notes

1. 1
NEW PRODUCT PLANNING AND PRODUCT LIFE CYCLE
A product refers to anything that can be offered to a market for attention,
acquisition, use, or consumption that might satisfy a want or need. Products
include more than tangible goods. It can include physical objects, services, events,
persons, places, organizations, ideas, or mixes of these entities.
A product is a good, service or idea consisting of a bundle of tangible and
intangible attributes that satisfies consumers and is received in exchange for money
or some other unit of value.
Services are a form of product that consists of activities, benefits, or satisfactions
offered for sale that are essentially intangible and do not result in the ownership of
anything. The sale of goods and services are frequently connected, that is a
product will usually incorporate a tangible component (good) and an intangible
component (service)
New product development is necessary because of changing consumer needs and
tastes, discovery of new technology, shortened product life cycle and increased
domestic and foreign competition. Developing new products is expensive and
risky. Also failure to introduce new products is also risky.
PRODUCT CLASSIFICATION
Products and services fall into two broad classes based on the types of consumers
that use them. That is,
a) Consumer products
b) Industrial products.

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CONSUMER PRODUCTS
These are products that are bought by final consumers for personnel consumption.
Marketers usually classify these goods further based on how consumers go about
buying them. Consumer products include
- Convenience products
- Shopping products
- Specialty products
- And unsought products.
Convenience products are consumer products and services that the customer
usually buys frequently, immediately,. and with a minimum of comparison and
buying effort. Eg soap, salt, news papers e.t.c
Convenience products are usually low priced, and marketers place them readily
available when customers need them.
Shopping products are less frequently purchased consumer products and services.
Customers compare carefully on suitability, quality, price, and style.
When buying shopping products and services, consumers spend much time and
effort in gathering information and making comparisons. Examples include
furniture, clothing, used cars, major appliances e.t.c.
Marketers usually distribute their products through fewer outlets but provide
deeper sales support to help customers in their comparison efforts.
Specialty products: these are consumer products with unique characteristics or
brand identification for which a significant group of buyers is willing to make a
special purchase effort. E.g designer clothes, specific brands and types of cars.

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Buyers can accept inconvenience even to travel long distances or postpone
consumption of such product.
Buyers normally do not compare specialty products. They invest on the time
needed to reach dealers carrying the wanted products.
Unsought products: these are consumer products that the buyer has no knowledge
of them or does not normally think of buying them.
Most major new innovations are unsought until the consumer becomes aware of
them through advertising. E.g coffins, life insurance, blood donations to the red
cross etc.
By their nature, unsought products require a lot of advertising, personnel selling
and other marketing efforts.
INDUSTRIAL PRODUCTS
These are products bought by individuals and organizations for further processing
or for use in conducting business. Thus, the difference between industrial products
and customer products is the purpose for which the product is bought.
Classification of industrial products
It is classified in the following ways:
- Materials and parts
- Capital items
- Supplies and services.

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Materialand parts: it includes raw materials and manufactured materials and
parts. Raw materials consists of farm products (wheat, cotton, livestock, fruits,
vegetables) and natural products (fish, crude petroleum, iron ore etc.)
Manufactured materials and parts consists of components materials (iron, cement)
and components parts( small motors, tires). Most manufactured materials and parts
are sold directly to individual users. Prices and services are the major marketing
factors. Branding and advertising tend to be less important.
Capital items: these are industrial products that aid in the buyer’s production or
operations, including installations and accessoryequipment. Installations consists
of major purchases such as buildings (factories, offices) and fixed equipment
(generators, large computers system, elevators) accessoryequipment includes
portable factory equipment and tools (hand tools, lift trucks) and office equipment
(fax machines, desks). They have a shorter life than installations and simply aid in
the production process.
Supplies and services: supplies include operating supplies (lubricants, paper,
and pencils) and repair and maintenance items (paint, nails, brooms). Supplies are
the convenience products of the industrial field because they are usually purchased
with a minimum of effort and comparison
Business services include maintenance and repair services (window cleaning,
computer repair) and business advisory services (legal, management consulting,
advertising). Such services are usually supplied under contracts
LEVELS OF A PRODUCT
The levels of a product fall into three categories. These are core product, actual
product and augmented product.

5. 5
Core product addresses the question of what the buy is really buying. It stands at
the center of the total product. It consists of core, problem-solving benefits that
consumers seek when buying a product or service.
Therefore, when designing a product, marketers must first define the core of
benefits the product will provide to consumers. They must understand the total
customer experience that surrounds the purchase and use of a product.
Actual product is built around the core product. It may have these characteristics:,
a quality level, features, design, a brand name, and packaging. These attributes are
combined carefully to deliver the core benefit such as convenience, high-quality
way to capture important moments.
Augmented product is built around the core and actual products by offering
additional consumer services and benefits. It have these characteristics:-
installation, delivery and credit, warranty, after-sales services.
Hence, a product is more than a simple set of tangible features. Consumer tends to
see products as complex bundles of benefits that satisfy their needs. When
developing products, marketers first must identify the core consumer needs the
product will satisfy. They must then design the actual product and find ways to
augment it in order to create the bundle of benefits that will best satisfy consumers.

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Diagrammatic view of levels of a product
Marketers must first identify the core consumer needs (develop core product), then
design the actual product and find ways to augment it in order to create the buddle
of benefits that will best satisfy the customer.

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Product Life Cycle Stages
This is a graphical representation of a product.
Product Life Cycle Stages Explained
Companies are always aware that products have limited life span in the market but
companies wants a productto enjoy long and happy life cycles. This leads the
majority of them to invest heavily in new productdevelopment in order to make
sure that their businesses continue to grow.
The productlife cycle has 5 very clearly defined stages, each with its own
characteristics that mean different things for business that are trying to manage the
life cycle of their particular products. Theseare:
Product development or researchand development stage: this is when a
company is developing new productideas. There are no sales and profits. The
company is heavily investing in research and development of a new a product.
Introduction Stage – This stage of the cycle is the most expensive for a company
when launching a new product. Marketers spend heavily on promotions to inform

8. 8
the target market about the new product’sbenefits. The size of the market for the
productis small, which means sales are low, although they will be increasing. On
the other hand, the costof things like research and development, consumer testing,
and the marketing needed to launch the productcan be very high, especially if it’s
a competitive sector.
A company should continuously formulate new pricing, promotion, and other
marketing strategies. It has the best chance of building and retaining market
leadership if it plays its cards correctly from the start.
Growth Stage – if the new productsatisfies the market, it will enter a growth
stage. It is typically characterized by a strong growth in sales and profits, and
because the company can start to benefit from economies of scale in production,
the profit margins, as well as the overall amount of profit, will increase. This
makes it possible for businesses to invest more money in the promotional activity
to maximize the potential of this growth stage.
Prices remain where they are or fall only slightly. Educating the market remains a
goal. Promotion costs are spread over a large volume and as unit manufacturing
costs fall.
A company improves productquality and adds new productfeatures and models. It
enters new market segments and new distribution channels. It shifts some
advertising from building productawareness to building productconviction and
purchase, and lowers prices at the right time to attract more buyers.
In this stage, the firm faces a trade-off between high market share and high current
profit. By spending a lot of money on productimprovement, promotion, and
distribution, the company can capture a dominant position.

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Maturity Stage – During the maturity stage, the productis established and the aim
for the manufacturer is now to maintain the market share they have built up. This is
probably the most competitive time for most products and businesses need to
invest wisely in any marketing they undertake.
They also need to consider any productmodifications or improvements to the
production process which might give them a competitive advantage.
Therefore, it is a period of slowdown in sales growth because the producthas
achieved acceptance by most potential buyers. Profits level off or decline because
of increased marketing outlays to defend the productagainst competition. The
marketing objectives should be to defend market share and maximize profits, build
strong relationship with dealers, keep intensive distribution and carry out
persuasive advertisement.
Decline Stage – Eventually, the market for a productwill start to shrink, and this is
what’s known as the decline stage. This shrinkage could be due to the market
becoming saturated (i.e. all the customers who will buy the producthave already
purchased it), or becausethe consumers are switching to a different type of
product. While this decline may be inevitable, it may still be possible for
companies to make some profit by switching to less-expensive productionmethods
and cheaper markets.
It is a period when sales fall off and profits drop. Sales decline because of
technological advances, shifts in consumer tastes, and increased competition. As
sales and profits decline, some firms withdraw from the market. Those remaining
may prune their productofferings. They may drop smaller market segments and

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marginal trade channels, or they may cut the promotion budget and reduce their
prices further.
Why new products fail?
- Market size is overestimated
- Productis not well designed
- A productis incorrectly positioned
- Not advertised effectively
- Adapting un favorable pricing strategy/policy
- New productdevelopment costs higher than expected
- Competitors fight harder than expected.
New product development
This is the development of original products, productimprovement, product
modifications, and new brands through the firm’s own research and development.
New products continue to fail at disturbing rate. Because of many new products
fail, companies are anxious to learn how to improve their odds ofnew-product
success.
So companies face a problem-they must develop new products, but the odds weigh
heavily against success. Thesolution lies in strong new-product planning and in
setting up a systematic new productdevelopment process forfinding and growing
new products. As shown below:
1.Idea Generationis a systematic search for new-product ideas. Companies need
to generate as many ideas as possible in order to find a few good ones.

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Major sources of new-product ideas include external sources suchcustomers,
competitors, distributors and suppliers etc. using internal sources, the company can
find new ideas through formal research and development. It can pick the brains of
its executives, scientists, engineers, manufacturing, and salespeople.
Customers: good new ideas also come from watching and listening to customers.
The company can analyses customer questions and complaints to find new
products that better solve consumer problems. The company can conductresearch
to learn about consumer needs and wants.
Competitors are another good source of new-product ideas. Companies watch
adverts and other communications to get clues about their new products. They buy
competing new products, take them apart to see how they work, analyze their sales,
and decide whether they should bring out a new productoftheir own.
Finally, distributors and suppliers contribute many good new-product ideas.
Resellers are close to the market and can pass along information about consumer
problems and new-product possibilities. Other idea sources include magazines,
shows, and seminars, government agencies, advertising agencies, marketing
research firms, university and commercial laboratories.
o Ideas for new products can be obtained from basic research using a
SWOT analysis (Strengths, Weaknesses, Opportunities & Threats).
Market and consumer trends, company's R&D department,
competitors, focus groups, employees, salespeople, corporate spies,
trade shows, or ethnographic discovery methods (searching for user
patterns and habits) may also be used to get an insight into new
productlines or productfeatures.

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o Lots of ideas are generated about the new product. Out of these ideas
many are implemented. The ideas are generated in many forms. Many
reasons are responsible for generation of an idea.
o Idea Generation or Brainstorming of new product, service, or store
concepts - idea generation techniques can begin when you have done
your OPPORTUNITYANALYSIS to supportyour ideas in the Idea
Screening Phase
2. Idea Screening. The first idea-reducing stage is idea screening, which helps
spotgood ideas and drop poorones as soonas possible. This helps reduce
costs and focus attention more on productive ideas. Companies should have
well-designed systems for rating and screening new-product ideas.
o The object is to eliminate unsound concepts prior to devoting
resources to them.
o The screeners should ask several questions:
 Will the customer in the target market benefit from the product?
 What is the size and growth forecasts of the market segment /
target market?
 What is the current or expected competitive pressure for the
productidea?
 What are the industry sales and market trends the productidea
is based on?
 Is it technically feasible to manufacture the product?
 Will the productbe profitable when manufactured and delivered
to the customer at the target price?
3. ConceptDevelopment and Testing

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An attractive idea must be developed into a productconcept. It is important
to distinguish between a productidea, a productconcept, and a product
image.
A productidea is an idea for a possible productthat a company can see itself
offering to the market.
A productconceptis a detailed version of the idea stated in meaningful
consumer terms.
A productimage is the way consumers perceive an actual or potential
product.
Concepttesting calls for testing new-product concepts with groups of target
consumers to find out if the concepts have strong consumer appeal. It is
important for companies to routinely test new-product conceptwith
consumers before attempting to turn them into actual new products. Other
issues to consider include:
o Develop the marketing and engineering details such as
 Investigate intellectual property issues and search patent
databases
 Who is the target market and who is the decision maker in the
purchasing process?
 What productfeatures must the productincorporate?
 What benefits will the productprovide?
 How will consumers react to the product?
 How will the productbe produced mostcosteffectively?

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 Prove feasibility through virtual computer aided rendering and
rapid prototyping
 What will it costto produceit?
4. Marketing strategydevelopment: this is designing an initial marketing
strategy for a new productbased on the productconcept.
The marketing strategy statement consists of three parts: the first part
describes the target market, the planned productpositioning, and the sales,
market share, and profit goals for the first few years.
The second part of the marketing strategy statement outlines the product’s
planned price, distribution, and marketing budget for the first year.
The third part of the marketing strategy statement describes the planned
long-run sales, profit goals, and marketing mix strategy.
5. Business Analysis
It reviews the sales, costs and profit projections for the productto find out if
it satisfy overall company objectives. If they do, the productcan move to the
productdevelopment stage. Managers should estimate the expected costs
and profits for the product, including marketing, research and development,
operations, accounting and finance costs. Thecompany then uses the sales
and costs figures to analyze the new product’s financial attractiveness. The
issues below should also be analyzed:
o Estimate likely selling price based upon competition and customer
feedback
o Estimate sales volume based upon size of market.

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o Estimate profitability and break-even point
6. Product development.
It involves bringing the productconceptinto existence as a physical product
to ensure that the idea is a workable product.
o Producea physical prototypeor mock-up
o Test the product(and its packaging) in typical usage situations
o Conductfocus group customer interviews or introduce at trade show
o Make adjustments where necessary
o Producean initial run of the productand sell it in a test market area to
determine customer acceptance
7. Testmarketing.
This is the stage of new-product development in which the productand
marketing program are tested in more realistic market setting. Test
marketing gives the marketer experience with marketing the productbefore
going to the great expenses of full introduction. It makes the company test
the productand its entire marketing program such as positioning strategy,
advertising, distribution, pricing, branding, packaging and the budget level.
Test marketing is expensive and it takes time that may allow competitors to
gain advantages. When introducing a new product, it requires a big
investment, or when management is not sure of the productor marketing
program, a company may do a lot of test marketing.
Therefore test marketing is the stage at which the productand marketing
program are implemented in one or more realistic market settings. It

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involves trade off between investment cost, risk, time pressure and research
costs.
8. Commercialization involves actually introducing the new productinto the
competitive marketplace. In this stage, the company must make decisions
involving:
- When (timing)
- Where (geographical strategy)
- To whom (target-market prospects)
- How (introduction market strategy) to introduce the new product.

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PRICING
Price is the value of a product expressed in monetary terms. All profit organization
and many non-profit organizations must set prices on their products or services.
Price goes by many names and is around us such as tuition fees for your education,
rent for a house, a fee for your physician or dentist, e.t.c. it is also defined as the
amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service.
Throughout history, prices were set by buyers and sellers negotiating with each
other. Sellers would ask for a higher price that they expect to receive and buyers
would offer less than they expect to pay. Buyers would offer less than they
expected to pay. Through bargaining they would arrive at an acceptable price. This
scenario persists up today.
Through most of history, price has operated as the major determinant of the buyers
choices. This is still in poor nations among poor groups. However, non-price
factors have become relatively more important in various choice behaviors in
recent decades. Price is the only element in the marketing mix that produces
revenue. Other elements represent costs. Companies handle pricing in a variety of
ways. In small companies prices are often set by top management rather than the
marketing or sales department. In large companies pricing is typically handled by
divisional and product line managers.
Despite the increased role of non-price factors in the modern marketing process,
price remains an important element in the marketing mix. Many internal and
external factors influence the company’s pricing decisions.
INTERNALFACTORS INFLUENCING PRICING DECISIONS.

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These factors include the following:
1. Marketing objectives: the company first has to decide what it wants to
achieve with a particular product. Price is the only one of the marketing-mix
tools that the company uses to achieve its marketing objectives. The
organization must seek objectives such as survival, current profit
maximization, market share leadership and product-quality leadership.
2. Costs involved: costs set the floor for the price that the company can charge
for its product, the company wants to charge a price that bother covers all its
costs for producing, distributing, and selling the product and delivers a fair
rate of return for its effort and risk. A company’s costs may be an important
element in its pricing strategy. Costs fall into two forms that is, fixed costs
and variable costs. Fixed costs are costs that don’t vary with the level of
production and sales volume, for instance bills for each month for rent, heat,
interests, salaries, e.t.c. while variable costs vary directly with the level of
production. These costs are usually constant per unit.
Management wants to charge a price that will at least cover the total
production costs at a given level of production. It should be noted that, costs
vary at different levels of production. Costs can be spread out over more
units but reach diminishing returns at some point and costs may be a
function of production experience. The learning curve concept notes that
experience making the product usually leads to lower costs.
3. Organizations considerations. Management must decide who within an
organization will be responsible for setting the price. In large organizations
top management will usually set overall pricing policies and determine
pricing objectives, with pricing itself left to divisional or line managers. In
smaller organizations top management may set prices. Various people ( such

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as sales managers, production managers, finance managers, and accountants)
within the organization may be involved in pricing decisions.
4. Nature of the product: company’s set a price depending on the nature of a
product for instance the size, colour, design, quality and the packaging of the
product.
5. Marketing mix strategy: price is only the marketing mix tools that a
company uses to achieve its marketing objectives. Price decisions must be
coordinated with product design, distribution, and promotion decisions to
form a consistent and effective marketing program. Decisions made for other
marketing mix variables may affect pricing decisions. For instance
producers using many resellers who are expected to support and promote
their products may have to build large reseller margins into their prices. The
decisions to position the product on high-performance quality will mean that
the seller must charge a higher price to cover higher costs.
EXTERNAL FACTORS AFFECTING PRICING DECISIONS.
1. Competitors’ price and offers: Competitor’s price and possible price
reactions help the firm establish where its prices may be set. The company
needs to learn the price and quality of each competitors offer. This can be
done in several ways:
- The firm can send out comparison shoppers to price and compare
competitor’s offers.
- The firm can acquire competitors’ price lists and buy competitors’
equipment and take it apart.
- The firm can ask buyers how they perceive the price and quality of each
competitor’s offer.

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Once the company is aware of competitors’ prices and offers, it can use them
as an orienting point for its own pricing. Some companies have standing
policies to match price changes of their competition. Other respond with
non-price changes in the marketing mix such as increased features or
performance.
2. Price elasticity of demand: marketers must know how responsive demand
would be to a change in price, that is, they need to know the price elasticity
of demand. If demand hardly changes with a small change in price, demand
is inelastic, and if a small change in prices changes demand greatly, demand
is elastic. Therefore, the more inelastic the demand the higher the company
can set its price and vice-versa. Price elasticity of demand is defined as the
percentage change in quantity demanded, divided by the percentage change
in price. It is usually a minus figure as demand is expected to fall with an
increase in price.
3. Consumer perceptions of price and value: buyers ultimately decide prices.
Marketers must combine technical expertise with creative judgment and an
awareness of buyers’ motivations.
4. Economic conditions: economic conditions can have a strong impact on the
firm’s pricing strategies. Economic factors such as inflation, boom or
recession, and interest rates affect pricing decisions because they affect both
the costs of producing a productand a consumer’s perception of the products
price and value.
5. Pricing in different types of markets: the seller’s pricing freedom varies with
different types of markets. Economists recognize four types of markets, each
presenting a different pricing challenge. Under pure competition, it is
characterized by many buyers and sellers so that no one agent affects pricing.
Going rate pricing is the rule., monopolistic competition consists of many

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buyers and sellers trading over a range of prices. Products can be
differentiated in quality, features, or styles. Under oligopolistic competition,
it consists of few sellers each sensitive to the other’s pricing and marketing
strategies. Barriers to entry prohibit new sellers from entering the market.
Under pure monopoly, it consists of a single seller. The seller may by a
government, a private regulated monopoly, or an unregulated monopoly.
Pricing may be linked to other than cost or profit factors, including fear of
competition entering or regulation.
6. Other environmental factors may include:, - the role of resellers in the
channel of distribution may affect pricing and also government’s role can be
consideration.
PRICING OBJECTIVES
There are four major pricing objectives that a company can pursue through pricing.
These include:
a) Survival: companies can set survival as their major objectives if faced with
over capacity, intense competition or changing consumer wants. To keep the
plant going and the inventories turning over they must set a low price hoping
that the market is price sensitive. Profits are less important than survival as
long as your prices cover variable costs and sum fixed costs, you are able to
stay in business.
b) Current profit maximization: many companies want to set a price that will
maximize current profits. They estimate the demand and costs associated with
alternative prices and choose the price that will produce maximum current
cash flow and rate of return on investment. In all cases the company is
emphasizing current financial performance rather than long-run performance.

22. 22
c) Market share leadership: other companies want to achieve the dominant
market share they believe that the company owning the largest market share
will enjoy the lowest cost and the highest long run profits. They go after a
market share leadership by setting prices as low as possible.
d) Product quality leadership: a company might adapt the objectives of being a
product quality leader in the market. This normally calls for charging high
prices to cover the high product quality and high cost of research and
development. For instance the certapillar company of Britain is a prime
example of a firm pursuing a product quality leadership. It builds a high
quality construction equipment and offer excellent services.
e) E.t.c
PRICING POLICY OR STRATEGY
A company must be objectively clear in what it is going to achieve in a way of
the entire business before he can set a price for his product. Each set price has a
different implication on profits, sales, revenue and market share.
Given the difficulties involved in pricing, a formula can always give abroad
expression of the range within which the desired volume can be achieved. In
broad terms, there are basic alternative strategies of pricing open to the market
namely:
1) Market-skimming pricing: many companies that invent new products initially
set high prices to “skim” revenues layer by layer from the market. This
strategy aims at increasing prices that is setting a higher price to recover
much profit. This strategy can be applied in the introduction stage of a new
product which defer significantly from those that are currently being offered.

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Skimming the cream is also attractive to firms with new and unique products
as commonly known that new product development involves considerable
high investment costs. So high price offered creates an opportunity to recover
the cost of launching a new product in the market while gaining product
profit.
Skimming the cream should also be used where firms want to take advantages
of the factor. Some buyers are ready to buy at high price than at a low price.
They believe that the higher the price the better the value. Skimming the
cream makes sense under the following conditions:
- A sufficient number of buyers have a high current demand
- The high initial price will not attract more competitors
- The high price supports the image of a superior product.
However as time passes firms using the skimming strategy low their price to
attract demand from the elastic segments. However, there is a
danger of reducing the price of the previously highly price as a drop in price may
be perceived as a drop in quality. This can be overcome by differentiating the
product and offering it as a model.
2) Market penetration: these advocates for a lower price hoping to attract as
many people to buy a particular product. They set a low initial price in order
to penetrate the market quickly and deeply- to attract a large number of
buyers quickly and win a large market share. This strategy may even accept a
loss initially that is below cost price so as to create product loyalty. However,
in actual facts firms are willing to adapt this policy openly due to the fear of
price wars.

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The strategy makes sense under the following conditions:
-the market must be highly price sensitive so that a low price produces more
market growth.
-production and distribution costs must fall as sales volume increases.
-the low price must help keep out the competition, and penetration pricer
must maintain its low-price position-otherwise; the price advantage may be
only temporary.
STEPS IN SETTING A PRICE
1) Determine the target market: this a segment identified by the organization
when setting a price. It can be an income class or a geographical
segmentation.
2) Select pricing objectives: objectives can be maximum current profits,
survival, or cost recovery and socially acceptable price. Depending on what
objective a company is pursuing, the objectives can be set.
3) Determine demand: that is the amount that will be purchased at a specifiable
price. Both price sensitivity and price elasticity of demand will be
considered.
4) Estimate costs: there are different types of costs to be identified. These are
fixed costs and variable costs. Fixed costs are costs that do not vary much
with production or sales levels whereas variable costs vary directly with the
level of production. Total costs are the sum of fixed and variable costs for
any given level of production. Costs at different levels of production can be
spread out over more units but reach diminishing returns at some point.
5) Analyze competitor’s prices and offers: the company needs to benchmark its
costs against its competitors’ costs to learn if it is operating at a cost
advantages or disadvantages. Also the company needs to know as the price

25. 25
and quality of competitors’ offers which can be acquired by comparison
shoppers.
6) General pricing approaches: These include cost-based pricing, value-based
pricing and competition based pricing.
7) Select the final price: pricing methods narrow down the price range from
which the company must select its final price. Selecting the final price the
company must consider the following additional factors such as
psychological pricing, influence of other marketing mix elements on price,
company pricing policies and impact of price on other parties.
PRICE SETTING IN PRACTICE
The price the company charges will be somewhere between one that is too
low to produce any profit and one that is too high to produce any demand.
The company must consider competitor’s prices and other external and
internal factors to find the best price between these extremes. Three
approaches that the company may use include: cost- based approaches,
demand -based approaches and competitive -based approaches.
a) Cost-based approaches: the simplest pricing method is cost-plus pricing
that is adding a standard markup to the cost of the product e.g if the cost
of a shirt is $500 and a markup of 20% are added to it, then the price of
a shirt will be 500+(500x20/100)=600.
- Break-even analysis (target profit pricing): the firm tries to determine the
price at which it will break even or make the target profit it is seeking.
This pricing method is also used by public utilities, which are constrained
to make a fair return on their investment. Target pricing uses the concept
of a break-even chart, which shows the total cost and total revenue
expected at different sales volume levels.

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b) Competition- based approach: here a company sets its price on the basis
of what competitor’s are charging. For instance:
- Going rate pricing: a company keeps its price at the average level
charged by the industry. It is known that the going rate price is the
collective wisdom of the industry and it yields affair rate of return.
- Sealed- bid pricing: firms bid for jobs, with the firms basing the price on
what it thinks other firms will be bidding rather than on its own costs or
demand. This is where companies compete for jobs on the basis of bids.
The bid is the firms offer price. It is based on expectations of how
competitors will price than on cost or demand. The objective of the firm
is to get the contract and this means it has to set a price lower than that
set by any other bidding firm.
c) Demand based pricing: this approach looks at the intensity of demand. A
higher price is charged where demand is high and a low price where
demand is weak, though the cost unit may be the same in both cases. For
instance:
- Price discrimination: some companies charge different prices in different
markets for same products. In discriminatory pricing a product is sold at
two or more prices even though the pricing differences are not based on
differences in costs. Discriminatory pricing takes several forms. These
include; customer-segment pricing, such as senior citizen discounts,
image pricing that is a product may be priced a two different price levels
based on image differences e.g. perfumes. And also geographic pricing.
- Skimming market pricing: here a high price is charged in the initial
stages of the introduction of a new product. The producer takes the
advantage of demand being inelastic in the early stages of the
introduction of a new product. Besides some buyers are ready to pay a

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higher price because the product has high present value to them.
Skimming is done to recover the initial investment quickly but the
product price gradually decreases as new competitors come into the
market.