The Impact of Pricing Strategy on Sales Performance
The Impact of Pricing Strategy on Sales Performance
Abstract of The Impact of Pricing Strategy on Sales Performance
The study examined effect of pricing strategy on sales performance, a study of Unilever Nigeria Plc.
The study employed the survey design and the purposive sampling technique to select 450 staff across management, senior and junior level. A well-constructed questionnaire, which was adjudged valid and reliable, was used for collection of data from the respondents. The data obtained through the administration of the questionnaires was analyzed using the Pearson correlation analysis.
The results showed that there is a positive and significant relationship between Pricing skimming and customer retention (r=0.772; p<0.05). a positive and significant relationship between Penetration strategy and firm’s market share (r=.896; p<0.05). a positive and significant relationship between market parity and sales volume (r=0.772; p<0.05).
The study concluded that; pricing strategy has a significant effect on sales performance in Unilever Nigeria Plc.
The study suggested that; Unilever Nigeria PLc should perform a comprehensive market research to study the market for effective pricing decision and strategy to later improve manufacturing sales; Marketing and sales managers should get sufficient training in strategic management which will help them set effective prices that would increase their sales; Marketing and sales managers should employ well thought out strategies that would help them improve on sales and their competitiveness; The government should review manufacturing competitive pricing policy and effect price control to ensure a level playing field to safeguard the manufacturing sector from undue and unfair competition.
Chapter One of The Impact of Pricing Strategy on Sales Performance
INTRODUCTION
Background to the Study
Businesses today are facing one of the most competitive eras in history. The rise and fall of businesses and the outright failure of some businesses suggest that if businesses are not properly managed and do not have a clear direction, its organizational performance and ultimately organizational sustainability is bound to be in jeopardy (Utaka, 2008). Furthermore, pricing strategy is a pivotal component of an organization’s management focus that can elevate or deter a company’s performance. As such it is extremely important that businesses get their pricing strategies absolutely right.
Globally, there have been a realisation of the impact that pricing strategies have on the product performance. Therefore the pricing strategy adopted has become extremely important in the face of rapid economic and technological changes in which the modern day consumer has become more curious, more educated and conversant with what he/she exactly wants. Nigerians, are not left out, with the advent of the internet, e-commerce and e-shopping allowing consumers to get loads of information about a product both from the manufacturer and external sources. Therefore it is pertinent that companies especially in the manufacturing industry such as Unilever Nigeria get their pricing strategies right (Kotler & Armstrong, 2011).
Price is the amount a customer pays for a product or the sum of the values that consumers exchange for the benefits of having or using a product or service (Bearden, Ingram & Lafforge, 2014). Price is the amount of money or value traded for the possession or utilization of a good or service (Kevin, Hartley & Rudelius, 2014). Furthermore, it can be defined as the worth that is put to a good or service and is the result of an intricate combination of costs, research and a full understanding of the perceived value of customers (Kelly & Willam, 2014). According to Kotler & Armstrong (2008) pricing is determining the value that must be provided by a customer in return for a product or service. Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business’s marketing plan (Dibb, Simkin, Pride & Ferrell, 2013). Furthermore, price is the measure of cash charged for an item or administration, it is the sum of all the values that customers give up in order to gain the the benefits of having or using a product (Kotler, Armstong & Tait, 2001). Pricing is one of the major components of a marketing plan, which is a component of a full business plan (Rao & Kartono, 2009). The principle objective of pricing is to adequately to cover overhead costs including work and materials costs and produce adequate profits which helps to maintain growth in the business and create organizational sustainability (Nikoomaram & Jafari, 2011). According to Yeoman (2011) price is one of the significant components in the marketing mix that organizations can control. Agwu and Carter (2014) agreed stating that among the famous four Ps, price is the only income generator as it is the only element that creates an exchange of value.
Kellogg, Youngdahl, & Bowen (2014) pointed out that if effective product development, promotion and distribution sow the seeds of business success, effective pricing is the harvest. Hence the need for pricing strategies designed to fit specific products and services and the customers perception of the value of the product or service. Therefore pricing strategies involves the use of a specific type of information on prices to represent the evolution of price in price index compilation (Mckenzie, 2015). A pricing technique is additionally focused at the characterized clients and against contenders (Nreick, 2012). Assigning product prices is a strategic activity. Pricing strategies are selected with the business and financial goals in mind. Elements of a company’s business plan (such as the vision and mission of the company) can also influence the choices of a pricing strategy.
The price assigned to a product will influence the consumer’s perception of the product and ultimately impact on their willingness to purchase it. According to Rosa & Rodan (2011), the importance of price as a purchase stimulus plays a key role in price management due to the fact that not only does it determine the way prices are perceived and valued, but it also influences consumer purchase decisions. Studies have shown price as an important factor in purchase decision, especially for frequently purchased products, affecting choices for store, product and brand (Simons, 2014; Rosa, 2011; Vanhuele & Dreze, 2012; Rondan, 2014). Furthermore, Roth (2007) noted that price helps as a market segmentation strategy because it is able to distinguish a product from those of competitors. However, the price assigned to a product must be in line with other marketing strategies and the product attributes.
It is no secret that the adoption of various pricing strategies portrays different things to various customers. Therefore there has been a debate about the particular pricing strategy that would be suitable to use in various situations. Some studies have suggested price skimming as a pricing strategy especially for service companies and producers of luxury products (Ndyamukama & Machibya, 2015; Dudu & Agwu, 2014). According to Huimin & Hernandez (2010) price skimming deals with the process of charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market. Its major aim is to skim off consumers who are willing to pay more for having the product sooner. Further down the line, prices are lowered when demand from the “early adopters” falls. It is a strategy that has been successfully adopted by companies like Apple especially when they release a new product innovation. However, there have been questions marks over whether the price skimming strategy can be successfully implemented in countries where the economy is not developed and their per capita income is low. One of such countries is Nigeria.
Nigeria is the largest economy in Africa and the 27th largest in the world, however, it is largely regarded as a poor country based on the human development index (UNDP, 2017). Therefore many price theorists have suggested that price skimming in an economy where majority of the indigenes are on a low-income budget may not be successful especially for products that are homogenous (Spann, Fischer & Tellis, 2015). Some price theorists have therefore suggested penetration pricing as the appropriate strategy to be used in a largely depressed economy (Marn, Roegner & Zawada, 2013). According to Nagle and Hogan (2014) penetration prices are low relative to perceived value in the target segment. According to Richards (2008) the penetration pricing strategy is used as a promotional tool in order to gain a significant market share. According to Raisoni (2013) the penetration pricing strategy helps a product gain entrance into an already saturated market especially when the target market of people of middle to low income classes. On the contrary, Singh (2013) opined that the best strategy to adopt in an underdeveloped economy like Nigeria is the market parity pricing strategy which adopts the pricing of other similar products in the market. She argued that it would be appropriate when the target market are the mass population who earn low incomes. Additionally, parity pricing is majorly adopted by manufacturing companies in Nigeria who have hardly any feature that distinguishes their product from their competitors own.
Unilever Nigeria Plc. is a multinational company that has various ranges of consumer products and therefore do not have a fixed pricing strategy for all their products (Attih & Adams, 2014). However the determination of an effective pricing strategy that works for all their products could go a long way in maintaining the company’s sales performance.
According to Nwokah, Ugoji and Ofoegbu (2009) sales performance is pivotal in improving the organizational performance of any company. Furthermore, Kyckling opined that a company’s performance cannot be better than their sales performance. Therefore the sales performance of any company is one of the key measures in determining the overall organizational performance of companies. According to Yhi (2006) sales performance is the yardstick of measurement of sales outcome of a company in a company or department. Furthermore, according to Naver & Slater (2004) it is used to measure the effectiveness of sale strategies. Therefore it is almost impossible for a company to survive with a low sales performance and Unilever Nigeria plc. is not different.
With the population of Nigeria being so large and uniquely diverse, pricing strategies is important for any company that aims to enjoy high sales performance. The Nigerian market lays a lot of potential for the producer and service provider who get their pricing strategies right and Unilever seems to be a company that has enjoyed high sales performance in Nigeria throughout the years. Ever since their incorporation on the 11th of April, 1923 as Lever Brothers West Africa Ltd they have been one of the strongest brands in West Africa and the largest producers of spread food (Butter and Margarine) in Nigeria (Morenikeji, 2015). Many studies have attributed these to their successful sales strategies of the company including their pricing strategies which many feel have led to a consistently high sales performance and ultimately the growth and sustainability of the company.
Statement of research problem
The business environment is fast evolving from one, where companies get to dictate the types of products and services produced to one where consumers get to decide what they want to be produced. Therefore, in a day and age where competition amongst businesses is rife and consumers are spoilt for choice, it is important for any company that hopes to maximize profit to get their pricing strategies right. Unilever Nigeria plc. Is an household brand in Nigeria engaged in the manufacture and marketing of food stuffs, food ingredients, home and personal care products. They are one of the foremost companies when it comes to the production of household goods in Nigeria. However, recently they have struggled with their sales performance as their financial performance has dropped over the last year (Investadvocate, 2017). Many financial experts have attributed this to their ineffective pricing strategy. However, the dilemma for management of Unilever Nigeria plc. is what pricing strategy is to be adopted for their products.
The fear for Unilever is the fact that Previous research done on pricing strategies hasn’t made clear the pricing strategies that works and guarantees increased sales and profitability in Nigeria. Koske (2012), made the case that price skimming strategy would make the consumers see the product as a high quality one. He concluded that this would increase sales, as the consumers will feel safe in the knowledge that they are getting value for their money. However, Attih & Adams (2014) contrarily made the case that companies that adopt penetration pricing strategy are more likely to achieve increase in sales revenues and gain more market share especially in developing countries like Nigeria.
Furthermore, Unilever Nigeria plc. Has struggled in attaining a high sales volume and as a result a lot of products are returned to the inventory to be sold at a loss or are wasted overtime. This has caused Unilever Nigeria plc. a lot of financial grief. It has been suggested by Parr (2015) that market parity pricing is an effective strategy of increasing sales volume. However, Duess (2014) disagreed saying the use of market parity pricing was not a guarantee to increasing sales volumes due to the presence of other competitors.
Therefore based on the inconclusiveness of past studies on effective pricing strategy, this study sets out to determine the how various pricing strategies affects sales performance in Nigeria and to determine which pricing strategy will be most suitable to Unilever Nigeria plc.
Objectives of the Study
General objective of the study is to examine the effects of pricing strategies on sales performance. The following are the specific objectives of this study:
- To identify the effect of price skimming on customer retention.
- To investigate the effect of penetration strategy on the firm’s market share.
- To determine the impact of market parity pricing on sales volume.
Research questions
The research will aim to answer the following questions. They are:
- How does price skimming strategy affect customer retention?
- How does penetration pricing strategy affects the firm’s market share?
- How does market parity have an impact on sales volume?
Research hypotheses
The research will aim to test the following hypothesis
Hypothesis 1
H0: Pricing skimming has no significant effect on customer retention.
H0: Pricing skimming has an effect on customer retention.
Hypothesis 2
H0: Penetration strategy has no effect on the firm’s market share
H0: Penetration strategy has an effect on the firm’s market share
Hypothesis 3
H0: There is no impact of market parity on sales volume.
H0: There is an impact of market parity on sales volume.
Operationalization of the research topic
In this research, we have the independent and the dependent variable. When operationalizing the dependent and independent variables are put in a mathematical form.
The independent variable is pricing strategy (PS)
The dependent variable is Sales Performance (SP)
Y=F(x)
Where
Y= dependent variable
X= independent variable
F= function
Substitute the value of X and Y
Y=SP {consumer purchase decision}
X=PS {pricing strategies}
Thus, SP=F {PS}
Therefore
SP or Y= {Y1, Y2, Y3…….YN}
Where
Y1= Customer Retention
Y2= Firm’s Market Share
Y3= Sales Volume
X or pricing
Where
X1= Penetration Strategy
X2 = Skimming
X3= Market parity
Scope of the Study
The study will focus on the impact of pricing strategy on sales performance in Unilever Plc Oregun Ikeja, Lagos State. The target population are the middle level management staffs of Unilever Nigeria Plc. the study will adopt the simple random sampling technique while data will be analysed using the regression analysis. The geographical location of the study will be Unilever Nigeria plc, Lagis State. Finally, the study would be carried out between September 2017 and April 2018 (8 months)
Significance of the Study
This study will be significant to the management of Unilever Nigeria plc. as it will help them understand the importance of pricing strategies in increasing sales revenue, profit and ultimately their organizational growth. It will also be significant in detailing the appropriate pricing strategy for each type product.
The study will be significant to the industry because it will show how pricing strategies adopted by manufacturing companies affects the industry performance of the manufacturing industry. It will also be significant in showing the pricing strategy that manufacturers of consumer goods can use effectively.
The study will be significant in helping the government understand their role in the regulation of prices to prevent exploitation by manufacturing companies.
The study will be significant increasing the awareness of the general public about pricing strategies and the reason why prices of product are high or relatively low. Thereby, it will expand their knowledge and help their consumer purchase decision.
Definition of terms
Price: Price is the amount of money charged for a product or service. It’s the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service (Kotler & Arsmtrong, 2008).
Strategy: Strategy is the framework which guides those choices that determine the nature and direction of an organization (Tregoe, 2010).
Consumer: A consumer is an individual who buys or purchases goods/products and services for final/ultimate consumption (Ibidunni, 2012).
Consumer behaviour: It’s the study of individuals, groups or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy needs and the impacts that these processes have on the consumer and society (Perner, 2016).
Services: This are economic activities offered by one party to another, most commonly employing time-based performances to bring about desired results in recipients themselves or in objects or other assets for which purchasers have responsibility (Kelly & William, 2014).
Marketing mix: Marketing mix is the set of controllable variables that the firm can use to influence the buyer’s response. (Kotler & Armstrong, 2010)
Market Parity: A parity price is when the price of an asset is directly linked to the price of another asset (American Marketing Association, 2008).
Price skimming: Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for a product or service at first then lowers the price over time. It is a temporal version of price discrimination/yield management (kotler & Armstrong 2008).
Penetration Strategy; Penetration pricing is a pricing strategy where the price of a prodyct is initially set low to rapidly reach a wide fraction of the market and initial word of mouth (Kelly & William 2014).
Customer Retention: customer retention refers to the activities and actions companies and organizations take to reduce the number of customer defections (Naver & Slater 2010)
Sales volume: Sales volume is the number of unit sold within a reporting period. This figure is monitored by investors to see if a business in expanding or contacting. Within a business, sales volume maybe monitored at the level of the product, product line, customer, subsidiary, or sales region (Kotler & Armstrong 2008)
Firm’s Market Share: Market share represent the percentage of an industry or market total sales that is earned by a particular company over a specified time period. It is calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period (Kelly & Williams 2014)
Pricing Strategy: A business can use a variety of pricing strategy when selling a product or service (Kotler & Armstrong 2008)
Sales Performance: Sales performance management (SPM) is the practice of monitoring and guiding personnel to improve their ability to sell product or services (Naver & Slater 2010)s