KENYATTA UNIVERSITY

SCHOOL OF BUSINESS

DEPARTMENT OF BUSINESS ADMINISTRATION

DEGREE:

MASTER’S DEGREE IN BUSINESS ADMINISTRATION

COURSE CODE:

BBA 840

COURSE TITLE:

MARKETING MANAGEMENT

GROUP ASSIGNMENT

TEAM DETAILS:

No. Name Admission number

1 Fatuma Hassan Hussein D53/MSA/PT/22543/2022

2 Amos Kinoti Murithi D53/MSA/PT/21677/2022

3 King'oo Lawrence Mulwa D53/MSA/PT/22541/2022

i
TABLE OF CONTENTS

pricing decision ..........................................................................................................1

Introduction .............................................................................................................1
Pricing .....................................................................................................................1
Factors influencing pricing .....................................................................................2
Pricing objectives ....................................................................................................4
Steps followed to arrive at specific pricing strategies ............................................7
Process of setting the price of a product/service ....................................................9
Pricing strategies ...................................................................................................10
Price adjustments ..................................................................................................20
References .............................................................................................................22

ii
PRICING DECISION

Introduction

The success of any organization products and services is largely determined by price set.

Pricing

Price is the value exchanged for a product or service in a marketing exchange. It is the
opportunity cost that the customer is willing to incur to acquire, consume, possess, or use a good
or service.

Price is also termed as, what the seller is willing to accept in exchange for his goods and
services. Price represents the revenue-earning side of the mix.

Pricing is a process to determine what manufacturers receive in exchange for the product or
service they offer. Pricing depends on various factors like manufacturing cost, raw material cost,
profit margin, etc.

1
Factors influencing pricing

The pricing of a product is influenced by various factors as price involves many variables.
Factors can be categorized into two, depending on the variables influencing the price.
Internal Factors

Internal factors are inherent in the organization's DNA and can be controlled or manipulated by
the company. The following are the factors that influence the increase and decrease in the price
of a product internally;

i. Marketing objectives of the company

ii. Consumer's expectations from the company by past pricing
iii. Product Features
iv. Position of product in the product cycle
v. Rate of product using a pattern of demand
vi. Production and advertisement cost
vii. Uniqueness of the product
viii. Production line composition of the company
ix. Price elasticity as per sales of the product

Internal factors that influence pricing depend on the cost of manufacturing the product, which
includes fixed costs like labor charges, rent price, etc., and variable costs like overhead, electric
charges, etc.
External Factors

External factors are those outside the control of the organization mostly in the marketplace. The
following are the external factors that have an impact on the increase and decrease in the price of
a product;

i. Open or closed market

ii. Consumer behavior for a given product
iii. Major customer negotiation
iv. Variations in the price of supplies
v. Market opponent product pricing

2
 vi. Consideration of social condition
vii. Price restricted as per any governing authority

External factors that influence price depend on elements like competition in the market,
consumer purchasing power, government rules and regulation, etc.

3
Pricing objectives

Pricing Objectives refer to the goals an organization wants to achieve through pricing.

Pricing objectives guide decision-makers in formulating price policies, planning pricing

strategies, and setting actual prices.

Once a pricing objective has been chosen, a pricing strategy that meets the pricing objective must
also be selected.

Assigning product prices is a strategic activity. The price you assign will impact how consumers
view your product and whether they will purchase it.

Price also helps differentiate your product from those of your competitors, however, the price
you assign must be in line with your other marketing strategies and product attributes.

Pricing objectives include:

a. Profit maximization

Profit maximization seeks to maximize current profit, considering revenue and costs. Current
profit maximization may not be the best objective if it results in lower long-term profits.

b. Current revenue maximization

Current revenue maximization seeks to maximize current revenue with no regard to profit
margins. The underlying objective often is to maximize long-term profits by increasing market
share and lowering costs.

c. Maximize quantity

The objective of maximizing quantity seeks to maximize the number of units sold or the number
of customers served to decrease long-term costs such as warehouse costs
d. Maximize profit margin

This objective attempts to maximize the unit profit margin, recognizing that quantities will be
low.

4
e. Quality leadership

To position the product as the quality leader price objective is set to signal the high quality of the
product

f. Partial cost recovery

An organization that has other revenue sources may seek only partial cost recovery.

g. Survival

In situations such as market decline and overcapacity, the goal may be to select a price that will
cover costs and permit the firm to remain in the market. In this case, survival may take priority
over profits, so this objective is considered temporary.

h. Status quo

The firm may seek price stabilization to avoid price wars and maintain a moderate but stable
level of profit.
i. Penetration in market

A new company may set attractive prices or promotional prices as a way of penetrating a new
market.
j. Introduction to new markets

When introducing a new product to the market, companies usually set promotional prices to
entice new customers to the new product.
k. Obtain profit in the whole product line irrespective of individual product profit targets.

When the pricing objective is leaning towards company-wide profitability at the expense of
individual product performance.
l. Tackle competition

A price objective may be set to either allow a product to compete in the market or low the price
to attract consumers due to high competition in the marketplace.

5
m. Recover investments faster.

The price set to recover investment faster is always high. This pricing objective would work on
demerit goods and conspicuous goods.
n. Stable product price

When there are no major fluctuations in the price of a product, a stable pricing objective is
adopted.
o. Affordable pricing to target a larger consumer group

Where a company has enough capacity to produce, a price is set to attract a large population.
Usually for consumer goods.
p. Pricing products or services that simulate economic development

The price objective here is set with the social needs of the community in mind. The price may be
influenced by government or social groups

6
Steps followed to arrive at specific pricing strategies
i. The mix of products being offered.

The mix of products you have available will either limit or broaden the pricing strategies
available for you to use.
ii. Who or what is your target market?

The demographics of your target market will help you identify appropriate pricing
objectives and strategies. Are target customers interested in value, quality, or low cost?
iii. The design of the distribution

Your method of product distribution can impact the pricing objectives and strategies you
can use. Direct marketing gives you more control than wholesale marketing over how
products are grouped, displayed, and priced.
iv. |The estimated life cycle of your product/service.

With a short-estimated life cycle, it will be necessary to sell greater quantities of products
or generate larger profit margins than with products where the life cycle is longer.
v. The projected demand for the product.

When demand for a product is expected to be high, you have more flexibility in choosing
pricing strategies because customers are less likely to be concerned with price and
packaging since they want your product. For example, consider the prices people are
willing to pay when new video 78 game consoles debut.
vi. Other entities, such as the government, may dictate the price range for your
product.

Some products, such as milk, have government-imposed regulations limiting the price
that can be charged.
vii. Manufacturing cost

The unit cost of a product will largely determine the unit price.

7
viii. Marketplace Condition & Competition

Favorable market conditions will attract a lower cost of production and subsequently the
low price of product. Where competition is high, prices might be set competitively or
lower to kick out the competition.
ix. Business and financial goals – Plans

Businesses are always a going concern, but where a business decides to close, prices may
be lowered to clear inventories before closure.

8
Process of setting the price of a product/service
i. Set pricing objectives

A pricing objective, for example, profit maximization, revenue maximization, or price

stabilization (status quo)
ii. Develop marketing strategy

Perform market analysis, segmentation, targeting, and positioning.

iii. Make marketing mix decisions

Define the product, distribution, and promotional tactics.

iv. Estimate the demand curve

Understand how quantity demanded varies with price.

v. Calculate the cost

Calculate cost including fixed and variable costs associated with the product.
vi. Understand environmental factors

Evaluate likely competitor actions, and understand legal constraints.

9
Pricing strategies

Pricing strategy refers to the method companies use to price their products or services.

A pricing strategy is an approach or a course of action designed to achieve pricing and marketing
objectives.

They help marketers to solve the practical problems of establishing prices.

There are 5 main categories:

a. Cost-based pricing strategies

Involves adding a shilling amount or percentage to the cost of the product. It also involves
calculations of desired profit margins. These strategies include:
i. Cost-plus pricing/Full cost pricing/absorption pricing

It is the process of adding a specified shilling amount or percentage to the seller’s

cost to establish the price of a product. It simply involves working out the average
cost per unit produced (total cost divided by output) and then adding a 79 percent
markup.
ii. Mark-up Pricing

A product’s price is derived by adding a predetermined percentage of the cost,

markup, to the cost of the product. Markup can be stated as a percentage of the cost or
as a percentage of the selling price.
iii. Marginal cost pricing

This is the addition to the total cost of producing one extra unit of output. Some
businesses have very high fixed costs (costs that do not vary with output) and very
low variable costs (costs that do vary with output therefore once their fixed costs have
been recovered, they can sell at any price above the variable (now the marginal cost)
This is because the extra units sold will only add a small amount to their total costs,
so the business can still be profitable as long as these costs are covered.

10
iv. Contribution pricing

This is similar to marginal-cost pricing in that it mainly considers the variable costs of
production. Businesses will want to make sure that their variable costs, such as raw
materials, are covered, but also need a contribution towards the fixed costs of the
business, such as rent on the factory. For example, the fixed costs for a product are
400/=. The variable costs are 6/= per unit. 100 units are sold. The business decides to
price the product at 11/= which means 5/= per unit sold will go towards the fixed
costs. The fixed costs of 400/= will be covered by the first 80 units sold. Any more
sold beyond 80, will each add 5/=to profits. If 100 are sold the total profit would be
20 x 5 = 100/=.

11
b. New product pricing strategies
These are used when launching a new product. Companies bringing out a new product face
the challenge of setting prices for the first time. They can choose between two broad
strategies market-skimming pricing and market-penetration pricing.
i. Price Skimming

This is charging the highest possible price that buyers who most desire the product
will pay. This is most commonly seen with new and innovative products, such as new
mobile phones. The price is set high initially to gain those customers who will pay
almost any price to get their hands on the latest gadget. Once the business has profited
from selling to those customers, it drops the price to tempt other customers who may
have been put off by the high price originally. When Sony introduced the world’s first
high-definition television (HDTV) to the Japanese market in 1990, the high-tech sets
cost $43,000. These televisions were purchased only by customers who could afford
to pay a high price for the new technology. Sony rapidly reduced the price over the
next several years to attract new buyers. By 1993 a 40-inch HDTV was for about
$2,000, a price that many customers could afford. An entry-level HDTV set now sells
for less than $500 in the United States, and prices continue to fall. In this way, Sony
skimmed the maximum amount of revenue from the various segments of the market.
ii. Penetration Pricing

Prices are set below those of competing brands to penetrate a market and gain a
significant market share quickly. For this to work, the firm wishes to discourage
rivals from entering the market; the firm wishes to shorten the initial period of the
product life cycle, to enter growth and maturity stages as quickly as possible;
Significant economies of scale and experience effects are anticipated when 80 high
volumes are achieved and the market is known to be price sensitive. For example,
Equity Bank’s no-account balance required product. The high-sales volume results in
falling costs, allowing the company to cut its price even further. For example, Dell
used penetration pricing to enter the personal computer market, selling high-quality
computer products through lower-cost direct channels. Its sales soared when IBM,
Apple, and other competitors selling through retail stores could not match its prices.

12
c. Competition-Based Pricing/Market-Based Pricing Strategies

These are pricing strategies that are determined by the marketing environmental factors such
as demand and supply, competitive rivalry, the number of substitute products, competitor’s
prices, etc. these include:
i. Demand-based pricing

When this type of pricing is used, customers pay a higher price when the demand for
the product is strong and a lower price when demand is weak.
ii. Competition-based pricing/ market stabilization pricing

This is where the prices of firm products are primarily influenced by the competitors’
prices. A firm that uses this type of pricing may choose to price below competitors’
prices, above competitors’ prices, or at the same level.
iii. Price leadership pricing

This exists where a dominant organization in a market sets a price for its products and
its rivals feel compelled to match that price. This may be because there is one large
business in the industry coupled with lots of smaller competitors with far less market
power to set prices. For example, - Petrol/gas stations will often have policies where
they agree to match local rivals' prices. This practice has brought about claims of
illegal agreements by businesses to fix prices at an artificially high level and exploit
customers. However, it is hard to prove that the collusion has occurred.

13
d. Product mix pricing strategies

The strategy for setting a product’s price is often changed when the product is part of a
product mix. In this case, the firm looks for a set of prices that maximizes the profits on the
total product mix. Pricing is difficult because the various products have different demands
and costs and face different degrees of competition. They include: -
i. Product line pricing

This entails setting the price steps between various products in a product line based
on cost differences between the products, customers’ evaluations of different features,
and competitors’ prices. The price steps should take into account cost differences
between the products in the line, customer evaluations of their different features, and
competitors’ prices.
ii. Captive Pricing

This is pricing the basic product in a product line low while pricing related items at a
higher level. For instance, charging a low price for cameras and a higher price for
films.
iii. Premium Pricing

Is pricing the highest-quality or most versatile products higher than other models in
the product line? Examples of products that use this type of pricing are kitchen
appliances, beer, ice-ream, etc.
iv. By-product pricing

This is setting a price for by-products to make the main product's prices more
competitive. In producing processed meats, petroleum, and agricultural products other
products, there are often by-products. If the by-products have no value and getting rid
of them is costly, this will affect the pricing of the main product. Using by-product
pricing, the manufacturer will seek a market for these by-products and should accept
any price that covers more than the cost of storing and delivering them. Sometimes
the by-products can even turn out to be profitable.

14
v. Product bundle pricing

This entails combining several products and offering the bundle at a reduced price.
Using product-bundle pricing, sellers often combine several other products and
bundle them at a reduced price. For example, Galittos and Chicken Inn bundle
chicken, fries, and a drink at a combo price Air Arabia operating in Kenya is known
to offer vacation prices that include airfares, accommodation, meals, and
entertainment. Zuku are offering cable service, phone service, and high-speed internet
connections at a low combined price.

15
e. Promotional pricing strategies

These are also referred to as price adjustment strategies. Companies usually adjust their basic
prices to account for various customer differences, changing situations as well as increasing
sales of a product. It is important to note that promotional pricing strategies are employed
along with other strategies and they run for a limited period. These include:
i. Loss leader pricing

Here supermarkets or department stores drop the price on well-known brands to

stimulate additional store traffic. But manufacturers typically disapprove of their
brands being used as loss leaders because this practice can dilute the brand image as
well as cause complaints from other retailers who charge the list (normal) price.
ii. Special event pricing

Sellers will establish special prices in certain seasons to draw in more customers.
iii. Cash rebates

Consumers are offered cash rebates to encourage their purchase of the manufacturer's
product within a specified period (e.g., bata) Low-interest financing – Instead of
decreasing its product price, the company can offer customers low-interest financing
e.g. auto-makers can announce 3% financing to attract customers.
iv. Longer payment terms

Sellers especially mortgage banks and auto companies stretch their loans over longer
periods and thus lower monthly payments  Warranties and services contracts – The
company promotes sales by adding a free warranty offer or service contract.
v. Psychological pricing

Where the price is set to attract the mind of the customer, for example, ensuring that
the prices are odd numbers, i.e., Kshs 379, or setting a price that makes the customer
judge it as low, e.g., Kshs 999.

16
i. Psychological discounting

This strategy involves putting an artificially high price on a product and then offering it at
substantial savings e.g., Kshs.359 and now Kshs.299.

17
f. Discriminatory pricing strategies

This occurs when a Company sells a product or service at two or more prices that do not
reflect a proportional difference in cost. They include:
i. Customer segment pricing

Different customer groups are charged different prices for the same product or service
e.g. museums often charge a lower admission fee to students.
ii. Time pricing

Prices are varied by season, month, day, or hour.

iii. Product form pricing

Different versions of the product are priced differently but not proportionately to their
respective costs. 82
iv. Image pricing

Different versions of the product are priced at 2 different levels based on image
differences e.g. perfume manufacturers.
v. Location pricing

The same product is priced differently at different locations even though the cost of
offering at each location is the same e.g. seat prices in a theatre.
vi. Differential Pricing

This is charging different prices to different buyers for the same product quality and
quantity. It can occur in several ways including the following:
Negotiated pricing

This occurs when the final price is established through bargaining between the seller
and the customer. For instance, prices for cars, houses, and used equipment.

18
vii. Secondary–market pricing

It means setting one price for the primary marketing and a different price for another
market when the price charge in the secondary market is lower. purchasing a product
during off-peak times.
viii. Periodic Discounting

This is the temporary reduction of prices on a patterned or systematic basis, for

example, seasonal sales offered by retail shops.
ix. Random Discounting
This is the temporary reduction of prices on an unsystematic basis. This is usually
done to attract new customers.

19
PRICE ADJUSTMENTS

This refers to any change to the original price of a product in inventory by a retailer.
Forms of Price Adjustment.
i. Promotion
ii. Price protection
iii. Markdown

Promotion

This refers to when a product is on sale for a designated period and will return to its original or
regular price after the promotion ends. It's a temporary form of price adjustment. In this case, the
retailer will display both the regular and the promotional price to show comparison and stimulate
more unit sales.
Price Protection

This is an adjustment made before and after a product has been reduced in price by a promotion.
Here most retailers will offer to refund the difference in price for 10-30 days after purchase. This
can also take the form of price matching. Price matching refers to an adjustment made by a
retailer when the same product purchased is advertised or available in the competition for a
lower price. Retailers will usually refund the price difference.
Markdown

This is a permanent form of price adjustment used by the retailer to liquidate the inventory of a
product or category of a product.

20
Price adjustment strategies
i. Discount and allowance pricing
ii. Segmented pricing
iii. Psychological pricing
iv. Promotional pricing
v. Geographical pricing
vi. International pricing
vii. Dynamic pricing

Benefits of price adjustments

i. Profit margins are maintained by preventing the expiry of old stock.
ii. It leads to higher unit sales especially if Promotional adjustment is used
iii. It improves the company's brand image
iv. It gives the company a competitive edge in the market
v. It builds a long-term relationship with the customers
vi. It stimulates the purchase of slow-going products

Price adjustment cons

i. It may be expensive for the company
ii. The company may not be able to match prices with the big competitors
iii. Discounts may lead to reduced profits
iv. Customers who paid full price before adjustment could resent your price cuts.
v. It may lead to the attraction of the wrong customers i.e. the Price shopper customer.

21
References

Albaum G.A., Duerr D., and Strandkov J.S., International Marketing and Export
Management, Prentice Hall Inc, 4th Edition, 2002.

Datta, D. &Datta, M. (2006): Marketing Management. New Delhi: Vrinda

Publications

Homburg, C., Kuester, S. & Krohmer, H. (2009): Marketing Management, a

contemporary perspective. London: McGraw Hill

Jain S. C. [1989]. International Marketing Management, 2nd edition, CBS

Publishers & Distributors, Delhi, India

Keegan W.J., Global Marketing Management, Prentice-Hall of India Private

Limited, 5th Edition, 1999

Kotler P. And Keller K. (2011). Marketing Management, 12th Edition (Upper

Saddle River, New Jersey: Prentice Hall

22