Effect of Pricing in a Competitive Marketing Environment (A Case Study of Globacom Nigeria Limited)
Effect of Pricing in a Competitive Marketing Environment – Marketing consists business related activities that see to anticipate demand, help in developing and making the goods and services available to the satisfaction of the consumers and users and at a profit to the organization. When a product is produced by an organization, the consumers usually do not collect the product free of charge but for a price. This consideration depends on the perceived worth of the product. All profit and non-profit organization face the task of selling price on their product and services (Philip Kotler, 1987).
Through history, sellers and buyers in the processes of negotiation set prices, it is normal that the sellers ask for a higher price than he is expected to receive, and the buyer will offer less than he is expected to pay. This bargain continues until an acceptable price is reached.
Pricing is the key activity within the capitalistic system or free market enterprises; in other words, it is the most critical element of marketing mix that determines a company’s market shares and profitability. Price is the only marketing mix that yields revenue, while the other 3p’s generate cost. Most companies do not only find it difficult but also mishandle their pricing strategies.
Price is one of the major variables that a marketing manager controls. Originally, price is considered vital among the factors which influence buyer’s choice and behaviour. In the 1950’s and 1960’s non-price factors grew relatively more importantly and it had reached a point where over half or a sample of a company managers did not select pricing as one of the five most important policy areas in their firm and marketing success. Recently, because of the world wide inflation price has again attracted considerable attention and is now viewed by many marketers as one of the most important elements in the marketing mix following the product.
BUSCH AND HOUSTON (1985: 558) defined price as the value assigned to the utility one receives from goods and services. Usually price is the amount of money that is given up to acquire a given quantity of goods and services. It is the regulator of the economic system because of its influence on the reward for all factors of production and the allocation of those factors.
However in the marketing of a new product, price policy should take cognizance of its importance on other elements of the marketing mix. In recent times, the questions, how much do you think we can get this item; how much do you think we ought to sell it for, have been asked by managements who are charged with the responsibility of pricing the products or services.
anagement therefore, considers the reaction of its competitors in deciding the pricing strategy to go for. That is, how will the dealers and distributors (Middle men) feel about our price? How will competitors react to this when they see ours? And will the government intervene and prevent this price? In all, markets need to know the laws and regulations affecting price and to comply with it.
Guided by the company’s objective the marketing management must develop a set of pricing objectives and policies. They must anticipate what the pricing policy of the firm will face and how it is going to overcome it. Some of these pricing policies should be seen as how flexible price will be, at what level it will be set, how pricing will be handled during the cost of the product life cycle.
Pricing is handled in various ways. In small business organization, pricing is handled by the top management rather than by the marketers or sales managers, while in large scale organization pricing is typically handled by divisional and product line managers, then the general price policy is done by the top management as it is with this case study.
Businesses these days are becoming competitive and sophisticated. This demands has made companies to adopt various price policy decisions and other strategies to attract customer price is part of the 4.Ps under the control of the marketing practitioners, its importance within the marketing mix cannot be over looked.
The pricing policy which a firm adopts in setting their product price normally goes to affect the organizations and profit. Although it is not out of place to recognize the important place of the other aspect of the marketing mix (product, promotion and place or distribution) in working in harmony with price towards the attainment of marketing objective of the firm. The purpose of pricing is not to cover cost, but to capture the value of the product or service in the mind of the customers.
Manager have to develop a set of pricing objectives and policies decision that will work towards the achievement of the overall marketing objective must be translated into pricing decisions. But, who is to accomplish the task? Pricing decision is a major decision area and as such every department or functional areas are committed into it. No single department takes care of pricing.
Pricing policies decision is expressed with the guideline set by the organization, which regulates future activities of the firm. There are so many pricing policy decisions which a firm has to adopt in order to increase the performance of their firms.
It includes the following.
1. Skimming or penetrations pricing policy
2. Resale agreement policy
3. Product line pricing policy
4. Discount pricing policy
5. Psychological pricing policy etc.
BACKGROUND OF THE GLOBACOM NIGERIA LIMITED
The world is fast becoming a global village and a necessary tool for this process is communication of which telecommunication is a key player. The quantum development in the telecommunication industries all over the world is very rapid as one innovation replaces another in a matter of weeks. A major breakthrough is the wireless telephone system lines or the global system of mobile communication (GSM). Communication without doubt is a major driver of any economy. Emerging trends in socio-economic growth shows a high premium being placed on information and communication technology (ICT) by homes, organisations and nations.
Nigeria is not left out in this race for rapid development as the nations economy had been subjected to years of economic reversal via mismanagement and bad leadership. The Nigeria telecommunications sector was grossly underdeveloped before the sector was de-regulated under the military regime of general Ibrahim Babangida in 1992 with the establishment of a regulatory body, the Nigeria communication commission (NCC). So far the NCC has issued various licenses to private telecommunications operators. These licenses allowed private telephone operators (PTOs), to roll out both fixed wireless telephone lines and analogue mobile phones.
The Globacom as the case study was introduced in Nigeria by Dr. Mike Adenugu in the year 2001. and before the introduction of Globacom there are other Networks like Econet Nigeria, MTN and others.
In lieu of Nigeria promotion decree 1999 and amendment decree of 2000, Nigeria holds 60% of the company’s equity while Globacom holds the remaining 40%.
Globacom Nigeria limited has 35,000 employees of which 12,000 are expatriates and 8,500 are Nigerians in every field of operation.
STATEMENT OF PROBLEMS
In an unstable economy like ours, determining the price of items or products, is difficult because of high inflation rate affecting the business environment.
When there is increase in the overhead expenses of production then, the anticipated price will change and will bring about difficulties and possible failure of the product, also there is an adverse effect on pricing policy decision when firm’s are faced with the complex of false future forecast, for example when a budget is wrongly appropriated and implemented, this is going to affect the organization adversely.
The research work, therefore talks on “Effect of pricing in a competitive management environment”.
OBJECTIVE OF THE STUDY
The objective of this research work is to know how companies price their new products, for all objectives, pricing is as important to the organization as product itself, it is equally important to the customers, as it is one of the parameters for evaluating the firm’s image. Thus, this research work seeks to find out the extent to which Globacom Nigerian company carryout it’s pricing policy in their operation with in the competitive marketing environment.
RESEARCH QUESTIONS
1. What pricing strategy does your firm adopt for a new product?
2. Does government policy on pricing affect your company?
3. Who determines the pricing policy of your company’s product?
4. What pricing strategies does your firm adopt?
5. Does the pricing strategies adopted by the firm reflect the nature of the products?
6. What are the pricing policies of your company?
RESEARCH HYPOTHESIS
1. HO1. Price decision has effect on the marketing of a new product.
2. HO2. Price policy decision does not influence consumers.
SIGNIFICANCE OF THE STUDY
This research project being done under a case study of Globacom Nigeria Limited will enable the reader to understand the relevance of price and pricing in marketing especially a competitive marketing environment. It will also highlight the importance of setting a standard pricing policy for new products as well as that of the existing products. It will reveal to the management of the organization the adverse effect of wrong price policy to its business growth and development.
However, the project work will serve as a source of information to the future researchers who would like to conduct studies related to this work.
Above all, the research work will serve as a partial fulfillment of the condition for the award of Bachelor of Science Degree in Marketing (B. Sc.) and will be of enormous benefit to my fellow students.
SCOPE (DELIMINATION) OF THE STUDY
This study has Globacom Nigerian Company Limited as its focal point though in a few instances, references were made to other branches; the respondents basically were drawn from Globacom Nigeria Limited Enugu.
Also, due to her numerous of plants, it was impossible to cover much area as desired, given the time factor and costs into consideration, the researcher had to limit herself to Enugu plant.
DEFINITION OF TERMS
PRODUCT: according to Kotler & Armstrong (2001:p7) a product is anything that can be offered to a market for an attention acquisition, use, or consumption that might satisfy a want or need. It includes physical objects, services, persons, places, organizations and ideas.
PRICE: According to Onuha, J. Kelechi (2004 p. 77). He defined price as a sacrifice made to acquire a given product, which may be monetary or non-monetary.
PRICING: According TO Onuoha, J. Kelechi (2004 p. 77) He defined pricing as the activities involved in setting the price for which a product will be sold.
PRICING POLICY: it is referring to as a guideline philosophy or course of action designed to influence and determine pricing decision.
LITERATURE REVIEW
This chapter will enhance the understanding of the nature of effect of pricing in a competitive marketing environment for a new product. However, it is aimed at viewing different tasks, magazines, unpublished lecture notes and related research works.
The following topics are being reviewed.
i. The concept of pricing decision
ii. Definition of pricing
iii. Organization of pricing
iv. Pricing strategy
v. Pricing policies
vi. Importance of pricing
vii. The techniques of price setting for a new product.
THE CONCEPT OF PRICING DECISION
Pricing decisions are perhaps the most complex decisions confronting managers in manufacturing organisations. Price manipulations become a powerful tool for enhancing the success of marketing programmes. Today, mass production, increased competition money, and other factors have sharply increased price competition in many industries and have given new relevance to the marketing channels. Pricing is an area of marketing decision-making that all Nigerians from housewives and business executives to legislatures and officials in government regulatory agencies. When done correctly the rewards are increased sales, better products and company image, favourable intervention and regulations poorly conceived and implemented price decisions are bound to result in a weakening marketing position generally, and in the extreme, out right business failure.
DEFINITION OF PRICING
Pricing has being defined in different ways. According to Staton (1981) Pricing is simply an offer or an experiment to test the pulse of the market. If the buyer accepts the offer, the price may even be withdrawn.
Onuoha J. Kelechi (2004 p. 77) defined pricing as a specific price made to acquire a given product which may be monetary or non-monetary
Anyanwu (1993:p.57) defines as pricing: the money value of a product, which emerges in a market transaction.
Busch and Houston (1985:658) defined price as the value assigned to the utility one receives from goods or services. Usually price is the amount of money that is given up to acquire a given quantity of goods and services.
Price is the amount of money needed to acquire a given quantity of goods or services, that is
Where: P = Price
N = Number of output
x = Naira
Y = Unit of the Product or Services
(Nwokoye 1981:111) It s worthy to note that price can be expressed in varying terms depending on the economic activity involved. Price is derived from its exchange value. The price of good and service is expressed in monetary unit exercise in exchanges on the market. Price is an agreement between seller and buyer concerning what each is to receive, the mechanism or device for translating into quantitative terms (Naira) the value of the product setting terms, like the time of payment, the currency used, which can be critical when exchange rates are rising or falling and the discount offered.
ORGANIZATION FOR PRICING DECISION
Pricing objective must be translated to pricing decision. But, who is to accomplish the task?
Pricing decision is a major decision area and as such every department or functional areas are committed in it. No single department takes care of pricing.
Some executives prefer to reduce the trouble from pricing factors to a routine procedure. The cost-plus approach allows some type of business such as job order, shops to regulate pricing to a clerical task
Finally, the marketing concept was sales oriented for the most past marketers were more than willing to let their accountants look into price levels as long as marketing administered discounts and the like.
Since, the adoption of the marketing concept, however, business has seen the need to coordinate the different variables in the marketing mix. As a result of this the responsibility of pricing decisions were partly shifted to the marketing departments. In Globacom Nigerian Limited, the marketing department supervises the pricing decision of any new product, which is the responsibility of the top management. The development of information system gives marketing better access to sales and cost data. Although the marketing function has usually assumed part of pricing responsibility, the price setter is the top management, sometimes it varies from company to company.
PRICING POLICY.
A policy is a decision guide to action designed to make the strategy work. It is defined by Awojo (1999:81) as a verbal, written or implied overall guide setting up boundaries that supply the general limits and direction in which management action will take place. Pricing policy therefore is the overall guideline set by top management to accomplish its pricing objectives. Pricing policy calls for the producer to establish a price list and schedule discounts and allowances that intermediaries see as equitable and sufficient. It is a useful connection between goals. It is an effort at coordinating and promotion uniformly in the fixing of prices of articles offered by the Globacom Nigerian Limited and they are plans for promotion of harmony.
Pricing policy has three basic purposes.
1. To ensure uniformity of pricing.
2. To influence buying behaviour
3. To meet legal requirement. Buskirk et al (1976: 193). The pricing policy of an organization therefore should be the focal point on which pricing decisions should revolve. Kinnear and Bernherath (1982: 569) identified three general pricing policies that are vital here viz:
a. Above the market price
b. At the market price
c. Below the market price.
According to Kalu (1993:5) it s unlikely that many firms can price above market price, as it is practically believed that price is a competitive weapon commonly employed by retailers to outwit their competitors.
Olaniran (1988:13) noted two pricing policies profit. This policy is divided into the following.
1. High price policy: This policy is designed to achieve maximum profit. This policy is divided into the following.
a. Cream skimming prices, this policy is chosen when the company wants to maximize profit in the short period by charging a high price. He further stressed that cream-skimming price are appropriate where the buyers for this product-are not price sensitive and only a few competitors are in the market.
b. Premium price: This policy can be set when the firm offer unique and superior quality services than others. The superior prices also go together with brand image.
c. Low price policy: This policy is designed to achieve higher market share and other volume objectives.
d. The concept of loss leader: Some products are priced very low to attract customers who might buy other products to cover the loss. The low price policy includes:
e. Penetration price: This policy is suitable for the firm, which has strong growth objective and emphasis on volume. In this policy, care must be taken as not to provoke price war.
f. Keep out prices: This policy is designed to discourage competitors. The effective. The effective keep out price might have to be lower than initial cost of a new investment.
g. Promotional prices: Prices may be low enough to penetrate the market without being used as a promotional price. There are two types of promotional prices, price-permanent promotional prices and price temporary promotional prices.
Contributing to the issue of pricing policy Okafor (1995:36) included the following as constituting the policy options for pricing as it concerns firms. These are competitive pricing, psychological pricing, variable cost pricing, peak lead pricing and products like pricing.
Olaniran et al (1988) further outlined price related polices methods, which goes a long way to condition the price flexibility policy. Here is it a process to revise lower price of a product. The marketer can determine the degree of price flexibility by setting.
A. A one-price policy: With a one-price policy, the product is sold for the same price and terms of sales to all customers in the firm. The following advantage favours a one-price policy.
i. Fairness to the buyers
ii. It makes pricing easier for the sellers.
B. A Flexibility of variable price policy: with a flexible price policy, the product is sold at different prices and terms to differentiate customers. It is important to note that flexible pricing allows the marketer to respond to specific market conditions quickly. An illegal price discrimination may occur in flexible policy and it is not suitable for firms whose products are price tact.
HOW PRICES ARE QUOTED?
The method for quoting prices depends on many factors such as cost structures, traditional procedures in a particular industry and the policy of individual firm. In this section this work shall examine the reasoning and methodology behind price quotation as regards the case study, Globacom Nigeria Limited.
LIST PRICES
These are basis upon which prices structures are built; some type of cost plus procedures usually determines them.
DISCOUNT AND ALLOWANCES
The amount that a consumer pays is the market price. This may or may not be the same as list price. In some cases discounts or allowances reduce the list price. These deductions are justified on the basis that customer performs some activity of value to the seller. Discounts can be classified as cash, quantity or trade discounts respectively.
Cash discounts are those reductions in prices that are given for prompt payment of a bill. They are probably the most commonly used variety. Cash discounts usually specify an exact time period, such as “210 30 net”. This would mean that the bill is due within thirty days, but if it is paid in ten days, the customer may subtract 2% from the amount due. Cash discounts have become a traditional pricing practice in many industries. They are legal, provided they are originally instituted to improve the liquidity position of sellers, lower bad debt losses and reduce the expenses associated with the collection of bills. Whether or not these advantages cut-weight the relatively high cost of capital involved. Cash discount depends upon the buyers need for liquidity as well as alternative sources of funds.
TRADE DISCOUNTS
Trade discounts also called functional discounts are payments to channel members or buyers for performing some marketing functions normally required of the manufacturer. These are legitimate as long as all buyers in the same category such as wholesalers and retailers receive the same discount privileges. Trade discounts were initially based on the operating expenses of each trade category but have now become more of the matter of customers in some industries.
QUANTIY DISCOUNTS
Quantity discounts are price reductions granted because of large purchases. These discounts are justified on the ground that large volume purchasers reduces selling expenses and may shift a part of the storage transporting and financing functions to the buyers. Quantity discounts are lawful provided they are offered on the same basis to all customers.
Quantity discounts may be either cumulative or non-cumulative. Non-cumulative discounts are one time reduction in list price while cumulative quantity discounts are reduction determined by purchases over a selected time period.
ALLOWANCES
These are similar to discounts in that they are deduction from price that purchaser must pay. The major categories of allowances are trade-lines promotional and breakage allowances. Trade-lines are often used in the sales of durable goods such as automobiles. They permit a reduction without altering the basic list price by deducting from the item price an amount for the customer odd items that is being replaced. Promotional allowances are attempts to integrate promotional strategy in the channels. For example, manufacturers often provide advertising and sales support allowances which are paid to channel middle persons, these are similar to trade or functional discounts.
PRICING STRATEGY
In general terms, polices are the general rules intended to keep an organization’s decisions in line with it’s objectives while strategies gives the guidelines on how to achieve the objectives.
There are two main pricing strategies: skimming and penetration, besides there are other variations such as price leading, prestige pricing and customary pricing.
THE SKIMMING PRICING STRATEGY
The strategy is used to reach the few core customers of a newly introduced product who are ready and willing to pay the high price tag of the product. These core customers are likely to be reached and successful too if they:
Are insensitive to high price.
Derive some psychological satisfaction for being the early adopters of the products.
Are ignorant of the production and marketing costs of the product.
Perceive substantial benefit in the product such that there are no immediate substitutes.
In some case of Globacom Nigerian Limited, this strategy was used to introduce its 35cl bottles but was successful enough (limited demand) in the sense that customers switched to other competitors brands because customers are price sensitive especially in Enugu.
In the event of a company making success of this strategy, the benefits include fast recovery of developmental costs; limited demand until full capacity is attained, creation of image of a high class quantity product, and the opportunity to adjust price downward to the advantage of the company. The disadvantage is that high initial price attracts competitors.
THE PENETRATION STRATEGY
This strategy is used to achieve high volume sales through low entry pricing. Unlike in the skimming pricing strategy in which appeals are to be directed to the core customers, penetration strategy appeals to the market, the objectives is to realize high sales volumes, which will result in high total revenue.
The advantage of the strategy is mainly achieving large sales volumes and discouraging competitors. The disadvantage however, is that the developmental cost may be recouped over a long time. It is necessary to note that Globacom Nigerian Limited adopts one or both of two strategies. But the ones commonly used today are:
PRICE LEADING
This strategy is engage in by companies, who are leaders in their respective industries. They may have assumed this leadership positions through financial strength, innovative, high quality products, promotional efforts, etc. such companies have been accepted by others in their respective industries as leaders. No other company would want to price above the leader. Globacom Nigerian Limited is always the first to change its price.
In developing its pricing strategy, management looks ahead in anticipating of the expected movement of cost, demand and competition overtime. Although, the three elements should always be considered, many pricing strategies and methods in practice lie heavily on one of the three elements. As a result, various pricing strategies have been described as being cost-oriented, demand- oriented or competition oriented.
COST ORIENTED PRICING METHOD.
In cost oriented method, many firms set prices largely on the basis of promotion. Typically, all cost are included and arbitrary allocation to overhead made on basis of sales level.
The most elementary example of cost oriented pricing is made up of cost plus pricing. In both cases, prices are determined by adding some fixed percentage to the unit cost. Mark up pricing is most commonly found in the retail trade where the retailer adds pre-determined but different mark-ups to various goods. Cost-plus pricing is most often used to describe the price of the job that is non-routine and difficult to cost in advance such as construction and weapon construction.
DEMAND-ORIENTED PRICING METHOD
These pricing method calls for betting base price on consumer perception and demand intensity, rather than on cost. This mode of pricing can also be called price discrimination where on one product or services is sold at two or more different prices that do not reflect proportional differences. The two major methods are the perceived-value pricing and the pricing-quality relationships.
1. Perceive-value pricing:- This is the determination of price based on how an aggressive seller emphasizes on product quality rather than price. He can change a higher price to those customers who will pay it and cut the prices for those who cannot pay. Flexibility prices unlike one price policy can cause legal difficulties. Hence, one price policy is most suitable when a firm wants to maintain a standard quality.
2. Price-Quality Relationship:- In price quality relationship, the concept holds that a manufacturer with a low quality product not to set a high price in order to position the product otherwise. Generally, consumers use brand name, advertising, store reputation and other variable to form an opinion about the quality of a product.
COMPETITION ORIENTED PRICING METHOD.
When a company sets its prices chiefly on the basis of what its competitors are charging, its pricing strategy can be described as competition oriented.
The competition oriented pricing firm may seek to keep its price lower or higher than its competitors by a certain percentage. The distinguishing factor is that it does not seek to maintain its price because competitors maintain their price conversely. The same firm will change its price when competitors change theirs, even when its own cost on demand is not altered.
IMPORTANCE OF PRICING
The importance of pricing to any employer of labour or producer cannot be over-emphasized. One will now attempt to look at it from the general view habit as well as from the industrial view.
Firstly, from the general point of view, it is assumed that price is the only activity that brings in revenue. It therefore becomes a determination of ones viability in the stock exchange market, and whether or not one can remain in business for long.
Again the primary aim of marketing is to cater for the consumers and in doing that it strives to sell goods at a price that will cover all production cost, operating expenses and leaves reasonable enough profit for the business operators.
The price at which a product is sold has direct influence on the net profit of that firm. Net profit itself is a motivating force of a business without which our competitive system may not continue to function. In the long run, prices serve to regulate economic activity through the price mechanism.
It affects the allocation of scarce resources when products are low, producers seek direct to other resources to sustain their existence. Also price determines what is to be produced. Price also defines who gets what is produced likewise how much of the goods is influenced by increase in price of the product.
PRICING OBJECTIVE
Pricing objectives are drawn from the overall company objective: Therefore the goal of the firm provides the basis for the development of pricing objectives which must be very clear and easy for implementation.
Firms set different prices for products because of the different objectives they intend to achieve within a particular period and market condition and situations. While some may aim at profit maximization, other may have the goal of risk minimization as an objective of setting either high, low or moderate prices for their products.
Ideally, pricing objectives should be exclusively stated because they have direct effect on pricing policies and price determination method, which are employed.
The following are some of the pricing objectives:
1. Pricing to achieve target returns on investment.
2. Pricing to maximize profit
3. Stabilization of price value and margin
4. Pricing to realize a target market share.
5. Pricing to face or prevent competitions.
Pricing to achieve target returns on investment is a common profit oriented objective of most firms. Some companies describe their pricing objective as the achievement of a satisfactory rate of return either on sales or on investment. The implication is that, although another pricing objective might produce even larger returns over the short run the firm is satisfied with a return conventional for the given level of investment and risk.
Long run target are some where between 0 to 20% return investments after tax, actual size may depend partly on industry or on market price.
PROFIT MAXIMIZATION
A Profit maximization objective might be stated as a desire to achieve a profit, a rapid return on investment. Usually profits are maximized at the point where the addition to revenue from the sales of the cost unit (MR) is exactly equal to the addition to the last unit sold (MC). This, profit is maximized when MC = MR (marginal Cost equals Marginal Revenues).
REALIZATION OF TARGET MARKET SHARES.
This is strategy employed by companies to set a price that maximized its market share penetration. Some companies believe that long run penetration pricing. They will build excess plant capacity to produce a huge volume. They set price between their competitors to win market share.
PRICING TO MEET OR PREVENT COMPETITORS.
In this case, the pricing objectives may be conservatives but the intention could be to avoid price competition in favour of aggressive action on one or more of the other price. This is called the know-price competitors.
MARKET SEGMENTATION
Price variation can be used in segmenting the market, which differ in price elasticity of demand. These differences in respond to price may come about as a result of different value in use among various classes of buyer and different competitive situation facing sellers.
MARKET EXPANSION
By offering lower price to customers who have lower value-in-use (utilities), the market for a given product or services may be expanded.
UTILIZATION OF EXCESS CAPACITY
Different prices, which gain additional value, may utilize products and marketing capacity. If such capacity exists the price differential which make the sales possible and which covers different cost may contribute to the profit of the firm.
IMPLEMENTATION OF CHANNEL STRATEGY
Differential price is major device by which a firm tries to implement its marketing strategies with respect to channel of distribution. Price differential may encourage certain channels to engage in vigorous promotion of the line.
On the other hand, differential pricing may discourage certain channels of distribution when such a policy is used fully in the furtherance of overall distribution.
PRICING TO MEET COMPETITION
Price variation is of course a device, which can be used to meet competition. The price selling for a particular product is set for the value-in-use or utility offered by the buyer as well as the alternative opened to the buyer with respect to other sources of supply. Under such a situation, the variance of price in favour of the buyer may induce him or her to become a customer.
TECHNIQUES FOR SETTING PRICE OF A NEW PRODUCT
Though the firm may not commit itself to a formal statement of price policy of a new product, but practicing its pricing behaviour is usually, sufficiently consistence to permit identification and classification.
Observation indicates that there are limited numbers of pricing techniques in general use of which the following are being used by Globacom Nigeria Limited.
FULL COST OR COST PLUS PRICING
In simple term, all this involves the addition of a predetermined margin to full unit cost of production and distribution without reference to prevailing demand condition.
In practice, it is doubtful if a firm establishes it’s true unit cost in advance owing to the uncertainly as to the volume it can produce or sell. Broadly speaking, all cost can be classified as fixed cost or variable cost.
FIXED COST
This is incurred irrespective of the volume of output of production example a labour cost.
The price setter may forecast sales volume and unit cost of production on the basis of this estimate adding the pre-determined margin in order to arrive at a price.
VARAIBLE COST
This varies as the volume of output of production varies It is incurred on daily basis. It may reduce or stop as production stops.
BREAK-EVEN ANALYSIS
This is yet another cost-oriented approach to price setting. A break-even point is that quantity of output at which the sales revenue equals the total costs, assuming a certain, setting price. Thus, at break-even point there is neither profit nor losses. The formular for determining the break-even point in unit(s) is expressed thus.
BEP = FC = FC
SP – AVC UCM
Where BEF = Break-even point in units
FC = Fixed Cost
SP = Unit selling Price
AVC = Average variable cost.
UCM = Unit contribution margin = SP-VC.
Assuming that Globacom Nigerian Limited has a fixed cost of N600,000 with an average variable cost of N8 and that management has set the unit selling price of their product [Eva table water (big)] at N30. How many units of the product need to be sold for the firm to break-even?
BEP = 600,000 = 600,000
100-8 92 Units
= 65217
The break-even point in monetary terms
= 100 x 65217 = 6521700
MARGINAL COSTING/CONTRIBUTION ANALYSIS
Break-even analysis allocates fixed cost to a predetermined rate in such a way that, collectively the firm’s produce will absorb the firms total fixed cost.
Many price theorists confessed that this conventional accounting approach could lead to investment decision and advocate the adoption of techniques based on marginal analysis as developed by economists.
COMPETITION – ORIENTED PRICING.
As already discussed in the previous topic (pricing methods) Globacom NigerianLimited makes use of competition – oriented pricing. This is because few manufacturers or sellers with similar products dominate their market.
Competition-oriented pricing method is made up of two different types, but Globacom Nigeria Limited is concerned with one-priced leadership.
PRICE LEADERSHIP
As discussed earlier, a price leader normally influences the price levels in a particular industry. When he sets the new price other smaller companies with smaller market share normally follow.
If the followers are unable to make reasonable profit as a result of the new price set by the price leader, they may resort to secret price cuts to increase their individual sales without any retaliation from the price leader.
In Nigerian scene, profits max plus, Globacom Nigerian Limited are price leaders within the soft drink industry. Usually, on the case of a new product, NBC sets the price without much fear of the competitors’ price. i.e. in the production of 35cl coca-cola bottle, the price was set for N20 per bottle and the price of other products in 25cl bottle increased to N15 per bottle. Still on this Globacom Nigerian Limited today has put new prices for these bottles without losing sales for other bottlers that sell at a lesser price.
STRATEGIC MARKETING PLANNING APPLIED TO PRICING.
The strategic marketing planning when applied to pricing involves six stages namely:
1. Situation analysis
2. Establishment of price objective
3. Determination of the product/market strategy.
4. Budget determination
5. Strategic pricing issues.
6. Evaluation of price performance
(Busch and Houston, 1985: 602). For the purpose of this study, the sixth stages will be analyzed.
EVALUATION OF PRICE PERFORMANCE
Evaluation allows the marketing practitioner to compare forecast sales figures to actual sales. Sales variance analysis identifies the source of variation in planned results from price and volume change. A marketing audit can be carried out to determine the contribution of each of the mix element in realizing the forecast sales.
A practical example of the sales variance analysis will be helpful here.
Assume that the following figures have been provided
Price per unit Volume
Forecast figures #50 20,000
Actual figures #30 15,000
These figures can be used to calculate the variance due to drop in price and volume decline.
From the figures above, we can determine the price and volume variance to be N20 and N5,000 units respectively calculate
1. Variance due to drop in price
(N50 – 30) (15,000) = N300,000 = N54.55%
2. variance due to volume decline
(N50) (20,000 – 15,000) = N3000,000 = 54.55%
Total 550,000 = 100%
Check
Forecast sales = N50 x 20,000 = N1,000,000..
Actual sales = N30 x 15,000 = N450,000
=N3000,000 + 250,000 = N550,000
N1,000,000
From the above analysis, we can determine that the failure of the firm to achieve forecast sales is accounted for by 54.55% drop in price and 45.45% decline in volume sold.
RECOMMENDED TOPICS
[simple-links category=”3213″]
Insightful post.