An investigation into the pricing methods used by small and medium-sized enterprises

Abstract

This thesis investigates the pricing methods used by small and medium-sized enterprises (SMEs). Prices are a key determinant of demand which influences revenue and in turn the business' profits. A business may fail if products and services are priced incorrectly. Pricing decision is, therefore, one of the critical success factors of a business, including SMEs. There is consensus widely disseminated in the textbook literature, that successful pricing can only be achieved when a multiplicity of factors are considered and managed and different pricing methods are applied. The shortcomings of limitations of theoretical concepts of supply and demand, market price and cost-based pricing make it necessary for managers to opt for alternative pricing methods that may address the gaps found in these determinants of price. Pricing objectives need to be stated explicitly and they should be in line with the overall company objectives. One of the key factors that marketing managers need to remember is that price is one element of the marketing mix and should not be set in isolation. Since price is a major determinant of profitability, developing a coherent pricing strategy assumes major significance. There is both art and science in deciding the right price, but the basic principle must be to equate profitability with goodwill and repeat business. It is not within the remit of this research to provide a detailed critique of small and medium-sized businesses, but clearly the population of SMEs ebbs and flows as businesses are started as businesses fail. The SME business sector is discussed briefly by giving an overview of the definition and discussing pricing as a critical success factor in SMEs. The methodology applied is both quantitative and qualitative in nature. Secondary data has been collected and it was used as the point of departure for the study. The literature review has given the background of pricing and price determination, followed by an empirical study through the questionnaire. The overriding perception derived from the findings in this study is that no decisions are taken in an isolated or discrete circumstance. Price was consciously considered with different context such as considering costs, value, competition, demand, revenue, margins and mark-ups, profits, survival and market share. However, in some cases setting price was based on a gut feeling of the managers. The company's pricing policy proves to be an important indicator of the company's overall image and the quality of its product. Pricing will always be a challenging area. The researcher has therefore developed a model - called the integrated pricing model - which is recommended for SME managers.