Many business entrepreneurs always face difficulties of determining the prices for their products or services yet pricing is a very important element of the marketing paraphernalia. Pricing as a key component of an entrepreneur’s marketing options plays both strategic and tactical roles aimed at achieving greater sales volumes. It is a generally acknowledged fact that pricing decisions are potentially amongst the most difficult that small business owners are required to make. This difficulty is influenced by the underlying factors that characterize the complexity of interactions that summarize the relationships between consumers, the trade and competitors as well as the constant need to take these interactions into account while either setting or changing a price. Further complexities are attributed to the need to make pricing decisions quickly and without testing, regardless to the fact that they will almost invariably have a direct effect on profits. Because of such impediments to pricing, many small business owners strive to reduce the relative importance of price by, for example, giving far greater emphasis on a product’s distinctive values and image through other forms of marketing and advertising. In some production and service industries however, the pricing decision is taken out of the hands of the marketing strategists by a combination of market-related factors. Prominent among such factors is the presence of a large and aggressive competitor who in effect determines the prices for the industry as a whole and whose path, with the exception of a few niche players, all other organizations are obliged to follow.
Pricing is undoubtedly a significant strategic variable and in many markets, despite a growth in the importance of the non-price factors, it is still the principal determinant of consumer choice. Its significance is further emphasized by the fact that pricing is the only element of the marketing mix that generates revenue – the others produce costs. It is therefore understandable that many marketing strategists treat pricing decisions with an extra degree of caution.
Worldwide studies have indicated that setting of prices and dealing effectively with price competition is one of the biggest challenges faced by small business entrepreneurs. Therefore relatively few entrepreneurs handle pricing well if the series of common mistakes committed by most of them is anything to go by. One of the most common mistakes that is usually committed is biasing pricing decisions towards cost structures thereby failing to take sufficient account of either competitors’ or customers’ probable response patterns. The other weakness involves setting prices independently of other market mix elements such as advertising strategies and sufficient market positioning. Quite often, there are usually tendencies of taking too little account of the opportunities to capitalize on product differentiation. There is also a general lack of price variations among different market segments. A keen observer can easily attest to the fact that most organizations set prices that largely reflect more of defensive rather than offensive posture.
