LESSON #08

PRICING DECISIONS

Presented by:
Dr. Chacha Magasi
College of Business Education

1
 Price is another important element of
marketing mix.
 The other three elements are product,

promotion and place.

 It is the only revenue-generating
element amongst the 4Ps, the rest
being cost centers.
 Pricing is a process of determining what to
charge a customer for the product or service
during exchange.
 Price is something of value a customer pays

in exchange for a product or service. (It is

an expression of value).
 Rent- for apartment
 Fee-for consulting a physician or dentist
 Donation- for assistance
 Tuition –for education
 Honorarium-charged by guest lecturer
 Premium-for insurance
 Commission-for salesman
 Wage, salary, dues for employees, laborer
 Interest- for borrowing money
 Fare –for transport
 Income tax-for government’s service
 Suitable pricing serves to attract new
customers.
 Price regulates demand- Price increases or
decreases the demand for the products.
 Price serves as a tool to defeat competitor
 Price contributes to revenue generation
 Price helps to communicate the quality of the
product or service
 There are different ways of setting price of a
product or service. These are three basic ways to
calculate prices.
1. Cost Based Pricing: This method involves setting price
based on production and marketing costs. To calculate
the price, you take the cost of the product and then add
a profit you desire. For example, a sports drink has a
cost of TZS 300 per item. The producer wants to make a
profit of TZS 150 per item, so the selling price will be
TZS 450
2. Competition Based Pricing: This method involves setting
prices based on what competitors are charging. You can
set price at the same level, above or below the
competitor.
3. Demand Based Pricing: This method involves setting
prices based on the value a product creates for the
customer.
 Pricing Objectives: - Before any pricing decisions are made, a company
must establish what it intends to achieve through pricing. The company
may have different marketing objectives such as maximization of
profit, maximization of sales, bigger market share, survival in the
market, quality leadership and so on.
◦ For example, if the objective is to maximize sales or have a bigger market
share, a low price will be fixed.
 Costs of Making and Selling the Product: - The Company has to
calculate the total costs involved in making, distributing and selling
the product.
◦ The price has to be set at a level which would cover the costs.
 Marketing Mix Strategy: - Price decisions must be related with product
design, product quality, product quantity, distribution, and promotion
decisions.
 Organizational considerations- Management must decide who within the
organization should set prices.
 The market and demand: - If the demand is high the
marketer usually sets high price and vice versa
 Competition in the Market: - The business has to set
price at a level which will encourage customers away from
competitors
 Customers: - A price should be affordable to the
customers
 Government Regulation: - Prices of some essential
products are regulated by the government.
 There are a number of pricing strategies that a company can use to
sell its product. Some of these pricing strategies are the
following:
1)Market Penetration Pricing involves setting low price at the
beginning in order to attract large number of buyers and large
market share. After attracting good number of customers the
price would be raised.
 For example, Fastjet Airline launched its services in Tanzania in late
November, 2012. During the first few months of the service launch, the
airline was operating very low cost flights which helped the company
to attract large number of customers.
2)Price Skimming involves setting a high price at the beginning to
gain a high profit from early adopters of a new product, then
gradually lowering the price to attract thriftier consumers.
 For example, mobile phones, laptops and other technological things
were sold at higher prices when newly launched
3) Premium Pricing involves setting a price higher than the
market price, in the expectations that customers will purchase
it due to the perception that it must have unusually high
quality or reputation.
4) Psychological Pricing; involves making small changes to
prices to make a customer think the item is priced lower than
it is. For example, customers will perceive a product priced
for 4.99$ cheaper than that priced for 5.00$.
5) Geographical Pricing: involves setting price based on
geographical location.
6) Promotional Pricing is when a firm temporarily sets price
below list price, and sometimes even below cost, to increase
short-run sales. For example, discount or allowance pricing.
1. Price has many names depending on the kind
of business activities. Support this
statement with examples.
2. Explain the importance of pricing.
3. Briefly describe the factors that influence
the pricing strategy of an organization.
4. Briefly explain three pricing approaches
5. Briefly describe the following terms:
a) Penetration pricing
b) Price skimming
c) Premium pricing
d) Competition based pricing.
6) Rachel bought a miniskirt for TZS 10,000 which
unfortunately could not fit her when she tried it at
home. She decided to resell it to Madonna for a markup
on price of 50%.
a)What price did she sell it for?
b)What pricing method did Rachel use to sell the
miniskirt? Name other two pricing methods firms commonly
employ
c)List five factors which determine price setting