Home Business Writing a Business Plan – Taking a Look at Pricing

Writing a Business Plan – Taking a Look at Pricing

by Olufisayo
Pricing Strategy

Price is one of the four Ps of marketing. It is of special significance because it is the only marketing mix element that generates revenue without which it is futile to talk of business and marketing. While the price is revenue to the marketer, it is a cost to the consumer.

As consumers, we come across price in various forms as we make transactions in everyday life. We pay the bill for utilities such as electric power and telephone. We pay rent to our landlords and commission to agents.

We pay for school fees and transport fares. We pay a premium for life or motor insurance. We pay tax for government services and so on.

Authors, musicians, and artists are paid a royalty on their work. All of these are different forms of price. It is quite apparent that price is the second most critical part of the marketing mix.

When the product is mentioned, the next logical thing that comes to mind is the price of the product. However, for not-for-profit organizations, where there are no prices for their offerings, the price is whatever is given up to obtain the product or assist the organization – for example, contributions to the World Wildlife Fund, SOS Village, the Red Cross, or a vote for a political candidate.

Now, what is marketing? Marketing is defined as the monetary value of a product. The higher the price of a product, the higher its value in relation to other products.

The customer must find the price reasonable otherwise there would be resistance. Before pricing was evolved, there was barter. Although still used in one form or another, barter has been largely jettisoned. Nowadays prices are fixed either through bargaining or uniform pricing.

Bargaining is common in our local markets, in bulk buying and in the purchase of heavy high-tech equipment. Uniform pricing is favored by stores, pharmacies, supermarkets, and other settings where thousands of items are sold under the same roof. This measure makes sales operations and accounting less cumbersome.

The Role of Pricing in the Marketing Mix

Price performs the following functions as one of the elements of the marketing mix;

  • It is the source of revenue for the marketer. Revenue = Price x Quality.
  • It is also the source of profit for a profit-making organization. Profit = Revenue – Costs.
  • Price facilitates exchange as the medium of common denominator for buyers and sellers.
  • A price is an important tool of competition. It can be used to drive other competitors from the market, maintain market stability, gain market share, prevent new entrants into the market, and reap the benefits of innovation.
  • Price can be used as an index of product quality, class, and luxury.
  • It can also be used as a psychological weapon. Some goods are priced high simply because if they are priced low; consumers would tend to confer low quality on them. Designer perfumes, apparels, and grooming aids are in this category. High prices confer some exclusivity on them.

Pricing Perspectives

There are three basic ways of approaching pricing in the business. We can arrive at a realistic balance by harmonizing these three perspectives below;

The Economist’s Perspective

As seen by the economist, price is the tool for aligning demand and supply. The equilibrium price is the point where demand equals supply. The economist’s notion of the firm is that it is always out to maximize profit within applicable demand criteria.

How the pricing mechanism functions depend on the type of market structure.

Let’s briefly consider major types of market structures:

Pure Competition

A pure market consists of a large number of sellers and buyers trading in a homogenous commodity e.g. stock market and commodity market. Buyers have little influence on the going market price because both buyers and sellers can only buy or sell all they want at that price. Sellers can enter and leave the market without hindrance.

Moreover, resources are highly mobile and there is a free flow of information. Buyers and sellers are price-takers rather than price-makers. In this type of market, product development, advertising, sales promotion and other forms of non-price competition is minimal as long as the market remains purely competitive.

Monopolistic Competition

Many sellers and buyers operating over a range of prices because sellers are able to differentiate their offers to the buyers. The physical products can be varied in quality, features, and styles.

On the other hand, an augmented product that is the services accompanying the product can be varied in such a way that the consumer perceives differences in the product.

Using branding, advertising, and personal selling, sellers can offer products to fit different market segments in order to earn reasonable returns. Each firm is less affected by competitors’ marketing strategies because there are many competitors.

Oligopolistic Competition

This consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies. The product can be homogenous (steel, aluminum) or heterogonous (cars, aircraft, computers).

There are few sellers because there is a strong barrier to entry in the form of patents, high capital requirement, expertise, scarce location, and control over raw materials, and so on. Each seller is alert to the competitors’ moves.

If an oligopolistic reduces price, competitors might follow suit. On the other hand, if he increases price and competitors fail to react, he will lose customers.

Pure Monopoly

Only one seller exists in the market. Government monopolies usually set prices to cover costs or operate below costs because the services they provide are essential and not everybody can afford the economic price. Prices keep going up without any effort to justify these increases.

The Accountant’s Perspective

The accountant is concerned with how all costs can be recovered in order to make a profit. Usually, the accountant stipulates a required rate of return that will make the whole business operations worthwhile.

Due to the emphasis on returns, the accountant’s major concern is to identify, classify and monitor different costs and appraise their effects on returns.

The accountant helps the organization focus on ensuring that investment (costs) yield reasonable returns; hence we have methods such as break-even analysis to help monitor costs.

However, there is the danger of emphasizing costs to the detriment of demand and other vagaries of the market.

The Marketer’s Perspective

The marketer sees price as just one of the factors affecting demand. For instance, the marketer is keen on exploiting the concept of value so that price is not just about cost but what customers are ready to pay in terms of the value they attach to the product.

Moreover, the marketer is also aware that pricing has an industry-wide effect. It affects competition, market share, sales, company image, and profits.

In making a pricing decision, the marketer must not limit himself to the marketing perspective; he must combine it with the economist and the accountant’s perspective in order to arrive at a realistic and effective price.

Photo by Wendy Wei from Pexels

Related Articles


The Steps Involved in Pricing Decision Making October 21, 2011 - 8:19 PM

[…] pricing decisions. In the long run, no company can survive that cannot cover costs. As we noted in our last post, accountants are particular about costs because they know that costs must be recovered for a firm […]

Writing a Business Plan – Taking a Look at Pricing | The Secrets of Entrepreneurship : Pricing News August 11, 2016 - 8:39 PM

[…] Writing a Business Plan – Taking a Look at Pricing. […]

Comments are closed.