POST GRADUATE PROGRAM

ASSIGNMENT ON PRICING AND BRAND MANAGEMENT

By: LEGESSE LEMMA
ID: 06297/08
Submitted to: Dr. Gashaw T.

Gondar, Ethiopia
Jan, 2017

Contents
Introduction............................................................................................................ 2

1.

1.1.

Basic pricing framework setting price....................................................................2

1.2.

Pricing strategies and brand value fundamentals.....................................................6

How price and brand related?........................................................................................ 7

Setting price boundaries...................................................................................... 9

1.3.

Establishing initial price......................................................................................... 9

1.4.

1.4.1.

Steps in setting price right price...........................................................................9

1.5.

Price volume trade-off, price elasticity.................................................................10

1.6.

Customer driven pricing................................................................................... 12

The psychology of pricing........................................................................................ 13

2.

2.1.

Perceptual challenge......................................................................................... 14

2.2.

Prospect theory............................................................................................... 15

2.3.

Price and value communication..........................................................................16

2.4.

Measurement of price sensitivity.........................................................................17

Pricing strategies................................................................................................... 18

3.

3.1.

Introduction................................................................................................... 18

3.2.

The strategic importance and role of pricing.........................................................20

II.
3.3.

Strategic role of pricing On brand equity.................................................................21

Pricing objectives and their relationship with overall business objectives....................22

3.4.
Key consideration in developing pricing strategies including cost, demand, and
competitive factors.................................................................................................... 23
3.5.

Pricing for new products................................................................................... 24

3.6.

Tactical approachs to pricing:............................................................................25

3.7.

Others strategic pricing considerations and strategic marketing implications.................25

Conclusion............................................................................................................. 27
References................................................................................................................... 28

1.

Introduction
2

1.1.

Basic pricing framework setting price

Marketing is organizational function and set of processes for creating ,communicating and
delivering value to the customers and managing relationship with customers in a way that benefit
the organization and its stakeholders. And also marketing is function of setting right product or
service, the right people, at the right time, place, and the right price with right communication
and promotion. When marketers creating values they the need something that satisfy what they
incurred in developing other marketing programs.
This means that marketers develop three marketing mix elements that bear costs to them but
pricing is the only element that generates income. All other elements are incurring cost.
Marketing mix elements is about combination and coordination of marketing program/
instruments, which are used to achieve the marketing goals of business for specific target market.
Brand equity is consumer brand knowledge. In the eyes of consumers price seen as the
expression for perceived quality and brand loyalty that directly affects brand equity. Marketers
need to actively manage the role of price in the equity of their brands. Ignoring it will not
minimize its importance. Price will affect brand perceptions; marketers need to shape those
effects.
Pricing is the marketing lever with the most immediate and direct business impact.
Management decisions to change prices translate into revenue and profit. Pricing also is closely
tied to the other elements of brand strategy. In Past times pricing takes into consideration that
classical economic notion that when demand increases price increases and vice versa but this
might work in market situation that everything might constant or everything else equal.
However, effective brand marketing can give consumers compelling reasons to pay a premium.
The reasons can relate to product quality, special ingredients, processes and craftsmanship.
Though the eventual goal of any marketing program is to increase sales, it is first necessary to
establish knowledge structures for the brand so that consumers respond favorably to marketing
activities for the brand (Keller, 1993). While positive customer based brand equity can lead to
greater revenue, lower costs and higher profit, it has direct implications for the firms ability to
command higher price, customers willingness to seek out new distribution channels, the
effectiveness of marketing communications, and the success of brand extensions and licensing
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opportunities. the marketing mix is about the combination and coordination of marketing
instruments, which are used to achieve the marketing goals of businesses for a specific target
market.
On the most simplistic level price can be defined as the amount of money that a consumer
must part with to get access to a product or service or brand. However price is just not a product
of the sum of the raw materials and labor plus a profit margin for the producer. Price is also
related to certain intangible attributes, namely perceived quality and value or benefit.
Every instrument has to be adjusted to the adoption of the other categories. Price is defined
as the price of the products and services provided. It includes all of the pricing related matters
such as the retail prices, volume discounts, and terms of payment, seasonal discounts, and credit
terms. Examining and evaluating prices regularly is a key to success. Companies should not be
afraid to revise their prices and to recognize that the current pricing structure may not be ideal
for the current market. The line of thought is that the right marketing mix can ensure an efficient
connection between the company and the market place.
Consumers use price as a significant extrinsic cue and signal of product quality or benefits.
High-priced brands are often perceived to be of higher quality and lower risk compared to low
priced brands. Consequently, price is positively related to perceived quality. A positive
relationship between price and perceived quality is well founded in previous research. By
increasing perceived quality, price is related positively to brand equity. Different marketing mix
elements impact the creation of brand equity. In the process of allocating marketing budgets to
cover individual marketing mix elements, it is necessary to take into account the potential effects
of each marketing mix element on brand equity building.
The point of departure of the marketing mix is, hence, that attributes related to the Four Ps
(product, price, place and promotion) are the main mechanisms behind the creation and
management of brand equity. The primary purpose for brand management is, according to these
premises, to produce, promote and distribute goods that are attractive to consumers because they
deliver the best deal measured by the utility value the goods offer, compared with the utility
value competitors offer, related to the price consumers are willing to pay.

Brand managers are assumed to be able to control consumers brand choice behavior by
ensuring an optimum mix between the four main elements of the marketing mix. The marketing
mix is hence a key instrument for understanding and facilitating transactions between the
company and the market. The logic is that a brand will succeed only if the manufacturer of that
brand is able to produce a product that delivers high utility benefits, then sells it at the right price,
in the right places, and promotes it to such an extent and in such a way that spurs consumer
awareness.
The Four Ps product, place, price and promotion are hence key denominators of a brands
success. The marketing mix quickly became an unchallenged basic model of marketing and the
Four Ps have gone their course of victory across the world of marketing: since its introduction,
when we describe of a marketing mix comprised of product, price, promotion and place has
widely become regarded as an infallible guide for the effective planning and implementation of
marketing strategy. Price is what a customer have to pay to acquire a product, or cost of a
product to a customer. Price is considered to be the most significant factor that affects
consumers choice (Kotler et al, 1999).
Price is the amount the consumer must exchange to receive the offering. As the price of a
product depends on different elements and hence it is changes constantly thus the pricing should
be dynamic so that it can bear the changes over duration. The important factor in pricing is the
deciding the cost of the product, strategy for marketing & its expenses related to distribution,
advertisement expenses or any kind of price variation in the market. Nonetheless if there is
change in all the variables then generally the pricing of the product may vary accordingly. The
price refers to the price that consumer will eventually pay for the product.
The price is in the economic approach based on the total cost of manufacturing the product,
the distribution and advertising cost. These direct and indirect production costs combined with a
competitive analysis, and perhaps uncovering how much consumers are willing to pay for the
product, make up the input for the analysis of what the price of the product should be. The price
factor of the marketing mix is closely linked with the marketing mix factor of promotion. Since
promotions are often used as a way to increase awareness or boost sales in the economic
approach -pricing strategies are often planned based on scanner data from supermarket checkouts
measuring how promotions affect the overall demand for the brand.
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Pricing is just as important to brand equity as other differentiators, because it is a source of

meaning and identity. Price is also the marketing variable that can be changed most quickly,
perhaps in response to a competitor price change. Put simply, price is the amount of money or
goods for which a thing is bought or sold. The price of a product may be seen as a financial
expression of the value of that product. For a consumer, price is the monetary expression of the
value to be enjoyed/benefits of purchasing a product, as compared with other available items.
Price is the amount of money that is charged for something of value. Fees, tuition, rent, and
interest are all examples of price. Almost every business transaction today involves the exchange
of money for something. Price is one of the main variables in the marketing mix.
A solid pricing strategy can have a positive effect on brand equity, while a poor strategy can
do the opposite. The various types of pricing strategies include premium pricing, discounted or
competitive pricing, cost-based pricing, introductory or penetration pricing, everyday low pricing
and bundle or bulk pricing. Finding the right pricing strategy is vitally important for the brand
equity of your business.
Setting price to build brand equity: value pricing based on product design and delivery,
product cost, and product prices. The strategy of everyday low price: a strategy based on low
pricing as well as discounts and promotions to consumers at regular intervals.
Power of pricing: Pricing at both ends of the strategy spectrum can affect brand equity in
different ways. Premium pricing is the principle of setting a high price point to reflect the
products exclusivity and quality. With niche brands, such as Chanel, Mercedes Benz or
Rolex, the price is an aspect that the customers of the brand enjoy. It adds meaning and value
to their purchase and sets the product apart from its competition. This makes the pricing
strategy an important and integral aspect of the products brand equity. If the product doesnt
have any other strong differentiators, however, lower prices are likely to sell better than more
expensive ones.
1.2.
Pricing strategies and brand value fundamentals
The fundamental role of pricing tells us that the price charged for the product must match the
value the consumers perceive and holds about that brand or product and they get when they
purchase that brand or product. Thats effective branding allows premium branding products to
sell at a premium price. The market will bear that price and consumers will pay it because, they
6

perceive the value high end brands delivers to be worth the high percentage its easy to brands to
set price of product. Product or brand with high tangible differentiation to be higher price.
Tangible differentiation can cause price difference across different brands in the same category as
well as across different products under the same brand umbrella category. For brand owners
brands are sources of economic value to the organization. It helps and supports the pricing
strategies.
When creating a frame of reference for brands in specific category, consumers consider a
variety of factors to fit each brand into a position such as competitor prices, past experiences in
the category with brands in the category, past pricing experiences in the category, tangible
differentiation (features and perceptions). Its the perception part of reference prices that gives
brands opportunities to set prices based on intangible differentiations. In other words, consumer
perception enables the brands to compete on more than price alone. If price were the only factor
that mattered in consumer purchase decisions, everything we buy would be a lot cheaper and
every one would buy the same brands.
Price just part one part of brand value and purchase decisions. The challenge for marketers is
finding the right price point to achieve maximum sales without damaging consumers perception
of the brands overall value. Any brand can compete on price. Successful brands dont rely on
pricing alone, but that doesnt pricing strategy isnt important. On contrarily, striking the right
balance between profits, brand value, and consumer perception of the brand ongoing process.
We think of pricing strategy as it pertains to brand value in terms of consumer reference
prices. Each consumer views a brand and its associated price tag in comparison to other brands
and products available to them. Thus other products and brands create a frame of reference for
the consumer and the consumer tries to fit each brand into a comfortable position in his mind
based on that frame of reference. Brands and products with pricing that doesnt fit well into
framework of orientation (frame of reference) are typically not even considered when it comes
time for the consumer to make a purchase because they dont make sense.
According to Keller brand image directly related to brand association this also affected by
attitude, benefit, and attributes of brand and thus attributes also two dimensions it have which is
product related and non-product related. The one dimension of non-product related dimension
called price. So price has strongly affects the image of brand.

How price and brand related?

Price as a component of the marketing mix can be manipulated that then compliments the brand
description, which in turn builds brand strength and results in competitive advantage.

The starting point for developing a pricing structure is the delineation of a framework for
pricing decisions. Specifically, we need to establish key inputs to pricing decisions. Although
there are a innumerable of considerations for arriving at a price for a product or service the
following are considered to be key inputs for the pricing decision maker that are now
discussed:
Company and marketing objectives;
Demand considerations;
Cost considerations;
Competitor considerations.
Company and marketing objectives
Pricing decisions are most important to the achievement of corporate and marketing
objectives, so it is essential that pricing objectives and strategies are consistent with and
supportive of these objectives. This selection from an even wider range of possible pricing
objectives which delineates, illustrates the fact that the pricing decision maker must establish
what objectives the pricing strategy is to achieve. The continued link between corporate
objectives and pricing strategies .Where a company has multiple objectives, pricing strategies
may need to consider trade-offs between different possible price levels, such that these different
objectives are met. In addition to these broader corporate objectives, pricing decisions must also
reflect and support specific marketing strategies. In particular, pricing strategies need to be in
line with market targeting and positioning strategies
Demand considerations
A key parameter affecting pricing decisions is customer based. The upper limit to the price to be
charged is set by the market, unless the customer must purchase the product and we are the sole
supplier. In competitive markets, demand, i.e. the price customers are willing and able to pay, is a
major consideration in the selection of pricing strategies and levels. It is in analysis and
interpretation of demand and demand schedules that the economist has much to offer the

marketer in terms of concepts and techniques. Ideally, the marketing manager needs to know the
demand schedule for products and services to be priced.
Attributes of the product
Demand for a product or brand and the price the customer is willing to pay, is related to the
attributes of competitive products being offered. Demand for a product is closely related to how
the customer perceives the various attributes of competitive products. These attributes include
physical/tangible attributes e.g. quality features and packaging, and non-tangible attributes,
such as brand/corporate image and status.
Tastes of the buyer
Related to attributes, another factor affecting demand is the tastes of the buyer. Although a
somewhat nebulous concept, tastes are a powerful influence on demand. Changes in taste can
give rise to the growth of entirely new markets and the demise of mature ones.
Price of other products
The price of competitive products is a key area affecting demand. Inevitably buyers tend to
considered prices of substitute products when evaluating the effect of prices on demand.
Competitor Considerations
It is increasingly recognized that in todays competitive environment, effective strategic
marketing plans are as much about being competitor-oriented as customer-oriented. Competition
is at the core of the success or failure of firms. Competition determines the appropriateness of a
firms activities that can contribute to its performance, such as innovations, a cohesive culture, or
good implementation. Competitive advantage is the benefit derived through competitive strategy
that aimed at establishing a profitable and sustain able position against the forces that determine
industry competition.

1.3.

Setting price boundaries

Price setting can be complex if it is difficult to identify the closest competitors, but it should
be borne in mind that no product is entirely without competition; there is almost always another
way in which customers can meet the need supplied by the product. The products price must
reflect a value proposition relative to where the competition is positioned. The rationale is that
the overall product landscape establishes the data points that a customer will evaluate the product
relative to what the customer sees as comparable goods. We see prices as delineated by
9

boundaries, and then disproportionately perceive items priced either side of a boundary (and
especially if the price is close to a boundary). There are two important aspects of this foundation:

Prices are confined to ranges of established norms outside of the brands control &
constrained by the consumers expectations (i.e. if you are going to make product

for this market, you have to price within this range to even be viable)
The price range is a subjective analysis of the competitive landscape from
the brands perspective.

Lower boundaries can also exist, below which things seem cheap. This can lead to higher sales,
although it may also cause a confusion effect in which people equate 'cheap' with low quality and
hence are less willing to buy. Boundaries are often created naturally within markets where many
products from different suppliers all fall within a clear price range, thus creating a default
expectation for lower and upper price boundaries. Market boundaries are also driven by factors
such as price sensitivity, product performance and social desirability, all of which can be seen in
price boundaries.

1.4. Establishing initial price

1.4.1. Steps in setting right price

Establish pricing goals

Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price

To introduce a new product, two methods may be used: Penetration and skimming policies are
most often encountered when dealing with new products but they are sometimes used in other
situations.
Skimming pricing: Setting a high price for a new product to capitalize on high demand. A
pricing policy that sets product or brand very high price for a new product/brands. A
skimming strategy contrasts with a penetration strategy and is used to take advantage of
the fact that some buyers are prepared to pay a much higher price because they want the
product very much.
Firms adopting this strategy may initially set a high price to gain a premium from such
buyers and may only reduce it progressively to bring in the more price-elastic segments. This

10

strategy is appropriate where there exist a substantially large number of buyers whose demand is
relatively inelastic.
It may also be used where the unit production and distribution costs associated with
producing a smaller volume are not so much higher that they cancel out the advantage of
charging what some of the market will buy, or where little danger exists that a high price will
stimulate the emergence of competition.
Penetration pricing: Setting a low initial price to encourage higher distribution and
exposure. A pricing policy that set the initial price for a new product/brand very low.
Penetration pricing also requires a marketing strategy that incorporates: mass production,
distribution, and promotion.
When introducing a new product, the objective may be to achieve early market
penetration. The strategy may amount to setting a comparatively low price to instigate market
growth and capture a large share of it. The effect of the experience curve will cause long-run
profitability to rise as a result of gaining a large market share or a growth in market share. A
penetration strategy may be appropriate if the market seems to be highly price sensitive, or if
a product is favored by economies of scale in production or, where a low price discourages
actual and potential competition.

1.5.

Price volume trade-off, price elasticity

Understanding of when determining where to set price levels is the relationship between
changes in price and volume. Economic theory indicates that profit-maximizing prices are found
at the point on the demand curve where marginal revenue is equal to marginal cost. While this
price-setting theory is elegant and clear, setting prices in practice is considerably more difficult.
Identifying marginal revenues is challenging because revenues are dependent on multiple factors
such as the relative size of the increase (for example, is it a significant portion of the customers'
expenditure?), the visibility of the price increase in the market, and competitor response, to name
a few.
Although marketers have many techniques available to them for estimating customer
response, all of them have some uncertainty associated with their estimates.

Rather than

attempting to determine marginal revenues and costs, we advocate that marketers follow a
sequence of steps to first understand the financial trade-offs between price and volume and then
analyze the market to estimate consumer response. Rather than attempt to answer the impossible
11

question of How will sales change following this price change, we suggest that managers focus
on a more useful pair of questions to guide their pricing choice:
How much volume could I afford to lose before a particular price increase would be
unprofitable?
How much volume would I have to gain in order for a particular price decrease to
improve my profitability?
So it is better to gain a definitive understanding of the price-volume trade-offs using a
simple, yet powerful, break-even analysis. Incremental break-even analysis can be implemented
on a spreadsheet and easily combined with both data and managerial judgment to make price
adjustments that improve profitability.
Price sensitivity is just what it sounds like-it defines how strongly will your customers react
price change of yours brand or product. High price sensitivity or price elasticity of demand
means a relatively small change in price will drive a big change in demand. Low price sensitivity
means even large changes in price will cause little change in demand. But lowering price could
drive a big increase in demand. Thus low price sensitivity means lowering price means risky it in
the case of highly differentiated and branded products. You might lower prices since your
customers are less driven by price. If your product is commodity and not highly differentiated
from what your competitors offer, your customers are relatively to be higher price sensitive.

1.6.

Customer driven pricing

Many companies now recognize the fallacy of cost-based pricing and its adverse effect on
profit. They realize the need for pricing to reflect, market conditions. As a result, some firms
have taken pricing authority away from financial managers and given it to sales or product
managers. In theory this trend is consistent with value-based pricing, since marketing and sales
are that part of the organization best positioned to understand value to the customer. In practice,
however, the misuse of pricing to achieve short-term sales objectives often undermines perceived
value and depresses profits even further.
The purpose of strategic pricing is not simply to create satisfied customers. Customer
satisfaction can usually be bought by a combination of over delivering on value and under
12

pricing products. But marketers delude themselves if they believe that the resulting sales
represent marketing successes. The purpose of strategic pricing is to price more profitably by
capturing more value, not necessarily by making more sales.
When marketers confuse the first objective with the second, they fall into the trap of pricing
at whatever buyers are willing to pay, rather than at what the product is really worth. Although
that decision enables marketers to meet their sales objectives, it invariably and undermines longterm profitability. Two problems arise when prices reflect the amount buyers seem willing to pay.

First sophisticated buyers are rarely honest about how much they are actually willing to pay
for a product. Professional purchasing agents are adept at concealing the true value of a

product to their organizations.

Second, there is an even more fundamental problem with pricing to reflect customers'
willingness-to-pay.
The job of sales and marketing is not simply to process orders at whatever price customers

are currently willing to pay, but rather to raise customers' willingness-to-pay to a level that better
reflects the product's true value. Many companies under price truly innovative production
because they ask potential customers, who are ignorant of the product's value, what they would
be willing to pay. So as marketer in this concept, Forget what customers who have never used
your product are initially willing to pay. Instead, understand the value of the product to satisfied
customers and communicate that value to others. Low pricing is never a substitute for an
adequate marketing and sales effort.

2. The psychology of pricing

Price, as is the case with certain other elements in the marketing mix, appears to have
meaning. To buyers that goes beyond a simple utilitarian statement. Such meaning is often
referred to as the psychological aspect of pricing. Inferring quality from price is a common
example of the psychological aspect. A buyer may assume that a suit priced at 500 birr is of
higher quality than one priced at 300 birr. From a cost-of-production, raw material, or
workmanship perspective, this may or may not be the case. The seller may be able to secure the
higher price by non price means such as offering alterations and credit or the benefit to the buyer
may be in meeting some psychological need such as ego enhancement.

13

In some situations, the higher price may pay simply due to lack of information or lack of
comparative shopping skills. For some products or services, the quantity demanded may actually
rise to some extent as price is increased. This might be the case with an item such as a fur coat.
Such a pricing strategy is called prestige pricing. Products and services frequently have
customary prices in the minds of consumers. A customary price is one that customers identify
with particular items.
Odd prices, on the other hand, appear to represent bargains or savings and therefore
encourage buying. There seems to be some movement toward even pricing. Every customer
wants to think he or she is getting a good deal, whether they are ordering a value meal or driving
a new car off the lot, and a price change as a little as a currency can have a huge impact on the
willingness to pay (WTP). Fully understanding what affects a persons WTP can help companies
better price their products and services.
One of the main considerations when evaluating a customers WTP is the reference price
of the brand with which a company aligns its offerings. This reference price can be influenced by
a number of factors, including competitive comparisons (either between brands or everyday and
feature prices of the same product), taste tests, symbolism or high-end store locations and
amenities. WTP will increase if a higher-priced brand is used as a reference point; likewise, it
will decrease if a lower-priced brand is used. Companies also need to understand that as a whole,
consumers are driven by proportional price evaluations, rather than absolute terms, and are more
motivated to change stores or brands when the savings is a larger percentage of the overall price.
The payoff for switching stores or brands is a much higher proportionate, though perhaps not
absolute, savings for the less expensive product. Another psychological concept to consider in
effective pricing is extremeness aversion. Buyers psychology tends to keep them in the middle
of the pack they dont want to pay too much, yet they dont want the least expensive product
either. Using this behavioral pattern, brands that offer a mid-range product can capture a larger
portion of the market, as many consumers trade up to a higher-priced product that is perceived as
a better value. Companies should also consider gain-loss framing when pricing their products.
Even when the economic cost of goods at two separate locations is the same, consumers favor
pricing that comes with no negative psychological outcome. As companies become more pricing
savvy, they are taking care to better understand what motivates customers to make favorable
buying decisions.
14

2.1.

Perceptual challenge

Most of us have been led to believe that high pricing enhances brand image and conversely
low pricing affects brand image. This is the reason why marketers fear to be the lowest priced
brand in a category or do frequent price-led communication. Is this fear well founded? What a
brand sells isnt price; but value. Consumers evaluate a brand by the value it offers and not by
the price at which it sells. The purpose of any brand pricing, therefore, is to create unique value
that consumers would be willing to pay for. A brand that can offer this value at the least possible
price would be the most preferred brand.
The perception of the value of a product varies from customer to customer, because
perceptions of benefits and costs vary. Consumers expect more value from a high priced brand
and less from a low priced brand. This is how price and value are co-related. A brand that helps
consumers rationalize, articulate and experience this value would be a value for money brand.
Price by itself is not the value. A brand that does not offer any value would be perceived to be
expensive, even if it isnt. Sales of such brands would not increase even when there is a price
drop.
Research shows that the consumer's perception of product quality is related closely to the
item's price. The high price of the product then the better its perceived quality of brand. Most
marketers believe the perceived price-quality relationship exists over a relatively wide range of
prices, although extreme prices may be viewed as either too expensive or too cheap. Marketing
managers need to study and experiment with prices because the price-quality relationship can be
of key importance to a firm's pricing strategy.
The role of marketing communication is to make consumers want and prefer the value
offered by a brand. Since price is relative to value, it is important to promote price along with
value. Brand image would suffer only when a brand fails to communicate the value it offers for
its price. Brand image should have the least consideration in pricing decisions.
Price should be a function of a brands target audience, context (business objective, brand life
stage, product life stage, consumer life stage, and competitive environment), and cost and desired
margin. Marketers must be concerned with the way consumers perceive prices. If a buyer views a
price as too high or too low, the marketer must correct the situation. Price quality relationships
and psychological pricing are important in this regard. The notion that high priced, expensive
15

brands have a better brand image is incorrect. Brands like Pepsi, Coca Cola, McDonalds and
many others arent expensive; yet they have a good image. Apple i-Phones image hasnt
suffered despite the many price reductions it has announced.

2.2.

Prospect theory

Marketers are implicitly interested in how and why people make decisions and how brands
and product affects the consumer decision making. Most of us have a self-image of ourselves as
rational beings that weigh up the odds and apply the laws of probability when making decisions.
If this were the case unilaterally across the population, marketing would be a simple science. The
assumption behind this concept the fact of the matter is that most decisions are not straight
forward but complex in nature and are often made under conditions that may be confusing
indistinct or even frightening.
Prospect theory postulates and demonstrates that the outcome of decision-making under
conditions of gains and losses is not symmetrical. Sometimes the population appears to make
irrational decisions. However this irrationality has some consistency. Most researchers found that
in the positive domain the populations are risk averse and when in the negative domain the
populations are risk seekers. The theory states that people make decisions based on the potential
value of losses and gains rather than the final outcome, and that people evaluate these losses and
gains using certain heuristics.
Prospect theory has wide ranging marketing implications. These include but are not limited to:

How an advertising message is framed.

How a new product is positioned.
How brand awareness increased in the consumer mind.
How a product is priced relative to the competition and consumer expectations.
How a product is priced and the premium a consumer is willing to pay.
What markets will respond to what types of offer.

When I conclude Prospect theory goes a long way towards explaining why we often make
decisions that seem irrational. If the population always made decisions on a utilitarian basis,
there would be little need for branding/product. In fact if utility were the basis for all decision
making there would be little need for marketing.

2.3.

Price and value communication

Before proceeding to price and value communication firstly what value mean in marketing
concept? It defined as value in terms of value in use, which is driven by product performance.
16

It also defined as the maximum amount a customer should be willing to pay, assuming full
information about the product and competitive offerings. Define value in business markets as the
perceived worth in monetary units of the set of economic, technical, service, and social benefits
received by a customer firm in exchange for the price paid for a product offering, taking into
consideration the available alternative suppliers offerings and prices.
Value communication is effective to the extent that buyers see the price as economically
important. The price is economically important when the buyer is committed to getting a good
deal or the most for my money. Value communication involves communicating credibly, in
monetary terms, the differentiating benefits of your product. The goal, particularly for a higherpriced product, is to establish for the customer the value identified during the value creation
stage. Without that, you run the risk that the purchasing department does not know the value of
your differentiating benefits to their company, or that they will not acknowledge the value, even
if they do know what it is. Understanding the value your products create for customers and
translating that understanding into a value-based price structure can still result in poor sales
unless customers recognize the value they are obtaining. A successful pricing strategy must
justify the prices charged in terms of the value of the benefits provided.
Developing price and value communications is one of the most challenging tasks for
marketers because of the wide variety of product types and communication vehicles. In some
instances, marketers might employ traditional advertising media to convey their differential
value. Ultimately, the objective of value communication is to raise customers willingness to pay
for the value they receive.
To develop a value communication strategy, you first need to identify where in the buying
process you intend to influence value perception. It is usually possible and often cost-effective to
influence customers willingness-to-pay through a systematic strategy. The differentiation that
distinguishes your offering is what can drive value perceptions and price for your offering if you
can influence how customers understand it. There are four potential goals of that strategy, one or
all of which may be important to raise willingness-to pay for your product or service. They are
the followings:
To help customers establish an appropriate reference value against which to measure
your product, unless there is a direct substitute for your product with a price that
establishes the reference.
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To help customers recognize your differentiation on attributes that are not readily
observable, unless yours is an established brand about which the market has learned from
experience.
To makes salient potential benefits of your differentiation that translates into high value
for the customer. Established brands focus the customer on the loss they could suffer
(e.g., social humiliation) by relying on a cheaper substitute. Differentiated newcomers
focus customers on the added benefits they could receive (e.g., prestige) over and above
what they get from their current supplier.
To justify that the share of value captured in your price is fair, assuming that you are in
the type of market environment (defined below) where fairness issues arise. The first
three indicates value communication and the latter one price communication.

2.4.

Measurement of price sensitivity

Price elasticity is the percentage change in the quantity sold of a product/brand when the
price changes, divided by the percentage change in price. Elasticity is measured for changes in
price from some specific price level so elasticity is not necessarily constant over the range of
prices under consideration. Surprisingly, research indicates that in some situations people will
buy more of certain products at higher prices, thus displaying a price-quantity relationship that
slopes upward to the right, rather than the typical downward sloping volume and price
relationship. In these instances, buyers seem to be using price as a measure of quality for the
brand because they are unable to evaluate the product.
There are ways to estimate the sensitivity of customers to alternative prices. Test marketing
can be used for this purpose. Study of historical price and quantity data may be helpful. End-user
research studies, such as consumer evaluations of price, are also used. These approaches, coupled
with management judgment, help indicate the responsiveness of sales to different prices in the
range of prices that is under consideration.
Analysis of buyers' price sensitivity should answer the following questions:

Size of the product-market in terms of buying potential.

The market segments and market targeting strategy to be used.
Sensitivity of demand in each segment to changes in price.
Importance of non-price factors, such as features and performance.
The estimated sales at different price levels.

3. Pricing strategies
3.1.

Introduction
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After a good or service has been developed, identified, and packaged, it must be priced. This
is the second aspect of the marketing mix and price is the exchange value of a good or service.
Pricing strategy has become one of the most important features of modern marketing and its
significant implication for brands. Pricing helps direct the overall economic system. A firm uses
various factors of production, such as natural resources, labor, and capital, based on their relative
prices. High wage rates may cause a firm to install labor-saving machinery. Similarly, high
interest rates may lead management to decide against a new capital expenditure. Prices and
volume sold determine the revenue received by the firm and influence its profits.
Strategic pricing is the coordination of interrelated marketing, competitive, and financial
decisions to set prices profitably. For most companies, strategic pricing requires more than a
change in attitude; it requires a change in when, how, and who makes pricing decisions. For
example, strategic pricing requires anticipating price levels before beginning product
development. The only way to ensure profitable pricing is to reject early those ideas for which
adequate value cannot be captured to justify the cost. Strategic pricing also requires that
management take responsibility for establishing a coherent set of pricing policies and
procedures, consistent with its strategic goals for the company. Abdicating responsibility for
pricing to the sales force or to the distribution channel is abdicating responsibility for the
strategic direction of the business. Perhaps most important, strategic pricing requires a new
relationship between marketing and finance. Strategic pricing is actually the interface between
marketing and finance. It involves finding a balance between the customer's desire to obtain
good value and the firm's need to cover costs and earn profits. Strategic pricing imposes financial
discipline - an optimizing constraint - on marketing and sales decisions. It says that a firm should
satisfy customers, but only up to the point where the incremental increase in value created
exceeds the incremental increase in the product's cost. It dictates that a firm should satisfy
customers when doing so is consistent with its competitive position and complements its core
competencies.
There are five types of pricing setting strategies according to Philip kotler et al (2005) and Nagle
and hagan (2006).
I.

Cost-based pricing is the simplest pricing strategy. Using this strategy price is set by
adding some mark-up to the cost of the product. This strategy works if firms prices
are not too high as compared to the competition. (Kotler et al, 2005).
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II.

Another cost-oriented pricing strategy is Break-even Pricing. Firms determine the

price at which they can recover manufacturing and marketing cost, or make targeted
profit. (Nagle & Hogan, 2006)
Competition-based Pricing is when a company sets prices in accordance with the

III.

competition. Prices are largely based on the prices of the competitors. (Kotler et al,
2005)
Marginal pricing strategy: An important cost-oriented approach is that of marginal

IV.

pricing. Suppose a firm manufactures beer which carries a fixed overhead charge of
100,000 birr and variable costs of 0.50 birr per beer. The firm currently supplies
1,000,000 beers to customers in the Ethiopia at 0.75 birr each and has considerable
capacity. An enquiry has come in from a company in the Far East which is interested
in using the same beer for a different purpose.
In Customer-value based Pricing: brands or products are priced on the basis of

V.

perceived value of the product. Company shall find out what value customers assign
to competitors product and what value they perceive of companys product.
Measuring perceived value is difficult and if the more prices are charged than the
perceived value, sales will suffer. (Kotler, et al, 2005)

3.2.

The strategic importance and role of pricing

Pricing decisions have substantial consequences for many companies as illustrated by the
effects of price competition from different companies. Once implemented, it may be difficult to
alter price strategy-particularly if the change calls for a significant increase in prices. Pricing
actions that violate laws can land managers in jail. Price has many possible uses as a strategic
instrument in business strategy.
I.

Strategic importance of pricing

The vital importance of pricing decisions argues strongly for cross-functional participation.
Pricing impacts all business functions. Coordination of strategic and tactical pricing decisions
with other aspects of marketing strategy is also critical because of the marketing program interrelationships involved and it should developed based on the following perspective.
A) Price on the Positioning Strategy

Price is an important part of positioning strategy, and pricing decisions need to be coordinated
with decisions for all of the positioning components. Importantly, this pricing perspective
mandates understanding how pricing and brand viewed and understood by customers.
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B). Price on Product Strategy

Pricing decisions require analysis of the product mix, branding strategy, and product quality and
features to determine the effects of these factors on price strategy. When a single product is
involved, the pricing decision is simplified. Yet, in many instances, a line or mix of products
must be priced. The prices for products in a line do not necessarily correspond to the cost of each
item. Understanding the composition of the mix and the interrelationships among products is
important in determining pricing strategy, particularly when the brand identity is built around a
line or mix of products rather than on a brand-by-brand basis. Consider a situation involving a
product and consumable supplies for the product. One popular strategy is to price the product at
competitive levels and set higher margins for supplies. Product quality and features affect price
strategy. A high-quality product may benefit from a high price to help establish a prestige
position in the marketplace and satisfy management's profit performance requirements.
C). Channel distribution strategy
Type of channel, distribution intensity, and channel configuration also influence pricing
decisions. The functions performed and the motivation of intermediaries needs to be considered
in setting prices. Value-added resellers require price margins to pay for their activities and
provide incentives to obtain their cooperation. Pricing is equally important when distribution is
performed by the producer. Pricing in coordinated and managed channels reflects total channel
considerations more so than in conventional channels.
II.

Strategic role of pricing On brand equity

Marketers need to actively manage the role of price in the equity of their brands. Ignoring it will
not minimize its importance. Price will affect brand perceptions; marketers need to shape those
effects. The first step for marketers is to understand the way pricing is influencing brand
associations. How strong are these associations compared with others? Are price perceptions in
line with actual market prices? What about perceptions of value? How is desire balanced with
price? Prices perform various roles in the marketing program-as a signal to the buyer, an
instrument of competition, a means to improve financial performance, and a substitute for other
marketing program functions. Pricing plays an important strategic role in marketing strategy.
Strategic choices about product decision, branding , positioning , market targets, positioning
strategies, and products and distribution strategies set guidelines for both price and promotion

21

strategies. Product quality and features, type of distribution channel, end-users served, and the
functions performed by value chain members all help establish a feasible price range.
A) Signal to the Buyer
Price offers a fast and direct way of communicating with the buyer. The price is visible to the
buyer and provides a basis of comparison between brands. Price may be used to position the
brand as a high-quality product or instead to pursue head-on competition with another brand.
B) Instrument of Competition
Price offers a way to quickly attack competitors or, alternatively, to position a firm away from
direct competition. Price strategy is always related to competition whether firms use a higher,
lower, or equal price of the brand.
C). Improving Financial Performance
Since prices and costs determine financial performance, pricing strategies need to be assessed as
to their estimated impact on the firm's financial performance, both in the short and long run.
Global competition has forced many firms to adopt pricing approaches that will generate
revenues in line with forecasts. Importantly, both revenues and costs need to be taken into
account in selecting pricing strategies.
D). Marketing Program Considerations
Prices may substitute for selling effort, advertising, and sales promotion. Alternatively, price may
be used to reinforce these promotion activities in the marketing program. The role of pricing
often depends on how other components in the marketing program are used. In deciding the role
of pricing in marketing strategy, management evaluates the importance of prices to competitive
positioning, probable buyers' reactions, financial requirements, and interrelationships with other
components in the marketing program.

3.3.

Pricing objectives and their relationship with overall business

objectives

Marketing attempts to accomplish certain objectives through its pricing decisions. Research
has shown that multiple pricing objectives are common among many firms. Pricing objectives
vary from firm to firm. Some companies try to maximize their profits by pricing their offerings
very high. Others use low prices to attract new business.
I.

Gain Market Position

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Low prices may be used to gain sales and market share. Limitations include encouraging price
wars and reduction (or elimination) of profit contributions.
II.

Achieve Financial Performance

Prices are selected to contribute to financial objectives such as profit contribution and cash flow.
Prices that are too high may not be acceptable to buyers.
III.

Product Positioning

Prices may be used to enhance product image, promote the use of the product, create awareness,
and other positioning objectives. The visibility of price (high or low) may contribute to the
effectiveness of other positioning components such as advertising.
IV.

Stimulate Demand

Price is used to encourage buyers to try a new product or to purchase existing brands during
periods when sales slowdown (e.g., recession). A potential problem is that buyers may balk at
purchasing when prices return to normal levels. Discount coupons for new products like
Colgate's Total toothpaste help stimulate demand without actually lowering listed prices.
V.

Influence Competition

The objective of pricing actions may be to influence existing or potential competitors.

Management may want to discourage market entry or price cutting by current competitors.
Alternatively, a price leader may want to encourage industry members to raise prices. One
problem is that competitors may not respond as predicted.
VI.

Profitability Objectives

Most firms have some type of profitability objective for their pricing strategy. Management
knows that Profit equals to Revenue minus expenses and that revenue is a result of the selling
price times the quantity sold: Total Revenue equals Price times Quantity Sold. Some firms try to
maximize profits by increasing their prices to the point where a disproportionate decrease
appears in the number of units sold. A 10 percent price hike that results in only an 8 percent
volume decline increases profitability. But a 5 percent price increase that reduces the number of
units sold by 6 percent is unprofitable. Profit maximization is the basis of much of economic
theory. However, it is often difficult to apply in practice, and many firms have turned to a simpler
profitability objective the target return goal. For example, a firm might specify the goal of a 9
percent return on sales or a 20 percent return on investment. Most target return pricing goals state
the desired profitability in terms of a return on either sales or investment.
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VII.

Volume Objectives

Another example of pricing strategy is sales maximization, under which management sets an
acceptable minimum level of profitability and then tries to maximize sales. Sales expansion is
viewed as being more important than short run profits to the firm's long-term competitive
position. A second volume objective is market share the percentage of a market controlled by a
certain company, product, or service or its brands. One firm may seek to achieve a 25 percent
market share in a certain industry. Another may want to maintain or expand its market share for
particular products or brands or product lines. Market share objectives have become popular for
several reasons. One of the most important is the ease with which market share statistics can be
used as a yardstick for measuring managerial and corporate performance. Another is that
increased sales may lead to lower production costs and higher profits.

3.4.

Key consideration in developing pricing strategies including cost,

demand, and competitive factors

Pricing objectives should fit in with a companys overall marketing strategy. Therefore, if a
company is profit-oriented, its pricing objective should be to maximize profits. Management's
objectives may affect the extent of pricing flexibility and should be included as the last part of
analyzing the pricing situation. The pricing strategy needs to be coordinated with the
development of the entire marketing program since in most, if not all, instances there are other
important marketing program component influences on buyers' purchasing behavior. Similar
assessments are needed depending on the pricing objectives set by management. Importantly, if
one or more of the pricing objectives cannot be achieved based on the assessments of customer
price sensitivity, costs, and competitors' likely responses the feasibility of the objective(s) may
need to be evaluated. There are the major steps in selecting a pricing strategy for a new product or
altering an existing strategy. Strategy formulation begins by determining pricing objectives, which

guide strategy development. Next, it is necessary to analyze the pricing situation, taking into
account demand, cost, competition, and pricing objectives.
These analyses indicate how much flexibility there is in pricing a new product or changing
the pricing strategy for an existing product. Based on the situation analysis and the pricing
objectives, the pricing strategy is selected. Finally, specific prices and operating policies are
determined to implement the strategy.
I.

Cost factors and Demand factors

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Demand and cost factors determine the extent of pricing flexibility. Within these upper and lower
boundaries, competition and pricing objectives also influence the choice of a specific pricing
strategy. The price gap between demand and cost may be narrow or wide. A narrow gap
simplifies the decision; a wide gap provides a greater range of feasible pricing options.
II.

Competitive factors

Choice of the pricing strategy is influenced by competitors' strategies, present and future, and by
management's pricing objectives. In competitive markets the feasibility range may be very
narrow. New markets or emerging market segments in established markets may allow
management more flexibility in strategy selection.

3.5.

Pricing for new products

A key decision is how far above cost to price a new product within the flexibility band a
relatively low market entry price may be used with the objective of building volume and market
position, or instead, a high price may be selected to generate large margins. The former is a
"penetration" strategy whereas the latter is a "skimming" strategy. Analysis of the results of low
price strategies in highly competitive markets indicates that while the strategies are sometimes
necessary, they should be used with considerable caution. Lack of knowledge about the probable
market response of buyers to the new product complicates the pricing decision. Several factors
may affect the choice of a pricing approach for a new product, including the cost and life span of
the product, the estimated responsiveness of buyers to alternative prices, and assessment of
competitive reaction. A decision should also be made about how visible price will be in the
promotion of the new product. The use of a low entry price requires active promotion of the price
to gain market position. When firms use a high price relative to cost, price often assumes a
passive role in the marketing mix and performance in combination with other attributes of the
product are stressed in the marketing program. The pricing strategy selected depends on how
management decides to position the brand or product relative to competition, and whether price
will perform an active or passive role in the marketing program. The use of price as an active (or
passive) factor refers to whether price is highlighted in advertising, personal selling, and other
promotional efforts.
3.6.

Tactical approachs to pricing:

This pricing called special pricing tactics and they are the following.
Single-price tactic: all goods offered at the same price.
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Flexible pricing: different customers pay different price.

Professional services pricing: used by professionals with experience, training or certification.
Price lining: several line items at specific price points.
Leader pricing: sell product at near or below cost.
Bait pricing: lure customers though false or misleading price ads.
Odd-even pricing: odd-number prices imply bargain; even-number prices imply quality
Price bundling: combining 2 or more products in a single package.
2-part pricing: 2 separate charges to consume a single good
3.7.
Others strategic pricing considerations and strategic marketing implications
Price/quality relationships

In the absence of other information, price is often used as a singular indicator of quality. The
pricing decision maker must be careful to ensure, particularly for a new product, that a low initial
price does not put off customers because they suspect the quality.

Psychological pricing

It is now recognized that pricing sends many complex signals to customers. Moreover these
price signals dont always mean the same thing to each customer. As a result, they are often
interpreted and acted upon in different ways. There are behavioral forces at work with respect to
price involving psychological factors such as perception, learning and personality. These
behavioral forces have led to the notion of considering the psychology of pricing processes.

Odd pricing: Often prices are set to end in an odd number (e.g. 4.99 birr instead of 5.00
birr). There is some evidence that customers then see the product as falling into the lower
priced category (i.e. 4.00 birr) rather than the higher one to which it is actually much
nearer. The psychological pricing method helps you build an impression of your brand
without making significant changes to the product. Simply revising your pricing structure
can make your product suddenly seem like the best bargain on the market or elevate your
luxury product to the top of the available options. Experiment with one or more

psychological pricing methods to help find a price point that increases your sales.
Price and perceptions of quality: Price is often used by potential customers as an
indication of quality, particularly where they are unfamiliar with a brand or supplier. This
means that a low price may be taken as a sign of low quality and vice versa for a high

price meaning it is possible to price a product too low.

Price and social status: Related to price as an indicator of quality, the marketer needs to
be aware that some customers will connect the prices they and other people pay as being
an indicator of status. Again, some customers may be deterred by low prices even if they
26

know it represents the best possible value, because they feel it detracts from their social
status.
When marketing manager set price for his/her product he/she should consider the ethical and
legal factors. A wide variety of laws and regulations affect pricing actions. Legal constraints are
important influences on the pricing of goods and services in many different national and
cooperative regional trade environments.
Price Fixing: A conspiracy among firms to set prices for a product is termed price fixing.
Pricing fixing is illegal. When two or more competitors collude to explicitly or implicitly set
prices, this practice is called horizontal price fixing. Vertical price fixing involves controlling.
Price Discrimination: Law prohibits price discrimination the practice of charging different
prices to different buyers for goods of like grade and quality. However, not all price
differences are illegal; only those that substantially lessen competition or create a monopoly
are deemed unlawful.
Deceptive Pricing: agreements between independent buyers and sellers (a manufacturer and
a retailer) whereby sellers are required to not sell products below a minimum retail price.
Price deals that mislead consumers fall into the category of deceptive pricing. It is outlawed
by the Federal Trade Commission. Bait and switch is an example of deceptive pricing. This
occurs when a firm offers a very low price on a product (the bait) to attract customers to a
store.
Predatory pricing is charging a very low price for a product with the intent of driving
competitors out of business. Once competitors have been driven out, the firm raises its prices.
Proving the presence of this practice has been difficult and expensive because it must be
shown that the predator explicitly attempted to destroy a competitor and the predatory price
was below the defendant's average cost.
Ethical issues in pricing are more subjective and difficult to evaluate than legal factors.
Companies may include ethical guidelines in their pricing policies. Deciding what is or is not
ethical is often difficult. Possible ethical issues should be evaluated when developing a
pricing strategy.
Conclusion
In organizations pricing is one of the most complex strategic activities. Pricing strategy
involves establishing cross-functional objectives and synergistic goals to create an organization
that can profitably produce and capture value. Nowadays for many companies, pricing is still a
27

collection of short term activities rather than a business discipline and an embedded core
competency. Pricing decisions are more than just a mechanical exercise of adding margins for
profit to costs. Price setting must become an integral part of the marketing strategy of the
company and must be consistent with corporate and marketing objectives and other elements of
the mix. In addition to these inputs to pricing decisions, the marketer must also consider demand,
cost and competitors. To price a brand appropriately and to effectively build relevant and
motivating associations around that price is to harness the power of one of the most important
factors in the decision-making process for consumers. The true test of a successful marketing
strategy is its ability to create value profitably. For marketing strategists, pricing is the moment
of truth all of marketing comes to focus in the pricing decision.

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