Final Report Analysis Price Strategy Of Product.pdf

ANALYZING KEY FACTORS INFLUENCING PRICING STRATEGIES IN SMALL BUSINESS ENTERPRISES SMEs Michael Colin Cant, University of South Africa, Pretoria, South Africa Jan Wiid, University of Sou

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TON DUC THANG UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION

Lecturer : MBA Tran Thi Thanh Van

Group : Money Heist Team — Shift : 3 (Tuesday)

Ho Chi Minh, 28 October 2023

ACS

ASSIGNMENT

Full Name | Student | Evaluation | Signature

ID Luong Chi | 721K0437 100% Signed

LIST OF FIGURES

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LIST OF TABLES

Table 1 Types of pricing Objectives ccc ccc cccceceecctecentee ce caesesetteetesteaeecniaes

ANALYZING KEY FACTORS INFLUENCING PRICING STRATEGIES IN

SMALL BUSINESS ENTERPRISES (SMEs)

Michael Colin Cant, University of South Africa, Pretoria, South Africa Jan Wiid, University of South Africa, Pretoria, South Africa Catherine Mpolokeng Sephapo, University of South Africa, Pretoria, South

Africa

ABSTRACT

The pricing strategy is an essential element for every firm and can significantly impact its viability and long-term success Failure to align the price with the chosen target market can have adverse effects on both the product and the company's financial performance The primary objective of profit-seeking entities is to generate a financial surplus To attain this objective, it is important to effectively manage many aspects encompassing product management, cost control, and pricing strategies The principal objective of this study was thus to examine the elements that small business organizations (SMEs) take into account when formulating their pricing strategies In order to effectively tackle this issue, the research technique employed in this study relied on the acquisition of primary data from small and medium-sized enterprises (SMEs) in South Africa Given the shared characteristics observed across SMEs globally, it is widely acknowledged that any discoveries made in this context can be considered internationally relevant A survey was administered to a sample of 88 small and medium-sized enterprises (SMEs) in order to collect pertinent data pertaining to the elements taken into account during the process of pricing determination The data was subjected to quantification and analysis through the examination of both the number of occurrences and the significance of the problem The research revealed that small and medium-sized enterprises (SMEs) commonly acknowledge that the determination of prices is influenced

by competitive information and macro-environmental factors, such as fuel prices and

inflation There was a consensus among the subject matter experts (SMEs) regarding the significance of consumer relationships, consumer advantages derived from the product, and product performance in the process of pricing determination

Keywords: Pricing; Influences On Pricing Strategies; Consumers; Competitors; SMEs; Gauteng

INTRODUCTION

The impact of pricing on the achievement of a business is a significant consideration The achievement of a business is contingent upon the meticulous evaluation of the components comprising the marketing mix, which encompass product, pricing, site, and promotion, among other factors Many firms tend to prioritize the promotion component, often neglecting the importance of price The determination of price is of utmost importance for the viability of the business Inaccurate pricing decisions have the potential to adversely affect both the good or service and the profitability of the organization (Hub Pages, 2013) Consumers commonly employ the price of a product as a means to assess the perceived quality of the product offering Consequently, significant consideration must be given to the pricing strategy and the manner in which goods are priced

One of the primary objectives of any organization, regardless of its size or kind, is

to generate financial gains This can be achieved by effectively allocating resources and providing a product or service at a suitable price point According to Machado (2013: 3), the concept of price can be defined as the monetary value assigned to a certain product or service, expressed in the currency of rands and cents It represents the financial cost required to acquire the said goods or service, as well as the accompanying benefits or utility associated with it Developing a pricing strategy holds significant importance in the field of marketing due to the fact that pricing is the sole element of the marketing mix that creates sales profits Conversely, the remaining components of the marketing mix contribute to expenses and sales volume (Small Business Development Corporation, 2014).The selection of a pricing strategy by small and medium-sized enterprises (SMEs)

is contingent upon the specific objective that the pricing strategy seeks to accomplish Table 1.1 provides an elucidation of the diverse categories of pricing objectives that guide the formulation of pricing strategies

Table 1 Types of pricing objectives

¬ terms of either sales | which encourage

their present financial

The rationale for | criteria beyond pricing

establishing sales volume | Organizations that adopt authors assess the demand

objectives is to generate an | this approach to pricing and expenses associated

" increase in sales or to | strategy do so with the am

maintain existing levels of | of maintaining with the aim of selecting

| sales competitiveness and the price poimt that will

optimize earnings, revenue,

with competing companies

Adapt from: Machado (2013: 70 - 71) The preceding discourse pointed out the significance of pricing strategies in attaining corporate objectives Given the diverse range of pricing methods that corporations can adopt, it is imperative to examine the key variables that these organizations must take into account when formulating their pricing frameworks The main objective of this article is to examine the elements taken into account by small and medium-sized enterprises (SMEs) during the formulation of their pricing strategy While the primary emphasis is placed on small and medium-sized enterprises (SMEs) in

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Gauteng, South Africa, it is hypothesized that the outcomes of this study would have broad applicability to SMEs globally

LITERATURE REVIEW

The discussion explains what constitutes a successful pricing strategy and outlines the external and internal factors that small businesses may take into account when determining pricing strategies

What Makes A Pricing Strategy Effective?

An effective pricing strategy should reflect a cohesive pricing structure that facilitates the attainment of business objectives by ensuring the value of a product or service offering relative to that of competitors (Meehan, Simonetto, Montan, and Goodin, 2011) According to Meehan et al (2011), a sound pricing strategy should direct an organization's core behavior as well as its peripheral communication to the market for all pricing-related activities

A pricing strategy should:

¢ Organizations must evaluate critical areas and make an informed decision on the basis of their investigation's valid findings, rather than relying on narratives and speculations;

¢ Consistent with organizational goals and other functional policies and structures,

e Adaptable, responsive, and meticulously observed

Next, the external and internal influences on the pricing strategy will be discussed The purpose of this discussion is to emphasize factors that businesses may take into account when determining the appropriate price for their product or service

Influences external and internal on the Pricing Strategy

When developing their pricing strategies, SME's must be cognizant of factors that can inform their pricing decisions Sometimes, SMEs must consider the consumer's ability and inclination to pay a premium for their product offering; if the consumer cannot

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afford the product, even if it is of high quality, they will not purchase it Figure 1 illustrates additional considerations for SMEs, which will now be discussed in detail

Figure 1 External and Internal influences on the pricing strategy

Adapted from: : Brassington & Pettitt (2013: 258 — 267)

External Influences on Pricing Strategy

The following external factors are taken into account when determining a company's pricing strategy:

® Consumers

Consumers play a very important role in the success of a business The main focus

of organizations is to satisfy the identified needs of consumers In the same light, consumers need to be considered when determining a suitable pricing strategy Setting prices too low, although it may attract customers initially, it will not keep them in the long run as they will simply go elsewhere when lower prices are available (Schuler, Not Dated) SMEs need to ensure that they identify which consumers they want to attract and work on strategies to retain these consumers In addition, the consumer’s ability and willingness to pay a certain amount for a product should be considered when determining which price to set

¢ Demand Curve

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This involves analyzing the relationship between price and demand for the organization's product or service offering on the market According to Kotler, Armstrong, Ang, Leong, and Hon-Ming (no date), demand and price are typically inversely correlated, such that when prices are high, product or service demand is relatively low However, when a product is perceived as a luxury item, consumers may use the price as

an indicator of the product's quality (Machado, 2013: 64) Therefore, the higher price can increase product demand, resulting in a positive demand curve Later in this article, the relationship between price and quality is discussed The influence of price elasticity is another aspect of the demand curve that SMBs must be aware of In general, the price elasticity of demand illustrates the response of consumers to a change in the price of a specific good or service Inelastic demand occurs when the demand for a product or service scarcely changes in response to a small price change (Kotler et al., Undated) When the demand for a product or service changes significantly in response to a minor change in price, the demand is elastic (Kotler et al., unpublished)

Small business proprietors must comprehend how price elasticity affects their pricing strategy Understanding pricing elasticity provides SME owners with an understanding of how a price change will affect demand When a product is unique or viewed as prestigious, when substitutes are difficult to obtain, and when the consumer's total expenditure for the product is low in relation to their income, consumers are deemed

to be less price sensitive (Kotler and Armstrong, 2010: 319)

It is essential for the owners of small and medium-sized enterprises (SMEs) to closely consider these factors, as they not only affect their pricing strategy but also provide an in-depth understanding of their target market

¢ Competitors

When establishing prices, SMBs must be aware of what their competitors are doing When a product is introduced to the market for the first time, high imtroductory prices may encourage competitors to enter the market with a comparable product at a

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lower price (Verhage, 2014: 500) Regarding extant products, SMBs must consider the impact of a price change on competing businesses Anticipating the competitor's response

to the company's price change can help determine which changes the company can withstand For instance, if SMBs initiated a price change, would competitors increase their prices, decrease their prices, or maintain their current prices? Brassington and Pettitt (2013: 265-266) note that the nature of the industry in which a company operates can significantly influence the effect of competitors on a company's pricing strategy For instance, in an oligopolistic industry in which a small number of vendors offer a specific product, SMEs may price their products or services relative to their competitors (Verhage, 2014: 500) In essence, small and medium-sized enterprises (SME) must determine the number of competitors in their industry and use this information to predict their potential reaction to price increases, thereby providing the company with valuable information on what price to set

® Distribution Channels

In general, distribution channels are believed to impact the pricing decisions of an organization Depending on the size of the SME, the distribution chain may begin with the manufacturer and conclude with the consumer If channel members exist, their needs and expectations must be clearly identified, as each channel member will have a different desired level of profit margin and need to cover the costs associated with the product's management and distribution (Brassington & Pettitt, 2013: 264) This obviously affects the product's price because it increases production costs (Brassington & Pettitt, 2013: 264)

® Statutory and regulatory

South Africa has advanced and regulated business competition in the country by unplementing international best practices (South Africa Info, 2013) The Competition Act

of 1998 provides institutions with guidance against restrictive pricing practices and against the abuse of dominant market positions by organizations (Competition Tribunal, 2014) The Act also prioritizes public interest and social objectives, such as the

advancement of small business enterprises in the country, the welfare of workforces, and minority economic empowerment (Werksmans Attorneys, Unknown)

Therefore, small businesses must thoroughly examine the Competition Act and ensure that their conduct is legal According to Price Intelligently (2012), the following pricing practices straddle the line between legality and decency, and all businesses, including small businesses, should be aware of them in order to defend themselves:

- Price fixing occurs when businesses in the same industry collude to purchase or sell products or services at a fixed price Companies discovered guilty of such conduct in South Africa may be prosecuted or fined (Moneyweb, 2007)

- Price discrimination occurs when an organization sells the same product to various segments of the consumer market at different prices This strategy takes advantage of consumers who are prepared to pay a higher price premium for a product by concealing cheaper alternatives

- Dumping is when a producer distributes its goods at a price that is lower than the price

at which the goods are sold in the market of ongin (Sibanda, 2014: 129) Investopedia (2016) describes the effect of dumping, which includes endangering the financial viability of merchandise producers in the importing country

Internal Influences on the Pricing Strategy

As depicted in Figure 1, internal elements that are deemed to exert an influence on

an organization's pricing decision encompass:

¢ Organizational objectives

As shown in Figure 1, organizational objectives are an internal factor that can be linked to the organization's corporate strategy According to Brassington and Pettitt (2013, 267), marketing plans and objectives must be formulated not only to satisfy identified customer wants and requirements, but also to reveal the company's ambitions

and goals Pricing can therefore be used to help signal the direction that the organization's leadership should take or to create a clearly differentiated niche, which can then be emphasized by leveraging other elements of the marketing communication mix (Brassington, & Pettitt, 2013: 267) In South Africa, for instance, businesses such as Flysafair, Shoprite, and Pep stores strive to offer the lowest prices in their respective industries If, on the other hand, the objective of the organization is to project an image of high quality and exclusivity, then high-priced products with high quality may achieve this objective

® Marketing objectives

Brassington & Pettitt (2013: 268) highlights an important distinction between organizational objectives and marketing objectives: organizational objectives are more concerned with the operation, welfare, security, and personality of the company, while marketing objectives are more concerned with the precise target markets and positioning within those markets Consequently, the pricing strategy selected for a particular product should correspond with the market that the organization wishes to serve For mstance, Woolworths is well-known for its high-quality products A company may offer a variety

of product categories, each of which caters to various consumer segments and may require distinct pricing strategies Therefore, it is necessary to establish the relationship between price and quality, as organizations may offer higher premiums for high-quality products According to Woolworths Holdings (2012), the company continues to target the LSM 8-10 demographic, as these individuals have a higher income and are therefore willing to pay higher premiums for higher-quality products

® Costs

One of the objectives of businesses is to maintain a consumer base while generating a profit Costs are therefore an essential factor to consider when determining a price According to Brassington and Pettitt (2013: 270), defining a cost is a difficult undertaking because both fixed and variable costs must be considered In order to ensure that, in the long run, all costs are met and the acceptable level of profit is attained,

organizations must consider variable costs and their contribution to fixed costs, as well as base their estimated profit on sales projections In the short term, however, it may be difficult to adhere to this because the price must remain flexible in a competitive and unpredictable market environment (Brassington & Pettitt, 2013: 270) For instance, despite the fact that fixed and variable costs can be determined, a product may need to be offered at a lower price during a different phase of the product life cycle in order to increase seasonal sales volume

Internal and external factors have been discussed thus far in relation to determining a pricing strategy It is evident that the relationship between the price of a product and its quality can have a positive or negative impact on the organization's public unage Therefore, the following discussion will dissect this relationship and highlight its impact on businesses

Relationship Between Price and Quality

When determining the price of a particular product or service, marketers must consider the importance that consumers place on the price As depicted in Figure 2, organizations can better comprehend how to target consumers based on price and quality

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