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EFFECT OF MARKET PENETRATION PRICING ON ORGANIZATIONAL PROFITABILITY CASE STUDY UNILEVER NIGERIA PLC

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EFFECT OF MARKET PENETRATION PRICING ON ORGANIZATIONAL PROFITABILITY CASE STUDY UNILEVER NIGERIA PLC

CHAPTER ONE

INTRODUCTION

Background to study

Price management is a critical element in marketing and competitive strategy and a key determinant of performance. Price is the measure by which industrial and commercial customers judge the value of an offering, and it strongly impacts brand selection among competing alternatives (Shipley and Jobber, 2001).Apart from world-class product development, pricing is key to success. Pricing is vital in attracting and capturing demand. Pricing is also fundamental in optimizing your product’s true worth out there in the real market place (Yeoman and McMahon, 2004). Furthermore, pricing is the only element of the marketing mix that generates revenue for the firm, while it is also the most flexible element of this mix in the sense that pricing decisions can be implemented relatively quickly (e.g. price changes) and be adapted easily to the conditions surrounding a company’s internal or external environment (Lewengart and Mizrahi, 2000). The objective functions of companies are multifaceted in that the viability of companies rests on a combination of different pricing objectives (Diamantopoulos, 1991). These objectives are flexible and change over time due to environmental or organizational conditions (Shipley and Jobber, 2001). Pricing objectives may be either supportive or conflictual. Thus, there are objectives that are compatible with each other e.g. market share increase and sales increase and objectives that oppose one another e.g. sales maximizations versus profit maximization (Myers, et al., 2002).

 

Penetration pricing strategy is a strategy in which prices of a  product or a service are set at less than its normal, long range market price set in order to gain more rapid market acceptance or to increase existing market share. This strategy can sometimes discourage new competitors from entering a market niche if they mistakenly view the penetration price as long range price (Justin, et al. 2004). Companies do their pricing in a variety of ways. In small companies, prices are often set by the boss. In large companies, pricing is handled by division and product – line managers. In industries where pricing is a key factor, pricing departments are set to assist others in determining appropriate prices. This departmental report is then disseminated to the marketing department, finance department and even top management. Others who exert an influence on pricing include sales managers, production managers, finance managers and accountants. Executives do complain that pricing is a big headache – and one that is getting worse by the day. Many companies do not handle pricing well and throw up their hands with strategies such as this: “We determine our costs and take our industry’s traditional margins”(htt://www.mbaknol.com/marketing – management/factors to consider when setting prices). Other common mistakes are not revising price often enough to capitalize on market changes; setting price independently of the rest of the marketing mix rather than as an intrinsic element of market positioning strategy; and not varying price enough for different product items, market segments, distribution channels and purchasing occasions. Firms must therefore set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area and when it enters bids on new contract. The firm must decide where to position its product on quality and price (Kottler and Keller, 2009).

Pricing therefore refers to the process of setting a price for a product or service and more than any other element of your marketing mix, will have the biggest impact on the amount of profit you make. Price for any product or a service will inevitably fall somewhere between that which is too low to produce a profit and that which is too high to generate any demand. Strategy is the set of actions through which an organization by accident or design develops resources and uses them to deliver services or products in a way which its users find valuable, while meeting the financial and other objectives and constraints imposed by key stakeholders. Most successful strategies give an organization some property that is unique or at least distinctive and the means for renewing its competitive advantage as the environment changes (Haberberg and Rieple, 2008).

 

Statement of the problem

 

 

Many empirical studies have been done on pricing strategies but none has really focused on the relationship that exists between penetration pricing strategy and the profitability of enterprises. Ruiliang and John (2010) conducted a study on service level, pricing strategy and firm profitability in a manufacturer-giant retailer supply chain, using a profit-maximization model demonstrated that optimal service level and pricing strategy exist under different market structures in a manufacturer-giant retailer supply chain. Ruiliang (2009) on his study on pricing strategies and firm profitabilitys under alliance brand through game-theoretic model demonstrated that optimal pricing and brand management strategies exist for firms in a competitive market. Chalita et al. (2013) on their part while studying pricing strategies and innovations in the Thai mobile communications market basing an original data set from several secondary data sources and includes all the price plans offered in the history of the Thai mobile communications market between 2002 and 2010 concluded that mobile operators have introduced several innovative price plans to attract and retain their consumers. Anna et al. (2012) conducted a study on the relationship between customer value and pricing strategies by use of a sample of 129 washing machine models which assessed through the conjoint analysis technique. This was then compared through a regression analysis to the market prices of the products revealed that the alignment between price and value for the customer is limited. Howard and James (2013) also  based their study of the effect of decision context on perceived risk in pricing strategies on attribution theory where more than 100 business managers were used and findings suggest that when uncontrollable environmental factors dominate pricing managers tend to select pricing strategies with external orientations to deflect risk away from themselves personally

This study therefore seeks to close the gap by examining the relationship that exists between penetration pricing strategy and the profitability of the business enterprises.

 

Objectives of the Study

The objectives of the research include the following:

  1. To determine if the market penetration pricing was adopted by the organization understudy
  2. To ascertain the influence market penetration pricing on organizational  profit
  3. To determine the relationship between quality of services offered and market penetration pricing

 

Research Questions

  1. Is market penetration pricing practiced by the organization understudy?
  2. What is the influence of market penetration pricing on organizational  profit?
  3. What is the relationship between quality of goods and services offered and market penetration pricing?

 

Research Hypotheses

Hypotheses are predictive statements capable of being tested scientifically by relating an independent variable to some dependent variable. For the purpose of this research, the researcher postulated the following hypotheses for scientific verification.

HO1 The market penetration pricing  have no significant relationship with the profitability objective

HO2 There is no significant relationship between the market penetration pricing and the quality of  goods and services rendered.

 

Significance of the Study

The importance of this research cannot be overemphasized because of its immense significance to different groups of people who are in need of information that it will provide. Its significance includes the following:

The study will enable the management of organisations to have an in-depth understanding and knowledge of the pricing strategies available so that they can adopt them adequately.

The study will provide the general public the needed knowledge about the pricing strategies adopted in organisations. This will enable them to appreciate better how the prices they are charged come about.

The study will provide the government the knowledge of how organisations come about the prices they charge their clients. This knowledge will enable the government to regulate the activities of the organisations better now and in the future.

The study will also serve as a source of secondary data for students and scholars of marketing who intend to carry out similar studies in the future.

 

Scope of the Study

The scope of this study in terms of its content is restricted to the market penetration pricing  adopted in organisations, the study is limited to Unilever nigeria plc.

Definition of Terms

For the purpose of clarification and understanding of this research study, some concepts required operational definition. Below are some of these concepts.   

Competitive Pricing – Pricing determined by following or beating prices of competitor (Haas 1986:875).

Demand – Customers and clients who have the intention of acquiring the goods or services as well as the money to pay for what they want (Fearns, 1980:12)

Market – All the potential customers sharing a particular need or want who might be willing and able to engage in exchange to satisfy that need or want (Kotler, 1997:13)

Market positioning –Arranging for a product to occupy a clear distinctive and desirable place relative to the competing products in the minds of the consumers (Kotler and Armstrong 1989:51)

Market potential – the limit approached by market demand as industry marketing expenditures approach infinity, for a given environment. (Kotler 1997:133)

Market segment – It is a relatively homogeneous group of customers who will respond to a marketing mix in a similar way. (Perreault and McCarthy 2002:74)

 Marketing mix – According Perreault and McCarthy (2002:46), it is the controllable variables the company puts together to satisfy its target market.

Price sensitive – When customers have alternative ways of meeting a need and their ability to compare prices (Perreault and McCarthy 2005:512).

Pricing policy – It is a guiding philosophy or course of action designed to influence and determine pricing decisions. (Pride and Ferell 1985:450)

Product – The need-satisfying offering of a firm (Perreault and McCarthy, 2002:48).

Service – Any act or performance that one party offers to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not tied to physical product (Kotler and Keller, 2006:450)

 

Strategy – The achievement of a stated goal or purpose through the utilization of available resources (Lancaster and Massingham 2001:15).

 

Target market – a fairly homogeneous (similar) group of customers to whom a company wishes to appeal (Perreault am McCarthy 2002:46).