Effective Pricing Strategies For Purchasing Of New Products

Project and Seminar Material for Purchasing and Supply PS

Effective Pricing Strategies For Purchasing Of New Products


Chapter One


Introduction

1.1 Background Of The Study

Purchasing operates within a dynamic environment and today’s companies are wreathing with customer values and orientations; economic stagnation, environmental decline, increased global competition, and a host of other economic political, social and pricing challenges which if Ignored will be detrimental to the company. Purchasing is concerned with getting the right product to the right customer at the right price.

Price for a product is one of the factors that determine the demand for the product, that is why economic theory states that price is determined by the interaction of demand and supply cost and price usually affect demand and these three are in continuous inter play. For economist, it is a key factor describing the level and movement of demand. The basic assumption made about demand is that all things being equal, price plays a decisive role in determination of the rate of purchase by the consumers. Price presents a thorny but interesting phenomenon under our current economic system.

Traditionally, price occupies the second position of the internal or important variables of the purchasing mix otherwise known as 4ps.

Product, price and promotion, place pricing decision aspect of a firms purchasing programme arises partly from the fact that of all the elements of the purchasing mix, price is the only one that generates income and revenue while the next represent lost to the firm (Adirika, Ebue and Nwachukwu 1996:59). Price is also one of the flexible elements of other elements of the purchasing mix unlike, product features and channel commitment, price can be changed quickly and if price is well blended with way in achieving better result. Price is a very sensitive issues facing a company of which a company cannot do without because of that, it can make or mar a company’s image. Price communicates to the market the company’s interview value/positioning of its products/services.

No company will want to incur loss through the sales of its products. Inspite of this firms want to achieve certain level of customer satisfaction translated in price terms, that is why both manufacturers and marketers use price to accomplish multiple objectives price may be use as a clue to product quality while conveying to the customers that a seller has high quality goods and services. Price wears many hats, stated by (Mark 1979) of the authors in pricing strategies and this emphasizes the crucial role of pricing in the survival of a company. At the same time price are pricing competition is the number one problem facing many purchasing executives. Yet, many companies do not handle pricing well. The most common mistake are: pricing that is too cost oriented; prices that are not revised often enough to take the rest of the purchasing mix into account; prices that are various enough for different products, market segment and purchase occasions.

Historically prices usually were set by buyers and sellers bargaining with each other sellers would asked for a higher price than they expected to get and buyers would offer less than they are expected to pay. Through the bargaining process, the would arrive at acceptable price individual buyer pay different prices for the same products, depending on their needs and bargaining skills.

Historically, price has been the major factor affecting choice. This is skill trade in poorer nations, among poorer groups, and with commodity products. However, non-price factor have become more important in buyers – choice behaviour in recent decades.

A company may decided to divert into a particular market at a specific price level as it develops a product accordingly, this is called pricing strategy. The organization aim at the most valuable price level that is ripe for exploitation or that meet its market objective at a profit, once the price level has been established necessary variation in price structure from day to day and from time to time are tactical.

But if you have a good product, do not spoil it by trying to sell it too cheaply because Nigerian Consumers associate high price with quality product even though it is a price consumed community.

From the above, “Price” constitute an important or essential area of study, because price of a product is not seen by the purchaser simply in terms of what is the cheapest price rather and element in the total bundle of satisfaction which constitute a product in the consumers eyes.

Therefore, it is a means of increasing primary demand per a product, a firm may like to fix a price that is likely to increase wider consumer acceptance and consequently increase the volume of a product. Both the manufacturers, the purchasers and likewise buyers look at price differently.

The manufacturer and the retailers view the price relating to how good his accounting method are how much profit he may be capable of making price is expressed in terms of Naira and kobo or any other monetary medium of exchange and it tells the purchaser what the cost will be to him. Although cost is not necessary regarded purely in terms of immediate ash payment in order to own a product.

Therefore, pricing function is handled different ways by different organization. In small organization, price decision is made by top management while in large organization it s handled by lower manager and purchasing department in accordance with top management pricing objective, policies, strategies and procedure,

A purchasing firm should, therefore adopt such pricing strategies that will lead to the realization of not only the pricing objective but also the normal corporate goals of the firm.

Schewe and Smith (1980: 134-137) identified two broad pricing strategies which purchasing can adopt in setting the prices of new products. These are setting an initial high price for the product (Skinghind Pricing Strategy) and/or setting an initial price (penetration pricing strategy) aimed at facilitating consumer acceptance.

Hardies and Dromades Nigeria Limited was incorporated in Nigeria as a private liability company in October 11th 1993 with its registration number as 232241. On October 10 1996, it was duly registered to be Mixing, compounding, manufacturing, preparing Dispensing and selling of drugs, poisons dispensing lotion, soaps etc at the provision of pharmacist council of Nigeria. Its functions amongst other business were to carry on manufacturing of hygiene household products.

The company is located at Emene in Enugu with branches in almost all the big cities in Nigeria. This research work centers on the company’s effective pricing strategies for purchasing of a New Product – Royallux. Pricing can determine especially at the introductory stage of a new product the success or failure of the product in the market.

Hardis and Dromades manufacturing firm adopts both low pricing strategy and high pricing strategy in purchasing its new product – Royallux. The low pricing strategy their new product – Royallux as fast as possible in order to generate substantial sales volume and a larger market share while the high pricing strategy makes it possible for the firm to recover its product cost and other expenses as quickly as possible (Stanton 1984:79). This decision is influenced by a number of factors such as customers demand schedule, the cost function, the competitors prices/reaction and the firms pricing objectives and existing government regulation regarding pricing generally. Vernon and Lamb (1986 : 60) stated the importance of these factors in determining the prices of varies from one company to another.

Because of the important of price in the purchasing of new product that the researcher takes a critical look at the effective of pricing strategies for purchasing of new product with emphasis of Royallux.


1.2 Statement Of The Problem

The research work is carried out to determine how Hardis and Dromades apply their pricing strategies in purchasing of the new product – Royallux. The question is, does the customers see the company’s prices as being in line with the value or quality of its offers from the discussion held with customers of Hardis and Dromades. Some complain that the price is high compared to the product quality while some customers opined that the price is in line with the quality of the product. Hardis and Dromades incurred cost in the process of providing goods for customers satisfaction, and one way of recovering some of these cost is through effective pricing strategy.

Therefore, there is need for manufacturing firms to adopt, pricing strategies that will enable them at least to recover production overhead cost and make profit. Thus, he determination of pricing strategies adopted by Hardis an Dromades in Enugu in the pricing of their new product – Royallux will form the central problem of this research.
Finally their problems include identification of the factors which determines or influence the price elastiity of demand experience – curve effects, competitors prices in similar goods, which consequently, determine the choice of pricing strategies by the firms and also in the purchasing of Royallux.


1.3 Objectives Of The Study

The objective of this study is to determine effective are the methods used by Hardis and Dromades in settling prices for their new product – Royallux.

  1. To determine how prices of the new product affect its demand, position and market share.
  2. To find out how consumers respond to different prices of different quality of products.
  3. To Know the pricing strategies necessary to achieve the companies sales goal with regard to Royallux.
  4. To evaluate the pricing strategies of the company in increasing patronage for Royallux
  5. To determine how prices can enhance the profitability of the company’s product.

1.4 Formulation Of Hypotheses

The following hypotheses were formulated to help in carrying out this study.

  1. H01 – The pricing strategies adopted by Hardis and Dromades for Royallux does not lead to increased sales of the product.
    H1 – The pricing strategies adopted by Hardis and Dromades for Royallux had to increased sales of the product.
  2. H02 – The pricing strategies adopted by Hardis and Dromades does not lead to repeat sales of Royallux.
    H2 – The pricing strategies adopted by the company to increase repeat sales of Royallux.
  3. H03 – The pricing strategies Hardies and Dromades for Royallux have negative impact on the profit of the company.
    H3 – The pricing strategies adopted by the company for Royallux have a positive impact on the profit of the company.

1.5 Significance Of The Study

A product’s price is a major determinant of the market demand for it. Price affects a firm’s competitive position and its market share is imperative for purchasing firm to understand and take cognizance of the pricing practice of other competitors and effective prices for its product.

Therefore, this research will be useful to other different brands product firms by enabling them to gain a useful insight into the effective pricing strategies of the purchasing firm whose operations and activities in one way or the other, effect and influence their own (different brand product firm) activities.

The consumer public will also benefit from this study since they will come to know why marketers prices are high or low, they will also be in a better position to know the best company industrial or consumer product.

The readers will benefit from the study as the information contained would widen their scope of understanding and knowledge in the area of study which will stir up further investigation.

Finally the study oil make the researcher to acquire more knowledge in the field of researching


1.6 Scope Of The Study

This study is centered on Hardis and Dromades Nig. Ltd – Enugu which is located in Emene. The research examined the pricing strategies used by the above-mentioned firm for the purchasing of Royallux in Enugu metropolis.


1.7 Definition Of Terms

The following terms used in this study should be taken to mean the following:

Purchasing:

It is all important task of identifying, anticipating and satisfying human needs and want through exchange process as efficiently and as effectively as posible (Adirika 1990:3)

Pricing objective:

They are goals which management attempts to achieve with its pricing structure and strategies (Adrika, Ebue & Nnolim 1996:71)

Product:

It is anything or idea that can satisfy a need or a want (Adirika, Ebue & Nnolic 1997: 114)

Strategy:

It is the major pattern of major objectives, purposes or goals, essential policies and plans for achieving a company goals in such a way to define what business the company is in or is to be in (Philip Kotler 2003:118)

Effective

It is a systematic means by which purchasing manager adopt in reaching the stated objectives, goals of an organization with the maximum available resources (Philip Kotler 2003: 286).

Skimming pricing:

This is a setting an initial high price on a new product (Ani 1998: 59)

Discount

This refers to a reduction from the base price of a product: usually they are offers to buyers for buying in large quantities, and paying services for the seller (Philip Kokler 2003: 497).

Pricing

Pricing is the moved or other considerations exchanges for the ownership of the goods or services (Edoga and Ani 2000: 218 – 319).


Effective Pricing Strategies For Purchasing Of New Products


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