs. The last two methods are
competition-oriented, as the prices here are set on the basis of what
competitors are charging.
3.2.1 Cost–Plus or Full–Cost Pricing
This is the most common method used in pricing. Under this method,
the price is set to cover costs (materials, labor and overhead) and a predetermined
percentage for profit. The percentage differs strikingly among industries,
among member–firms and even among products of the same firm. This may reflect
differences in competitive intensity, differences in cost base and differences
in the rate of turnover and risk. In fact, it denotes some vague notion of just
profit.
What determines the normal profit? Ordinarily margins charged are highly
sensitive to the market situation. They may, however, tend to be inflexible in
the following cases:
1)They may become merely a matter of common practice.
2)Mark–ups may be determined by trade associations either by means
of advisory price lists or by actual lists of mark–ups distributed to members.
3) Profits sanctioned under price control as the maximum profit margins
remain the same even after the price control is discontinued. These margins are
considered ethical as well as reasonable. Their inadequacies are:
·
It ignores demand – there is no necessary relationship between cost
and what people will pay for a product.
·
It fails to reflect the forces of competition adequately.
Regardless of the margin of profit added, no profit is made unless what is produced
is actually sold.
·
Any method of allocating overheads is arbitrary and may be unrealistic.
Insofar as different prices would give rise to different sales volumes, note costs
are a function of price, and therefore, cannot provide a suitable basis for
fixing prices. The situation becomes more difficult in multi-product firms. I
·
t may be based on a concept of cost which may not be relevant for
the pricing decision.
Explanation for the widespread use of Full–cost Pricing
A clear explanation cannot be given for the widespread use of
full–cost pricing, as firms vary greatly in size, product characteristics and
product range, and face varying degrees of competition in markets for their products.
However, the following points may explain its popularity:
1 Price based on full–cost looks factual and precise and may be more
defensible on moral grounds than prices established by other means.
2 Firms preferring stability, use full-cost as a guide to pricing
in an uncertain market where knowledge is incomplete. In cases where costs of
getting information are high and the process of trial and error is costly, they
use it to reduce the cost of decision-making.
3 In practice, firms are uncertain about the shape of their demand
curve and about the probable response to any price change. This makes it too
risky to move away from full–cost pricing.
4 Fixed costs must be covered in the long run and firms feel insecure
if they are not covered in the long run either.
5 A major uncertainty in setting a price is the unknown reaction
of rivals to that price. When products and production processes are similar,
cost-plus pricing may offer a source of competitive stability by setting a
price that is more likely to yield acceptable profit to most other members of
the industry also.
6 Management tends to know more about product costs than factors which
are relevant to pricing.
7 Cost-plus pricing is especially useful in the following cases:
·
Public utilities such as electricity supply, and transport, where
the objective is to provide basic amenities to society at a price which even
the poorest can afford.
·
Product tailoring, i.e. determining the product design when the selling
price is predetermined. The selling price may be determined by government, as
in the case of certain drugs, cement, and fertilizers. By working back from
this price, the design and the permissible cost is decided upon. This approach takes
into account the market realities by looking from the viewpoint of the buyer in
terms of what he wants and what he will pay. Pricing products that are designed
to the specification of a single buyer as applicable in case of a turnkey
project. The basis of pricing is estimated cost plus gross margin that the firm
could have got by using facilities otherwise.
·
Monophony buying – where the buyers know a great deal about suppliers’
costs as in the case of an automobile maker buying components from its
ancillary notes. They may make the products themselves if they do not like the
price. The more relevant cost is the cost that the buying company, say the
automobile manufacturer, would incur if it made the product itself.
3.2.2 Pricing for a Rate of Return
An important problem that a firm might have to face is one of
adjusting the prices to changes in costs. For this, popular policies that are
often followed are as:
1 Revise prices to maintain a constant percentage mark-up over costs.
2 Revise prices to maintain profits as a constant percentage of
total sales.
3 Revise prices to maintain a constant return on invested capital
The use of the above
policies is illustrated below:
ILLUSTRATION
A firm sells 100,000 notes
per year at a factory price of N12 per note. The various costs are given below:
Suppose the labor and materials cost
increases by 10 per cent. The question is how to revise price according to the
three policies discussed above. The above data reveal that costs are
N1,080,000. The profits as percentage of costs, sales and capital employed
(according to the three policies are):
The revised costs are N1,158,000 (N1,080, 000
+ 36,000 + 42,000)
According to the first formula, we have to earn a profit of 11.1
per cent on costs. Our revised profits should be #128,667 and sales volume on this
basis would be N1,286,667. The selling price would, therefore be N 12.87 per note.
Under the second formula, the profit should be 10 per cent on
sales. If sales are (S), the profit would be S/10 and cost would be 9S/10. The
cost known to us and we have to find out the sales.
If 9S/10 = N1,158,000 then S = N1,286,667
Therefore, the price per note is N12.87.
Under the third formula, we
assume that the capital investment is the same. Therefore, the required profit
is N120, 000 (15 per cent on N800,000). The sales value would then be N1,278,
000 and the selling price per note would be N12.78.
Rate of return pricing is a refined variant of full-cost pricing.
Naturally, it has the same inadequacies, viz. it tends to ignore demand and
fails to reflect competition adequately. It is based upon a concept of cost,
which may not be relevant to the pricing decision in hand and overplays the precision
of allocated fixed costs and capital employed.
3.2.3 Marginal Cost Pricing Under full-cost and rate-of -return
pricing, prices are based on total costs comprising fixed and variable costs.
Under marginal cost pricing, fixed costs are ignored and prices are determined
on the basis of marginal cost. The firm uses only those costs that are directly
attributable to the output of a specific product. With marginal cost pricing,
the firm seeks to fix its prices so as to maximise its total contribution to
fixed costs and profit. Unless the manufacturer’s products are in direct
competition with each other, this objective is achieved by considering each
product in isolation and fixing its price at a level, which is calculated to
maximise its total contribution.
Advantages
·
With marginal cost pricing, prices are never rendered uncompetitive
merely because of a higher fixed overhead structure. The firm’s price will be
rendered uncompetitive by higher variable costs, and these are controllable in
the short run while certain fixed costs are not.
·
Marginal cost pricing permits a manufacturer to develop a far more
aggressive pricing policy than does full-cost pricing. An aggressive pricing
policy should lead to higher sales and possibly reduced marginal costs through
increased marginal physical productivity and lower input factor prices.
·
Marginal cost pricing is more useful over the life-cycle of a product,
which requires short-run marginal cost and separable fixed data relevant to
each particular state of the cycle, not long run full-cost data.
Marginal cost pricing is more effective than full-cost pricing because
of two characteristics of modern business:
·
The prevalence of multi-product, multi-process and market concerns
makes the absorption of fixed costs into product costs absurd. The total costs
of separate products can never be estimated satisfactorily, and the optimal
relationships between costs and prices will vary substantially both among
different products and between markets.
·
In many businesses, the dominant force is innovation combined with
constant scientific and technological development, and the long-run situation
is often highly unpredictable. There is a series of short runs. When rapid
developments are taking place, fixed costs and demand conditions may change
from one short run to another, and only by maximising contribution in each
short run will profit be maximized in the long-range.
Limitations .
·
The encouragement to take on business, which makes only a small
contribution to the business arises. Such business may have to be foregone
because of inadequate free capacity, unless there is an expansion in
organization and facilities, with the attendant increase in fixed costs.
·
In a period of business recession, firms using marginal cost pricing
may lower prices in order to maintain business and this may lead other firms to
reduce their prices, leading to cut-throat competition. With the existence of
idle capacity and the pressure of fixed costs, firms may successively cut down
prices to a point at which no one is earning sufficient total contribution to
cover its fixed costs and earn a fair return on capital employed.
In spite of its advantage,
due to its inherent weakness of not ensuring the coverage of fixed costs,
marginal cost pricing has usually been confined to pricing decision relating to
special orders.
3.2.4 Going-Rate Pricing
Instead of the cost,
the emphasis here is on the market. The firm adjusts its own price policy to
the general pricing structure in the industry. Where costs are particularly
difficult to measure, this may seem to be the logical first step in a rational pricing
policy. Many cases of this type are situations of pricing leadership. Where
price leadership is well established, charging according to what competitors
are charging may be the only safe policy.
It must be noted that ‘going-rate pricing’ is not quite the same
as accepting a price impersonally set by a near perfect market. Rather it would
seem that the firm has some power to set its own price and could be a price
maker if it chooses to face all the consequences. It prefers, however, to take
the safe course and conform to the rice of others.
3.2.5 Customary Pricing Prices of certain goods become more or less fixed, not by
deliberate action on the seller’s part but as a result of their having
prevailed for a considerable period of time. With such goods, changes in costs
are usually reflected in changes in quality or quantity. Costs change significantly
only when the customary prices of these goods are changed.
Customary prices may be
maintained even when products are changed. For example, the new model of an
electric fan may be priced at the same level as the discontinued model. This is
usually so even in the face of lower costs. A lower price may cause an adverse
reaction on the competitors leading to a price war so also on the consumers who
may think that the quality of the new model is inferior. Perhaps, going with the
prices as long as possible is a factor in the pricing of many products.
If a change in customary prices is intended, the pricing executive
must study the pricing policies and practices of competing firms and the behavior
and emotional make-up of his opposite number in those firms. Another possible
way out, especially when an upward move is sought is to test the new prices in
a limited market to determine the consumer reaction.
3.3 Objectives of Pricing Policy
Before a marketer fixes a price, he should keep in mind certain
basic considerations. The pricing policy he adopts is closely related to his other
policies, like production programme, advertising policy, and selling methods.
For example, it may be necessary to reduce the price to offset the probable
loss of sales from a lower advertising budget or to enable fuller utilization
of plant capacity more quickly. Aggressive sales campaign may be necessary to
meet the advent of a new competitor. Your price should not be so high that it
attracts others to compete with you. A low price may result in such a high
volume of sales and low note costs that profits are maximized even at low
prices.
If a marketing manager is to make effective pricing decisions, he
should be clear about the firm’s long-term marketing objectives for the entire range
of products and services. If the firm is interested in increased market share,
it would have to resort to penetration pricing. If it is interested in
short-term profitability, it may have a higher price even at the expense of
sales volume and market share. The following table gives a summary of some
marketing objectives and their pricing implications:
Some Marketing Objectives & their Pricing Implications
J.J.
Ward (Editor), (1985). The Export Marketing Management. Geneva:
International Trade Centre.
3.4 Consumer Psychology
and Pricing
Sensitivity to price change will vary from consumer to consumer.
In a particular situation, the behavior of one individual may not be the same as
that of the other. Some important characteristics of the consumer as revealed
by research and experience are detailed below:
1 From the point of view of the consumer, prices are quantitative and
precise whereas product quality, product image, customer service, promotion and
similar factors are qualitative and ambiguous. It is easier to speculate about
what consumers would do if prices rose by 5 per cent than if the quality
improved by 5 per cent.
2 Price constitutes a barrier to demand when it is too low just as
when it is too high. Above a particular price, the article is regarded as too
expensive and, below another price, as constituting a risk of not giving
adequate value. If the price is too low, consumers will tend to think that a
product is of inferior quality. Balsara,
manufacturers of ‘Odonil’ and ‘Promise’ realized that pricing a product too low
could adversely affect its sales by creating a credibility problem.
Consequently, they began to price their products with higher note margins, to
make higher advertising outlays to emphasise product attributes rather than the
price and provide more attractive margins to dealers to push up their products
(Business India, April 28-May 11, 1980, 35).
3 Price inevitably enters into the consumer’s assessment of
quality. There are two reasons for this:
(a) It needs expert knowledge and appropriate equipment to test
the quality or durability of some particular products (to say nothing of the
time and cost involved in carrying out a proper test).
(b) Customers tend to look upon price itself as a reasonably
reliable indicator of quality. What is costly is thought to be of high quality.
A higher price is ordinarily taken to be a symbol of extra quality, or extra
value of extra prestige. It is very difficult to convince people that something
cheap is of good quality and that something expensive is of poor quality. It
may be easier to prove that an expensive product is of superior quality than to
prove that a cheap product is of good quality. This is especially true of durable
consumer goods which are very often differentiated, at least psychologically,
through branding, packaging and advertising. In such cases, the sale of certain
goods could be stimulated more effectively through higher rather than lower prices
for two reasons:
(i)The higher price increases the snob appeal of the goods.
(ii) The higher price
creates confidence in the customer that he/she is getting good quality.
(iii) To conclude, in many cases, price is used by the prospective
customer as a clue for sizing up the quality of the product. This price quality
association is well established.
(iv) With an improvement in incomes, the average consumer becomes quality-conscious.
An improvement may, therefore, lead to an increase in demand. If this is so, a
time may come when a rise in prices results in an increase in demand. This
extreme situation may arise if price in increasingly affluent societies comes
to serve merely as an indicator of quality.
(v) Consumers may be persuaded to pay more for heavily advertised goods.
A firm’s size, its financial success, and even its age are often perceived by
consumers as measures of quality. Well known firms very often assert that by
virtue of their reputation they are able to charge 5 to 10 per cent higher than
other firms but definitely not much more.
(vi) In a comprehensive survey of consumer consciousness, it was revealed
that the basic postulate of the demand theory, i.e., the consumer has an
appropriate knowledge of market prices, was not fundamentally wrong.
An experimental study in Nigeria showed that more than 50 per cent
of the respondents revised their ratings of ready-made shirts after knowing their
prices, indicating thereby that price information does have a significant
effect on quality perception.
In fact, higher prices that increase consumer readiness to buy may
sound uneconomic, but may not be unrealistic. The price-quality concept has equal
relevance to new product pricing. The lesson from this discussion is that the
producer has considerable flexibility in pricing his products, provided he can
create a psychological image of quality.
3.2 Nature and Use of Price Discounts
There are two popular types of discounts:
1)Quantity discounts
2)Cash Discounts.
Quantity Discounts Quantity discounts are price reductions related to the quantities purchased.
Quantity discounts may be related to the size of the order being measured in
terms of physical notes of a particular commodity. This is practicable where
the commodities are homogeneous or identical in nature, or where they may be
measured in terms of truck-loads. However, this method is not possible in case
of heterogeneous commodities which are hard to add in terms of physical notes
or truckload. The drug industry and the textile industry offer examples of
these types. Here, quantity discounts are based upon the money value of the quantity
ordered. Money becomes a common denominator of value.
Quantity discounts based on physical notes become important where
cost of packing is a significant factor and orders of less than standard qualities,
say, less than a case of 6 pressure cookers, may involve higher packing charges
per cooker since the space remains unutilised. Thus, quantity discounts may be
employed to induce full carton purchasing.
In some cases, quantity discounts may be based on the cumulative purchases
made during a particular period, usually a year or a season, e.g. Christmas
discounts may be given on the basis of cumulative purchases made during the
Christmas season spread over October to December.
One important objective of quantity discounts is to reduce the
number of small orders and thereby avoid the high cost of servicing them.
Quantity discounts can facilitate economic size order in three ways:
·
A given set of customers is encouraged to buy the same quantity but
in bigger lots.
·
The customers may be induced to give the seller a larger share of their
total requirements by giving preference over competitors.
·
Small size purchasers may be discouraged and bigger size customers
may be attracted.
In many cases, discounts
have become a matter for trade customers.
Quantity discounts are most useful in the marketing of materials
and supplies but are rarely used for marketing equipment and components.
Cash Discounts Cash discounts are price reductions based on promptness of
payment. An example of discount can be 2 per cent off if paid in ten days, full
invoice price min 30 days. In practice, the term cash discounts may vary widely.
Cash discount is a convenient device to identify and overcome bad credit
risks. In certain trades where credit risk is high, cash discounts would be
high. If a buyer decides to purchase goods on credit, this reflects his weak
bargaining position, and he has to pay a higher price by foregoing the cash
discount.
By prompt collections, manufacturers reduce their working capital requirements
and thus save their interest costs. However, allowing discounts may involve
paying 36.5 per cent in order to save 18 per cent. On the basis of 2 per cent
off if paid in 10 days, full involve price in 30 days, the seller’s cost comes
to 36.5 per cent (for getting the money 20 days before he has to lose 2 per
cent which amounts to 36.5 per cent per year). He could get accommodation from
any bank at about 18 per cent. Thus, it is the reduction in collection expenses
and in risks rather than savings on interest, which should be the guiding
consideration for cash discounts.
3.3 Product Positioning and Price
By ‘positioning’ we mean the way a product is viewed by the
customers in comparison with similar products. Price is just one element of the
marketing mix and it must reflect the product’s position in the market. A toilet
soap meant to be a novelty to attract the elite must be sold at a higher price.
This is the basic idea behind product differentiation, i.e. to avoid a
situation where the product has to compete only on the basis of price. Pricing
is an important element of the marketing mix. Pricing is affected not only by
the cost of manufacturing the product, but also by:
(i) the company’s objectives in relation to market share and sales
(ii) the nature and intensity of competition
(iii) stage of the product life-cycle at which the product is
currently positioned
(iv) nature of product whether as consumer or industrial product,
and if the former, whether it is a luxury or necessity. Before making any
pricing decision it is important to understand all these factors.
There are various methods of pricing. The four most commonly used methods
are full cost pricing, pricing for rate of return, going rate pricing, and
customary pricing. While the first two methods are based on the costs incurred,
the latter methods are based on the competition’s pricing. While from the
company’s point of view, price represents a kind of ‘maximum’ that it can
charge given its own costs and nature of competition, from the costumer’s
viewpoint it is a representation of quality of the product.
4.0 CONCLUSION
Pricing policies are considered one of the most marketing mix
elements. The psychological pricing affects mainly from one consumer, to
another. The importance attached to the price of a company’s product by the consumer
is of significant importance to the marketing activities. Thus, in fixing a
price for a product, marketing executives should consider necessary pricing
policies and other market elements.
5.0 SUMMARY
In this note, we examined:
·
Pricing methods
·
Objectives of pricing policy
·
Nature and use of pricing discounts
Product positioning
and price. 
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