1. Chapter 1: Nature and role of pricing in the organisation

2. Learning outcomes After this study unit, you should be able to:
Understand the value of pricing in an organisation;
Be able to define price and have a clear understanding of what price is;
Have an understanding of the role price plays in the evaluation of product alternatives;
Be able to explain and understand why price is the most flexible element of the marketing mix;
Be able to identify the most common pricing mistakes that may transpire;
Have an understanding of the importance of price to the consumer;
Comprehend the importance of price in the economy; and
Realise the importance of price in an organisation.

3. Introduction
Pricing questions span organizational boundaries because of their strategic importance, crossing over into marketing, sales, finance, and operations.
Pricing decisions affect the resources of an organisation and therefore its ability to meet its obligations to its staff and customers.
Making the wrong decisions regarding the price can be very costly to the organisation. Whether the price is too high or too low, pricing errors destroy profits.
Even though there are pressure on companies to cut prices, cutting prices is often not the best answer.
The challenge is to convince customers that paying a higher price for the organisation’s brand is worth it because it delivers more value.

4. Introduction Cont…
Playing around with prices and dropping prices indiscriminately may result in a reduction in profit and price wars between companies where there are no real winners – except the customer!
Depending on the brand image that the company want to nurture and develop companies should focus on selling value rather than price – even in difficult economic times.
When economic conditions worsen, most organisations’ first reaction is to reduce prices.
Lowering prices can also tell customers that price is more important than brands, so it can damage the organisation’s brand positioning.
An effective pricing strategy succeeds if marketers ensure that the price they charge shows the value a customer will get.

5. Pricing defined
“Price can be defined as the value expressed in terms of rand and cent. Price is therefore the value which is connected to products and services and is the amount of money needed to obtain such a product and the benefit or utility which goes with it”

6. What is price Price means different things to the seller and buyer.
To the consumer, it is what you pay for something that is the cost of it.
To the seller it is the generating of income or revenue for the business in order to make a profit.
Price is therefore that which is given up in an exchange to acquire a good or service and plays two important roles in the evaluation of product alternatives.

7. What is price Cont…
Important roles in the evaluation of product alternatives
The sacrifice effect of price:
The buyer has to sacrifice something, or give something up, in order to obtain some product or service.
This sacrifice is usually money, but it can also be something else such as another product that is given up, or time and effort that is given up to acquire the product.
As with everything the value of what is sacrificed must be comparable to that what is obtained through this sacrifice – from the view of both the buyer and seller.

8. What is price Cont…
Important roles in the evaluation of product alternatives
The information effect of price:
In today’s’ world products offered by competitors are very similar in terms of quality but may differ vastly in terms of price.
It is a known fact that consumers will not automatically select the lowest priced items even though they might be very similar.
Suppliers of branded products often use a high price to create an impression (right or wrong) that the quality of that brand is so much better than that of competing brands.

9. What is price Cont…
The price paid is based on the satisfaction consumers expect to receive from the product and not necessarily the satisfaction they actually receive. Price can relate to anything with perceived value, not just money. When goods and services are exchanged, trade is called barter.
The term ‘price’ can generally be seen as an exchange object for a product or service and can be connected with concepts such as value or even benefit (utility).
The value of the product or service which is sold can be determined firstly by the benefit that it represents to the consumer and secondly by the sacrifice or trouble which the consumer is willing to go to in order to get ownership of the product.

10. The meaning of price
When an organisation decides on the right price, it should answer the following questions.
Who is the primary target market (that is, the demographics and income levels of the possible customers)?
What is the market position of the organisation? That is, does the organisation operate as a monopoly or a business just starting up or a competitor?
What are the perceptions of customers about competing brands and products?
What is the total cost to deliver the product to the market?
What are the sales and profit projections of the organisation?

11. Common pricing mistakes
Pricing that is too cost orientated.
Prices that are not revised often enough to reflect market changes.
Pricing that does not take the rest of the marketing mix into account.
Prices that are not varied enough for different products and market segments.

12. Common pricing mistakes Cont…
Decentralised pricing strategy
Unstructured pricing management and decision-making leads to inconsistencies in the valuation of goods and services.
Cost-plus pricing
Nearly 85 per cent of companies use some form of cost-plus mark-up to set prices. This fails to maximise profit in several ways.

13. Common pricing mistakes Cont…
Effective customer segmentation
Many companies fail to effectively segment their markets and to develop and grow these markets by means of a suitable and realistic pricing structure.
Lack of resources
The use of highly qualified and experienced pricing strategists is long overdue in the world of marketing.

14. The importance of price to the consumer
The ultimate aim is to ensure that the price charged for a product is such that the consumer is satisfied that he/she is getting value for money, and that the organisation is making the maximum profit from the price charged – while delivering value.
To the consumer price is obviously important as the consumer has limited resources from which a multitude of needs must be satisfied.
As price rises, the rand shrinks in terms of purchasing power because it can buy fewer items or items of lesser quality.
When prices rise faster than income, however, the consumer is placed in a position that places more emphasis on price and then price becomes a more important determinant of consumer purchasing decisions.
Buying a product costs money and may also involve travel, time and other costs. It is not only the physical price a person has to pay for the product that marketers must be aware of.

15. The importance of price in the economy
If demand rises for a particular product, then firms can charge a higher price and thus increase profits. This higher profitability will attract competition, which will increase the total supply of the product (resource) and in turn help to soften prices.
Pricing is considered by many to be the key activity within the capitalistic system of free enterprise.
The market price of a product influences wages, rent, interest, and profits.
That is, the price of a product influences the price paid for the factors of production – labour, property, capital, and entrepreneurship.
As an allocator of scarce resources, price determines what will be produced (supply) and who will get the goods and services that are produced (demand).

16. The importance of price in an organisation
Prices are the key to revenues, which in turn are the key to profits for an organisation.
If, in the consumers’ mind, a price is set too high, the perceived value will be less than the cost, and the sale will be lost.
In the same way, if a price is too low, the consumer may perceive it as great value, but the company will lose revenue it could have earned.
Although the price of products is an important factor to organisational buyers, research has revealed that other factors, such as product quality, product servicing and the reputation of the supplier, are generally more important.
As many (or most) manufacturers, wholesalers and retailers operate on a very thin net profit margin, usually between 1 to 5 per cent, the price they receive from the sale of goods and services is very important to them.

17. The importance of price in an organisation Cont...
Price takers
Price takers have no effect on the decision about the prices they charge. External things, over which the organisation has no control, fix the prices.
E.g. petrol stations are price takers due to the fact that the government fixes the price of petrol.
Price makers
Price makers have control over the decision about prices they charge.
E.g. the local corner shop can put whatever price it likes on it’s chocolates. No external things make the shop decide on a particular price for the chocolate.

18. Summary
In the chapter, price was established to be the value of products and services expressed in monetary values.
Consumers might perceive this value as an indication of the quality of the product therefore it is evident that this element of the marketing mix cautions much attention.
Price is also the most flexible element since the right price needs to be established for the right market segment.
Organisations may compose errors in the process of setting the right price for the specific market segment. These errors vary from pricing being too cost orientated to prices not being revised often enough to reflect market changes.
In conclusion, the right price for a product or service is not only beneficial to consumers but also to organisations themselves and the environment which it operates in.