Entrep 2ND Quarter

Sibugay Technical Institute Inc.
SECOND QUARTER
Learner’s Module in Entrepreneurship
MODULE 9 – WEEK 9
“Always deliver more than expected”
Lesson Title: Target Market

Learning Objectives:
At the end of this module, the students can;
1. Define “Target Market”
2. Understand “Target Market”
3. Discuss the importance of identifying the target market to improve the way of growing
business.
What Is a Target Market?

A target market refers to a group of potential customers to whom
a company wants to sell its products and services. This group
also includes specific customers to whom a company directs
its marketing efforts. A target market is one part of the total
market for a good or service.
Consumers who make up a target market share similar

characteristics including buying geography, buying power,
demographics, and incomes.
Identifying the target market is an essential step for any company in the development of a
marketing plan. Not knowing who the target market is could cost a lot of money and time for a
company.
Understanding Target Markets
Part of the success of selling a good or service is knowing to whom it will appeal and who will
ultimately buy it. That's why businesses spend a lot of time and money to define and monitor its
target market. That's because not all products and services are meant for every consumer, who
are generally cautious with their money.
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Target markets are generally categorized by age, location, income, and lifestyle. Defining a
specific target market allows a company to home in on specific market factors to reach and
connect with customers through sales and marketing efforts.

IMPORTANT THING TO REMEMBER: A business may have more than one
target market—a primary target market, which is the main focus, and a secondary
target market, which is not as large but still has growth potential.
Testing a target market often occurs well before a product is released. During the testing phase,
a company may use limited product rollouts and focus groups, allowing the product managers
to get a feel for which aspects of the product are the strongest. Once a product is released, the
company can continue to monitor the demographics of its target market through sales tracking,
customer surveys, and various other activities that allow the company to understand what its
customers demand.
Defining a target market is important for any business because it means the difference between
selling a product or service and sitting on the sidelines while the competition boosts its revenue.
Not knowing its target can be a big mistake for a business. Trying to rustle new clients or
customers without knowing who it will target can cost the business a lot of time and money.
What is the purpose of target markets?

Target markets are used to gain a better understanding of a company's current and potential
consumer base. Once a target market is identified, it can affect a product's price, promotion, and
distribution. For instance, target groups may be useful when a company is looking to expand its
operations to an international audience. Meanwhile, a company may choose to tweak a product,
such as through its packaging, to attract a health-conscious subgroup.
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SELF – ASSESSMENT:
Direction: Identify the target market of the following famous

businesses in the Philippines
Business Name Who are their Target Customers?

1.
2.
3.
4.
5.
6.
7.
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8.

SECOND QUARTER
MODULE 10 – WEEK 10
“Price is what you pay, Value is what you get”

Lesson Title: Price
1. Define price and its relationship to cost
2. Name the terms used to preference pricing
3. Discuss how pricing impacts marketing and business strategy
4. Discuss the different concepts of value and how it influences consumer buying decisions
MODULE CONTENT:
Price is both the money someone charges for a good and service and what the consumer
is willing to give up to receive a good or service.
What is a Price?
Buying something means paying a price. But what exactly is “price?”
 Price is the money charged for a good or service. For example,

an item of clothing costs a certain amount of money. Or a
computer specialist charges a certain fee for fixing your computer.
 Price is also what a consumer must pay in order to receive a
product or service. Price does not necessarily always mean
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money. Bartering is an exchange of goods or services in return for goods or services. For
example, I teach you English in exchange for you teaching me about graphic design.
 Price is the easiest marketing variable to change and also the easiest to copy.
Even though the question, “How much?” could be phrased as “How much does it cost? ” price
and cost are two different things. Whereas the price of a product is what you, the consumer
must pay to obtain it, the cost is what the business pays to make it. When you ask about the cost
of a good or service, you’re really asking how much you will have to give up to get it.
Different Perspectives on Price
The perception of price differs based on the perspective from which it is being viewed.
The Customer’s View
A customer can either be the ultimate user of the finished product or a business that purchases
components of the finished product. It is the customer that seeks to satisfy a need or set of needs
through the purchase of a particular product or set of products. Consequently, the customer uses
several criteria to determine how much they are willing to expend, or the price they are willing
to pay, in order to satisfy these needs. Ideally, the customer would like to pay as little as
possible.
For the business to increase value, it can either increase the perceived benefits or reduce the
perceived costs. Both of these elements should be considered elements of price.
To a certain extent, perceived benefits are the opposite of perceived costs. For example, paying
a premium price is compensated for by having this exquisite work of art displayed in one’s
home. Other possible perceived benefits directly related to the price-value equations are:
 status
 convenience
 the deal
 brand
 quality
 choice
Many of these benefits tend to overlap. For instance, a Mercedes Benz E750 is a very high-
status brand name and possesses superb quality. This makes it worth the USD 100,000 price
tag. Further, if one can negotiate a deal reducing the price by USD 15,000, that would be his
incentive to purchase. Likewise, someone living in an isolated mountain community is willing
to pay substantially more for groceries at a local store than drive 78 miles (25.53 kilometers) to
the nearest Safeway. That person is also willing to sacrifice choice for greater convenience. 10
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Increasing these perceived benefits are represented by a recently coined term, value-added.
Providing value-added elements to the product has become a popular strategic alternative.
Perceived costs include the actual dollar amount printed on the product, plus a host of additional
factors. As noted, perceived costs are the mirror-opposite of the benefits. When finding a gas
station that is selling its highest grade for USD 0.06 less per gallon, the customer must consider
the 16 mile (25.75 kilometer) drive to get there, the long line, the fact that the middle grade is
not available, and heavy traffic. Therefore, inconvenience, limited choice, and poor service are
possible perceived costs. Other common perceived costs include risk of making a mistake,
related costs, lost opportunity, and unexpected consequences.
Ultimately, it is beneficial to view price from the customer’s perspective because it helps define
value — the most important basis for creating a competitive advantage.
Society’s View
Price, at least in dollars and cents, has been the historical view of value. Derived from a
bartering system (exchanging goods of equal value), the monetary system of each society
provides a more convent way to purchase goods and accumulate wealth. Price has also become
a variable society employs to control its economic health. Price can be inclusive or exclusive. In
many countries, such as Russia, China, and South Africa, high prices for products such as food,
health care, housing, and automobiles, means that most of the population is excluded from
purchase. In contrast, countries such as Denmark, Germany, and Great Britain charge little for
health care and consequently make it available to all.
There are two different ways to look at the role price plays in a society; rational man and
irrational man. The former is the primary assumption underlying economic theory, and suggests
that the results of price manipulation are predictable. The latter role for price acknowledges that
man’s response to price is sometimes unpredictable and pretesting price manipulation is a
necessary task.
Introduction
We’ve been using the word “price” a lot. There are, however, other terms you may come
across in your studies and daily life that serve as synonyms.
Price Point
The price of an item is also called the price point,

especially where it refers to stores that set a limited number of
price points.
For example, Dollar General is a general store or “five and

dime” store that sets price points only at even amounts, such as
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exactly one, two, three, five, or ten dollars (among others). Other stores will have a policy of
setting most of their prices ending in 99 cents or pence. Other stores (such as dollar stores,
pound stores, euro stores, 100-yen stores, and so forth) only have a single price point ($1, £1,
1€, ¥100), though in some cases this price may purchase more than one of some very small
items. Price is relatively less than the cost price.
Charge
When someone wants to know the price of a service, they may ask, “How much do you
charge?” In this context, the word “charge” is a synonym for price.
Value
From a customer’s point of view, value is the sole justification for price. Many times customers
lack an understanding of the cost of materials and other costs that go into the making of a
product. But those customers can understand what that product does for them in the way of
providing value. It is on this basis that customers make decisions about the purchase of a
product.
Fee
Service providers may present you with a fee list as opposed to a price tag if you ask for the
price of their services.
Fare
You pay a price to fly, ride the bus and take the train. The price in these industries is expressed
as a fare.
The Importance of Price to Marketers
Since pricing has a direct impact on a company’s revenue, and thus profit, setting the right price
is essential to a company’s success.
Price is important to marketers because it represents marketers’ assessment of the value

customers see in the product or service and are willing to pay for a product or service. The other
elements of the marketing mix (product, place and promotion ) may seem to be more glamorous
than price, and thus get more attention, but determining the price of a product or service is
actually one of the most important management decisions. Here’s why.
 While product, place and promotion affect costs, price is the only element that affects
revenues, and thus, a business’s profits. Price can lead to a firm’s survival or demise.
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 Adjusting the price has a profound impact on the marketing strategy, and depending on
the price elasticity of the product, it will often affect the demand and sales as well. Both a
price that is too high and one that is too low can limit growth. The wrong price can also
negatively influence sales and cash flow.
 Problems occur if the marketer fails to set a price that complements the other elements of
the marketing mix and the business objectives, as pricing contributes to how customers
perceive a product or a service. A high price indicates high quality. The term luxury comes
to mind. If, however, a firm wants to position itself as a low-cost provider, it will charge
low prices. Just as they do with high-end providers, consumers know what to expect when
they see low prices.
So, as you can see, it is important that a company sets the right price. A company’s success can
depend on it. However, with so many factors to consider along with the lack of a crystal ball
that will show the effect of a price change, It isn’t so easy to do.
Value and Relative Value
Value is the worth of goods, and relative value is attractiveness measured in terms of
utility of one good relative to another.
What is Value?
Value is the worth of goods and services as determined by markets. Thus, an important
part of economics is the study of policies and activities for the generation and transfer of value
within markets in the form of goods and services.
Often a measure for the worth of goods and services is units of currency such as the US
Dollar. But, unlike the units of measurements in Physics such as seconds for time, there exists
no absolute basis for standardizing the units for value.
One of the most complicated and most often misunderstood parts of economy is the
concept of value. One of the big problems is the large number of different types of values that
seem to exist, such as exchange value, surplus value, and use value.
The Buyer’s Utility
The discussion of values all start with one simple question: What is something worth?
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Today’s most common answer is one of those answers that are so deceptively simple that
it seems obvious when you know it. But then remember that it took economists more than a
hundred years to figure it out: something is worth whatever you think it is worth.
This statement needs some explanation. Take as an example two companies that are
thinking of buying a new copying machine. One company does not think they will use a
copying machine that much, but the other knows it will copy a lot of papers. This second
company will be prepared to pay more for a copying machine than the first one. They find a
greater utility in the object.
The companies also have a choice of models. The first company knows that many of the
papers will need to be copied on both sides. The second company knows that very few of the
papers it copies will need double- sided copying. Of course, the second company will not pay
much more for this feature, while the first company will. In this example, we see that a buyer
will be prepared to pay more for the increase in utility compared to alternative products.
So we can summarize this with the statement that the economic value of an item is set by
the increase in utility for customers. This increase in utility is called marginal utility, and this is
all known as the marginal theory of value.
The Seller’s Utility
But how does the seller value things? Well, in pretty much the same way. Of course,
most sellers today do not intend to use the object he sells himself. The utility for the seller is not
as an object of usage, but as a source of income. And here again it is marginal utility that comes
in. For what price can you sell the object? If you put in some more work, can you get a higher
price?
Here we also get into the utility for resellers. Somebody who deals in trading will look at
an object, and the utility for him is to be able to sell it again. How much work will it take, and
what margins are possible?
Subjective Value
Not only do the two different buyers have a different value on an object, the salesman
puts his value on it, and the original manufacturer may have put yet another value on it. The
value depends on the person who does the valuation–it is subjective.
Relative Value and Pricing
Relative value in the marketing context is attractiveness measured in terms of utility of

one product relative to another.
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In term of pricing, prices of valued items undergo questionable fluctuations. For example,
even though housing provides the same utility to the individual over time, and supply and
demand are relatively constant and stable, the relative price of housing fluctuates, even more so
than with stocks, oil, and gold.
This price volatility appears to occur in cycles and is caused by a myriad of factors.
Figure 1 is an attempt to overlay the prices of housing, stocks, oil, and gold by normalizing the
price streams. Normalizing is achieved by applying a discounting formula which converts a
price to the price it would be at a certain date, given a certain discount rate. This would
normally be used to cancel the effects of inflation, in which case the inflation rate would be
used.

SECOND QUARTER
Lesson Title: Price Competition and Non-price Competition

1. Discuss price as a competitive.
2. Differentiate price competitive strategy in marketing
3. Differentiate price competition from non-price competition tactics
MODULE CONTENT:
Price Competition
With competition pricing, a firm will base what they charge on what other firms are
charging.
Once a business decides to use price as a primary competitive strategy, there are many
well-established tools and techniques that can be employed. The pricing process normally
begins with a decision about the company’s pricing approach to the market.
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Approaches to the Market
Price is a very important decision criteria that customers use to compare alternatives. It also
contributes to the company’s position. In general, a business can price itself to match its
competition, price higher, or price lower. Each has its pros and cons.
Pricing to Meet Competition
Many organizations attempt to establish prices that, on average, are the same as those set
by their more important competitors. Automobiles of the same size that feature equivalent
equipment tend to have similar prices. This strategy means that the organization uses price as an
indicator or baseline. Quality in production, better service, creativity in advertising, or some
other element of the marketing mix are used to attract customers who are interested in products
in a particular price category.
The keys to implementing a strategy of meeting competitive prices are an accurate

definition of competition and a knowledge of competitor’s prices. A maker of hand-crafted
leather shoes is not in competition with mass producers. If this artisan attempts to compete with
mass producers on price, higher production costs will make the business unprofitable. A more
realistic definition of competition for this purpose would be other makers of hand-crafted
leather shoes. After defining this competition, knowing their prices would allow the artisan to
put this pricing strategy into effect. Banks shop with competitive banks every day to check their
prices.
Pricing Above Competitors
Pricing above competitors can be rewarding to organizations, provided that the objectives
of the policy are clearly understood. The marketing mix must also be used to develop a strategy
that enables management to implement the policy successfully.
Pricing above competition generally requires a clear advantage on some non-price

element of the marketing mix. In some cases, it is possible due to a high price-quality
association on the part of potential buyers. Such an assumption is increasingly dangerous in
today’s information-rich environment. Consumer Reports and other similar publications make
objective product comparisons much simpler for the consumer. There are also hundreds of
dot.com companies that provide objective price comparisons. The key is to prove to customers
that your product justifies a premium price.
Pricing Below Competitors
While some firms are positioned to price above competition, others wish to carve out a market
niche by pricing below competitors. The goal of such a policy is to realize a large sales volume
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through a lower price. By controlling costs and reducing services, these firms are able to earn an
acceptable profit, even though profit per unit is usually less.
Such a strategy can be effective if a significant segment of the market is price-sensitive and or
the organization’s cost structure is lower than competitors. Costs can be reduced by increased
efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and
advertising. For example, if a firm could replace its sales force in the field with telemarketing or
online access, this function might be performed at a lower cost. Such reductions often involve
some loss in effectiveness, so the tradeoff must be considered carefully.
Historically, one of the worst outcomes that can result from pricing lower than a competitor is a
price war. Price wars usually
occur when a business
believes that price-cutting
produces increased market
share, but does not have a true
cost advantage. Price wars are
often caused by companies
misreading or
misunderstanding
competitors. Typically, price
wars are overreactions to
threats that either are not there
at all or are not as big as they
seem.
Another possible drawback

when pricing below
competition is the company’s
inability to raise price or image. A retailer such as Kmart, known as a discount chain, found it
impossible to reposition itself as a provider of designer women’s clothes. In keeping with this
idea, can you imagine Swatch selling a 3,000 dollar watch?
How can companies cope with the pressure created by reduced prices? Some are redesigning
products for ease and speed of manufacturing or reducing costly features that their customers do
not value. Other companies are reducing rebates and discounts in favor of stable, everyday low
prices (ELP). In all cases, these companies are seeking shelter from pricing pressures that come
from the discount mania that has been common in the US for the last two decades.
Non-price Competition
Non-price competition involves firms distinguishing their products from competing products on
the basis of attributes other than price.
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Introduction
Since price competition can only go

so far, firms often engage in non-price
competition. Non-price competition is a
marketing strategy “in which one firm tries
to distinguish its product or service from
competing products on the basis of
attributes like design and workmanship.”
The firm can also distinguish its

product offering through quality of
service, extensive distribution, customer
focus, or any other sustainable competitive
advantage other than price.
The idea is to try to convince consumers that they should buy these products, not just
because they are cheaper, but because they are in some way better than those made by
competitors.
It can be contrasted with price competition, which is where a company tries to distinguish
its product or service from competing products on the basis of a low price.
The Benefits of Non-price Competition
Non-price competition typically involves promotional expenditures (such as advertising,

selling staff, the locations convenience, sales promotions, coupons, special orders, or free gifts),
marketing research, new product development, and brand management costs.
Firms will engage in non-price competition, in spite of the additional costs involved,
because it is usually more profitable than selling for a lower price and avoids the risk of a price
war. For example, brand-name goods often sell more units than do their generic counterparts,
despite usually being more expensive. Non-price competition may also promote innovation as
firms try to distinguish their product.
Although any company can use a non-price competition strategy, it is most common
among oligopolies and monopolistic competition, because these firms can be extremely
competitive.
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SECOND QUARTER
Lesson Title: Specific Pricing Strategies
Learning Objectives;
1. Compare and contrast penetration pricing and skimming pricing
2. Describe the characteristics of line pricing
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3. Explain the types of psychological
MODULE CONTENT:
New Product Pricing
With a new product, competition does not exist or is minimal, hence the general pricing
strategies depend on different factors.
With a totally new product, competition does not exist or is minimal. Two general
strategies are most common for setting prices:
(1) Penetration pricing
In the introductory stage of a new product’s life cycle means accepting a lower profit
margin and to price relatively low. Such a strategy should generate greater sales and establish
the new product in the market more quickly. Penetration pricing is the pricing technique of
setting a relatively low initial entry price, often lower than the eventual market price, to attract
new customers. The strategy works on the expectation that customers will switch to the new
brand because of the lower price. Penetration pricing is most commonly associated with a
marketing objective of increasing market share or sales volume, rather than to make profit in the
short term. The advantages of penetration pricing to the firm are as follows:
 It can result in fast diffusion and adoption. This can achieve high market penetration rates
quickly. This can take the competitors by surprise, not giving them time to react.
 It can create goodwill among the early adopters segment. This can create more trade
through word of mouth.
 It creates cost control and cost reduction pressures from the start, leading to greater
efficiency.
 It discourages the entry of competitors. Low prices act as a barrier to entry.
 It can create high stock turnover throughout the distribution channel. This can create
critically important enthusiasm and support in the channel.
 It can be based on marginal cost pricing, which is economically efficient.
A penetration strategy would generally be supported by the following conditions: price-

sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by
competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate
resource base for the firm to meet the new demand and sales.
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(2) Skimming
Skimming involves goods being sold at higher prices so that fewer sales are needed to
break even. Selling a product at a high price and sacrificing high sales to gain a high profit is
therefore “skimming” the market. Skimming is usually employed to reimburse the cost of
investment of the original research into the product. It is commonly used in electronic markets
when a new range, such as DVD players, are firstly dispatched into the market at a high price.
This strategy is often used to target “early adopters” of a product or service. Early adopters
generally have a relatively lower price-sensitivity and this can be attributed to their need for the
product outweighing their need to economize, a greater understanding of the product’s value, or
simply having a higher disposable income.
This strategy is employed only for a limited duration to recover most of the investment
made to build the product. To gain further market share, a seller must use other pricing tactics
such as economy or penetration. This method can have some setbacks as it could leave the
product at a high price against the competition. A skimming strategy would generally be
supported by the following conditions:
 Having a premium product. In this case, “Premium” does not just denote high cost of
production and materials- it also suggests that the product may be rare or that the demand
is unusually high. An example would be a USD 500 ticket for the World Series or an USD
80,000 price tag for a limited-production sports car such as this.
 Having legal protection via a patent or copyright may also allow for an excessively high
price. Intel and their Pentium chip possessed this advantage for a long period of time. In
most cases, the initial high price is gradually reduced to match new competition and allow
new customers access to the product.
Product Line Pricing
Line pricing is the use of a limited number of price points

for all the product offerings of a vendor.
Line pricing is the use of a limited number of prices for all

the product offerings of a vendor. This is a tradition started in the
old five and dime stores in which everything cost either 5 cents or
10 cents. Its underlying rationale is that these amounts are seen as
suitable price points for a whole range of products by prospective
customers. It has the advantage of ease of administering, but the
disadvantage of inflexibility, particularly in times of inflation or
unstable prices.
Line pricing serves several purposes that benefit both

buyers and sellers. Customers want and expect a wide assortment
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of goods, particularly shopping goods. Many small price differences for a given item can be
confusing. If ties were priced at $15, $15.35, $15.75, and so on, selection would be more
difficult. The customer would not be able to judge quality differences as reflected by such small
increments in price. So having relatively few prices reduces this kind of confusion.
From the seller’s point of view, line pricing holds several benefits:
1. It is simpler and more efficient to use relatively fewer prices. The product and service
mix can then be tailored to select price points.
2. It can result in a smaller inventory than would otherwise be the case. It might increase
stock turnover and make inventory control simpler.
3. As costs change, the prices can remain the same, but the quality in the line can be
changed. For example, you may have bought a $20 tie 15 years ago. You can buy a $20 tie
today, but it is unlikely that today’s $20 tie is of the same fine quality as it was in the past.
Psychological Pricing
Psychological pricing is a marketing practice based on the theory that certain prices have
meaning to many buyers.
Price, as is the case with certain other elements in the marketing mix, has multiple
meanings beyond a simple utilitarian statement. One such meaning is often referred to as the
psychological aspect of pricing. Inferring quality from price is a common example of the
psychological aspect of price. For instance, a buyer may assume that a suit priced at $500 is of
higher quality than one priced at $300.
Products and services frequently have

customary prices in the minds of
consumers. A customary price is one that
customers identify with particular items.
For example, for many decades a five-stick
package of chewing gum cost five cents and
a six-ounce bottle of Coca-Cola also cost
five cents. Candy bars now cost 60 cents or
more, which is the customary price for a
standard-sized bar. Manufacturers tend to
adjust their wholesale prices to permit
retailers to use customary pricing.
Another manifestation of the psychological aspects of pricing is the use of odd prices. We call
prices that end in such digits as 5, 7, 8, and 9 “odd prices.” Examples of odd prices include:
$2.95, $15.98, or $299.99. Odd prices are intended to drive demand greater than would be
expected if consumers were perfectly rational.
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Psychological pricing is one cause of price points. For a long time, marketing people
have attempted to explain why odd prices are used. It seemed to make little difference whether
one paid $29.95 or $30.00 for an item. Perhaps one of the most often heard explanations
concerns the psychological impact of odd prices on customers. The explanation is that
customers perceive even prices such as $5.00 or $10.00 as regular prices. Odd prices, on the
other hand, appear to represent bargains or savings and therefore encourage buying. There
seems to be some movement toward even pricing; however, odd pricing is still very common. A
somewhat related pricing strategy is combination pricing, such as two-for-one or buy-one-get-
one-free. Consumers tend to react very positively to these pricing techniques.
The psychological pricing theory is based on one or more of the following hypotheses:
 Consumers ignore the least significant digits rather than do the proper rounding. Even
though the cents are seen and not totally ignored, they may subconsciously be partially
ignored.
 Fractional prices suggest to consumers that goods are marked at the lowest possible price.
 When items are listed in a way that is segregated into price bands (such as an online real
estate search), the price ending is used to keep an item in a lower band, to be seen by more
potential purchasers.
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SECOND QUARTER
Lesson Title: Pricing during difficult economic Times

1. Discuss pricing strategies during difficult economic times
2. Translate the meaning of the EDLP (everyday low price) pricing strategy
3. Recognize the mechanism of High/Low pricing strategies
4. Describe various pricing strategies
MODULE CONTENT:
Pricing During Difficult Economic Times
During a recession, companies must consider their unique situation and what value they
provide customers when devising a pricing strategy.
Pricing During Difficult Economic Times
Every company has a unique pricing strategy during a boom period, based on their own
product, market, and managerial decision
making. However, during a recession, many
companies may be tempted to abandon these
strategies. After all, if customers are less willing
to spend money, simplistic logic suggests that,
by cutting prices, you can attract more
customers. However, this strategy should be
approached with caution.
Cutting prices can quieten customer

complaints and help boost sales for a time, but
can have longer-term effects on profitability,
and weaken the brand’s image. Reductions can
also lead customers to expect discounts
whenever the economy dips, causing them to wait to make purchases in the future.
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A model of pricing based on ‘rational’ economic theory suggests that prices are set by the
forces of supply and demand, and individual companies in a perfectly competitive market must
follow the equilibrium price. However, real life is not so simple; people do not always act in the
prescribed logic. Sometimes prices go up and people buy more, and vice versa.
A smart pricing strategy during a recession can become a competitive advantage. By

knowing what value a company delivers to its customers, it can price more confidently and not
panic into slashing prices when it does not necessarily need to. Price-cutting may even lead to
price wars where nobody wins. If cuts must be made, companies should focus on cutting the
prices of low-value items and retaining high-value products.
Similarly, price increases during a recession can also be a bad idea. Many firms try to
recover higher costs through price increases, which can turn away customers. Customers locked
into contracts may have no regress if a company raises prices on them, but it tarnishes the
seller’s reputation and will make the customer think twice when the time comes to renew.
Ultimately, the pricing strategy becomes even more important during a recession, and
companies must consider all these factors when attempting to adjust. It is important to protect
the brand, not alienate customers, and remember what value the company offers in order to get
through the difficult economic period unscathed.
Fighter Brands
In marketing, a fighter brand (sometimes called a fighting brand) is a lower priced offering
launched by a company to take on, and ideally take out, specific competitors that are attempting
to underprice them. Unlike traditional brands that are designed with target consumers in mind,
fighter brands are created specifically to combat a competitor that is threatening to take market
share away from a company’s main brand.
The strategy is most often used in difficult economic times. As customers trade down to lower
priced offers because of economic constraints, many managers at mid-tier and premium brands
are faced with a classic strategic conundrum: Should they tackle the threat head-on and reduce
existing prices, knowing it will reduce profits and potentially commoditize the brand? Or should
they maintain prices, hope for better times to return, and in the meantime lose customers who
might never come back? With both alternatives often equally unpalatable, many companies
choose the third option of launching a fighter brand.
When the strategy works, a fighter brand not only

defeats a low-priced competitor, but also opens up a
new market. The Celeron microprocessor, shown here,
is a case study of successful fighter brand. Despite the
success of its Pentium processors, Intel faced a major
threat from less costly processors that were better 10
4
placed to serve the emerging market for low-cost personal computers, such as the AMD K6.
Intel wanted to protect the brand equity and price premium of its Pentium chips, but it also
wanted to avoid AMD gaining a foothold on the lower end of the market. So it created Celeron
as a cheaper, less powerful version of its Pentium chips to serve this market.
Everyday Low Pricing
Everyday low price is a pricing strategy offering consumers a low price without having to
wait for sale price events or comparison shopping.
Everyday low price (EDLP) is a pricing strategy promising consumers a low price
without the need to wait for sale price events or comparison shopping.
EDLP saves retail stores the effort and expense needed to mark down prices in the store
during sale events, as well as to market these events. EDLP is believed to generate shopper
loyalty. It was noted in 1994 that the Wal-Mart retail chain in America, which follows an EDLP
strategy, would buy “feature advertisements” in newspapers on a monthly basis, while its
competitors would advertise 52 weeks per year.
Procter & Gamble, Wal-Mart, Food Lion, Gordmans, and Winn-Dixie are firms that have
implemented or championed EDLP. One 1992 study stated that 26% of American supermarket
retailers pursued some form of EDLP, meaning the other 74% were Hi-Lo promotion-oriented
operators.
One 1994 study of an 86-store supermarket grocery chain in the United States concluded
that a 10% EDLP price decrease in a category increased sales volume by 3%, while a 10% Hi-
Low price increase led to a 3% sales decrease; but that because consumer demand at the
supermarket did not respond much to changes in everyday price, an EDLP policy reduced
profits by 18%, while Hi-Lo pricing increased profits by 15%.
An example of a successful brand (other than the infamous Wal-Mart) that uses the
EDLP strategy is Trader Joe’s. Trader Joe’s is a private-brand label that conducts a Niche
marketing strategy describing itself as the “neighborhood store. ” The firm has been growing at
a steady pace, offering a wide variety of organic and natural food items that are hard to find,
enabling the business to enjoy a distinctive competitive advantage.
Apart from the many strengths of Trader

Joe’s, the most prominent is their commitment to
quality and lower prices. The company has worked
hard to manage this economic image of value for its
products that competitors, even giant retail stores,
are unable to meet. Trader Joe’s is not an ordinary
store. It is unique because it does not market itself
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like other grocery stores do nor does it require its customers to take out a membership to enjoy
its low prices.
At Trader Joe’s, its everyday low prices are available to everyone. The firm states that “every
penny we save is every penny our customer saves” (Trader Joe’s 2010).
High/Low Pricing
High-low pricing is a strategy where most goods offered are priced higher than
competitors, but lower prices are offered on other key items.
High-low pricing is a method of pricing for an organization where the goods or services
offered by the organization are regularly priced higher than competitors. However, through
promotions, advertisements, and or coupons, lower prices are offered on other key items
consumers would want to purchase. The lower promotional prices are designed to bring
customers to the organization where the customer is offered the promotional product as well as
the regular higher priced products.
High-low pricing is a type of pricing strategy adopted by companies, usually small and medium
sized retail firms. The basic type of customers for the firms adopting high-low price will not
have a clear idea about what a product’s price would typically be or have a strong belief that
“discount sales = low price. ” Customers for firms adopting this type of strategy also have
strong preference in purchasing the products sold in this type or by this certain firm. They are
loyal to a specific brand.
There are many big firms using this type of pricing

strategy (ex: Reebok, Nike, Adidas). The way
competition prevails in the shoe industry is through
high-low price. Also high-low pricing is extensively
used in the fashion industry by companies (ex: Macy’s
and Nordstrom) This pricing strategy is not only in the
shoe and fashion industry but also in many other
industries. However, in these industries one or two
firms will not provide discounts and works on fixed
rate of earnings. Those firms will follow everyday low
price strategy in order to compete in the market.
Other Pricing Strategies
One pricing strategy does not fit all, thus adapting various pricing strategies to new
scenarios is necessary for a firm to stay viable.
Pricing strategies for products or services encompass three main ways to improve profits.
The business owner can cut costs, sell more, or find more profit with a better pricing strategy. 10
4
When costs are already at their lowest and sales are hard to find, adopting a better pricing
strategy is a key option to stay viable. There are many different pricing strategies that can be
utilized for different selling scenarios:
Cost-Plus Pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of
producing the product and adds on a percentage (profit) to that price to give the selling price.
This method although simple has two flaws: it takes no account of demand and there is no way
of determining if potential customers will purchase the product at the calculated price.
Limit Pricing
A limit price is the price set by a monopolist to discourage economic entry into a market,
and is illegal in many countries. The limit price is the price that the entrant would face upon
entering as long as the incumbent firm did not decrease output. The limit price is often lower
than the average cost of production or just low enough to make entering not profitable. The
quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than
would be optimal for a monopolist, but might still produce higher economic profits than would
be earned under perfect competition.
Dynamic Pricing
A flexible pricing mechanism made possible by advances in information technology, and

employed mostly by Internet based companies. By responding to market fluctuations or large
amounts of data gathered from customers – ranging from where they live to what they buy to
how much they have spent on past purchases – dynamic pricing allows online companies to
adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline
industry is often cited as a success story. In fact, it employs the technique so artfully that most
of the passengers on any given airplane have paid different ticket prices for the same flight.
Pricing Above Competitors
Pricing above competitors can be rewarding to organizations, provided that the objectives
of the policy are clearly understood and that the marketing mix is used to develop a strategy to
enable management to implement the policy successfully. Pricing above competition generally
requires a clear advantage on some non-price element of the marketing mix. In some cases, it is
possible due to a high price-quality association on the part of potential buyers. Such an
assumption is increasingly dangerous in today’s information-rich environment. Consumer
Reports and other similar publications make objective product comparisons much simpler for
the consumer. There are also hundreds of dot.com companies that provide objective price
comparisons. The key is to prove to customers that your product justifies a premium price.
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Pricing Below Competitors
While some firms are positioned to price above competition, others wish to carve out a
market niche by pricing below competitors. The goal of such a policy is to realize a large sales
volume through a lower price and profit margins. By controlling costs and reducing services,
these firms are able to earn an acceptable profit, even though profit per unit is usually less. Such
a strategy can be effective if a significant segment of the market is price-sensitive and/or the
organization’s cost structure is lower than competitors. Costs can be reduced by increased
efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and
advertising. For example, if a firm could replace its field sales force with telemarketing or
online access, this function might be performed at lower cost. Such reductions often involve
some loss in effectiveness, so the trade-off must be considered carefully.
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SECOND QUARTER
Lesson Title: Pricing Tactics

1. Analyze the use and types of discounts as part of pricing tactics

2. Examine the rationale behind value based pricing as a pricing tactic
3. Describe the different types of geographic pricing from a pricing tactic perspective
4. Review the rationale and use of consumer penalties as part of pricing tactics
MODULE CONTENT:
Discounting
Discounts and allowances are reductions to a basic price of goods or services and can
occur anywhere in the distribution channel.
Discounts and allowances are reductions to a basic price of goods or services. There are
many different types of price reduction, each designed to accomplish a specific purpose. They
can occur anywhere in the distribution channel, modifying either the manufacturer’s list price
(determined by the manufacturer and often printed on the package), the retail price (set by the
retailer and often attached to the product with a sticker), or the list price (which is quoted to a
potential buyer, usually in written form).
Quantity discounts are reductions in base price given as the result of a buyer purchasing
some predetermined quantity of merchandise. A noncumulative quantity discount applies to
each purchase and is intended to encourage buyers to make larger purchases. This means that
the buyer holds the excess merchandise until it is used, possibly cutting the inventory cost of the
seller and preventing the buyer from switching to a competitor at least until the stock is used. A
cumulative quantity discount applies to the total bought over a period of time. The buyer adds
to the potential discount with each additional purchase. Such a policy helps to build repeat
purchases. Building material dealers, for example, find such a policy quite useful in
encouraging builders to concentrate their purchase with one dealer and to continue with the
same dealer over time.
Seasonal discounts are price reductions given for out-of-season merchandise. An example
would be a discount on snowmobiles during the summer. The intention of such discounts is to 10
4
spread demand over the year. This can allow fuller use of
production facilities and improved cash flow during the
year. Electric power companies use the logic of seasonal
discounts to encourage customers to shift consumption to
off-peak periods. Since these companies must have
production capacity to meet peak demands, the lowering of
the peak can lessen the generating capacity required.
Cash discounts are reductions on base price given to

customers for paying cash or within some short time
period. For example, a 2% discount on bills paid within 10
days is a cash discount. The purpose is generally to
accelerate the cash flow of the organization.
Trade discounts, also called functional discounts, are

payments to distribution channel members for performing
some function. Examples of these functions are
warehousing and shelf stocking. Trade discounts are often
combined to include a series of functions, for example 20/12/5 could indicate a 20% discount
for warehousing the product, an additional 12% discount for shipping the product, and an
additional 5% discount for keeping the shelves stocked. Trade discounts are most frequent in
industries where retailers hold the majority of the power in the distribution channel (referred to
as channel captains). Trade discounts are given to try to increase the volume of sales being
made by the supplier.
Educational or student discounts are price reductions given to members of educational

institutions, usually students but possibly also to educators and to other institution staff. The
provider’s purpose is to build brand awareness early in a buyer’s life, or build product
familiarity so that after graduation the holder is likely to buy the same product, for own use or
for an employer, at its normal price. Educational discounts may be given by merchants directly,
or via a student discount program, such as College Budget in the United States or NUS and
Studentdiscounts.co.uk in the United Kingdom.
Senior discounts are discounts offered to customers who are above a certain relatively advanced
age, typically a round number such as 50, 55, 60, 65, 70, and 75; the exact age varies in
different cases. The rationale for a senior discount offered by companies is that the customer is
assumed to be retired and living on a limited income, and unlikely to be willing to pay full
price; sales at reduced price are better than no sales. Non-commercial organizations may offer
concessionary prices as a matter of social policy.
Value-Based Pricing
Value-based pricing seeks to set prices primarily on the value perceived by customers rather
than on the cost of the product or historical prices. 10
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Value-based pricing sets prices primarily, but not exclusively, on the value, perceived or
estimated, to the customer rather than on the cost of the product or historical prices. This
strategy focuses entirely on the customer as a determinant of the total price/value package.
Marketers who employ value-based pricing might use the following definition: “It is what you
think your product is worth to that customer at that time.” This image shows the process for
value based pricing.
Goods that are very intensely traded (e.g., oil and other commodities) or that are sold to
highly sophisticated customers in large markets (e.g., automotive industry) usually are sold
based on cost-based pricing. Value-based pricing is most successful when products are sold
based on emotions (fashion), in niche markets, in shortages (e.g., drinks at open air festival at a
hot summer day) or for indispensable add-ons (e.g., printer cartridges, headsets for cell phones).
Many customer-related factors are important in value-based pricing. For example, it is

critical to understand the consumer buying process. How important is price? When is it
considered? How is it used? Another factor is the cost of switching. Have you ever watched the
television program,” The Price is Right”? If you have, you know that most consumers have
poor price knowledge. Moreover, their knowledge of comparable prices within a product
category (e.g., ketchup is typically worse). So price knowledge is a relevant factor. Finally, the
marketer must assess the customers’ price expectations. How much do you expect to pay for a
large pizza? Color TV? DVD? Newspaper?Swimming pool? These expectations create a
phenomenon called “sticker shock” as exhibited by gasoline, automobiles, and ATM fees.
Value-based pricing is predicated upon an understanding of customer value. In many

settings, gaining this understanding requires primary research. This may include evaluation of
customer operations and interviews with customer personnel. Survey methods are sometimes
used to determine value a customer attributes to a product or a service. The results of such
surveys often depict a customer’s willingness to pay. The principal difficulty is that the
willingness of the customer to pay a certain price differs between customers, between countries,
even for the same customer in different settings (depending on his actual and present needs), so
that a true value-based pricing at all times is impossible. Also, extreme focus on value-based
pricing might leave customers with a feeling of being exploited which is not helpful for the
companies in the long run.
Although it would be nice to assume that a business has the freedom to set any price it
chooses, this is not always the case. There are a variety of constraints that prohibit such
freedom. Some constraints are formal, such as government restrictions in respect to strategies
like collusion and price-fixing. This occurs when two or more companies agree to charge the
same or very similar prices. Other constraints tend to be informal. Examples include matching
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the price of competitors, a traditional price charged for a particular product, and charging a
price that covers expected costs.
Geographic Pricing
Geographical pricing is the practice of modifying a basic list price based on the location
of the buyer to reflect shipping costs.
Geographical pricing is the practice of modifying a basic list price based on the
geographical location of the buyer. It is intended to reflect the costs of shipping to different
locations. There are several types of geographic pricing:
 FOB origin (Free on Board origin): The shipping cost from the factory or warehouse is
paid by the purchaser. Ownership of the goods is transferred to the buyer as soon as it
leaves the point of origin. It can be either the buyer or seller that arranges for the
transportation.
 Uniform delivery pricing (also

called postage stamp pricing): The
same price is charged to all.
 Zone pricing: Prices increase as
shipping distances increase. This is
sometimes done by drawing
concentric circles on a map with
the plant or warehouse at the
center and each circle defining the
boundary of a price zone. Instead
of using circles, irregularly shaped
price boundaries can be drawn that reflect geography, population density, transportation
infrastructure, and shipping cost. (The term “zone pricing” can also refer to the practice of
setting prices that reflect local competitive conditions (i.e., the market forces of supply and
demand, rather than actual cost of transportation). Zone pricing, as practiced in the
gasoline industry in the United States, is the pricing of gasoline based on a complex and
secret weighting of factors, such as the number of competing stations, number of vehicles,
average traffic flow, population density, and geographic characteristics. This can result in
two branded gas stations only a few miles apart selling gasoline at a price differential of as
much as $0.50 per gallon. Many business people and economists state that gasoline zone
pricing merely reflects the costs of doing business in a complex and volatile marketplace.
Critics contend that industry monopoly and the ability to control not only industry-owned
“corporate” stations, but locally owned or franchise stations, make zone pricing into an
excuse to raise gasoline prices virtually at will. Oil industry representatives contend that
while they set wholesale and dealer tank wagon prices, individual dealers are free to see
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whatever prices they wish and that this practice in itself causes widespread price variations
outside industry control. Zone pricing is also used to price fares in certain metro stations.
 Basing point pricing: Certain cities are designated as basing points. All goods shipped
from a given basis point are charged the same amount.
 Freight-absorption pricing: The seller absorbs all or part of the cost of transportation.
This amounts to a price discount and is used as a promotional tactic.
Transfer Pricing
Transfer pricing describes all aspects of intracompany pricing arrangements between

business entities for goods and services.
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges
of goods and services within a multi-divisional organization, particularly in regard to cross-
border transactions. Transfer pricing describes all aspects of Intra Company pricing
arrangements between related business entities, including transfers of intellectual property,
transfers of tangible goods, services and loans, and other financing transactions.
For example, goods from the production division may be sold to the marketing division,
or goods from a parent company may be sold to a foreign subsidiary, with the choice of the
transfer price affecting the division of the total profit among the parts of the company. This has
led to the rise of transfer pricing regulations as governments seek to stem the flow of taxation
revenue overseas, making the issue one of great importance for multinational corporations.
Intra-company transactions across borders are growing rapidly and are becoming much
more complex. Compliance with the differing requirements of multiple overlapping tax
jurisdictions is a complicated and time-consuming task. At the same time, tax authorities from
each country are imposing stricter penalties, new documentation requirements, increased
information exchange and increased audit/inspection activity.
Division managers are provided incentives to maximize their own division’s profits. The
firm must set the optimal transfer prices to maximize company profits, or each division will try
to maximize their own profits leading to lower overall profits for the firm. Double
marginalization is when both divisions mark up prices in excess of marginal cost and overall
firm profits are not optimal.
One can use marginal price determination theory to analyze optimal transfer pricing,
with optimal being defined as transfer pricing that maximizes overall firm profits in a non-
realistic world with no taxes, no capital risk, no development risk, no externalities, or any other
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frictions which exist in the real world. From marginal price determination theory, the optimum
level of output is that where marginal cost equals marginal revenue. That is to say, a firm
should expand its output as long as the marginal revenue from additional sales is greater than
their marginal costs. In the diagram that follows, this intersection is represented by point A,
which will yield a price of P*, given the demand at point B.
When a firm is selling some of its

product to itself, and only to itself (i.e.,
there is no external market for that
particular transfer good), then the
picture gets more complicated, but the
outcome remains the same. The
demand curve remains the same. The
optimum price and quantity remain the
same. But marginal cost of production
can be separated from the firm’s total
marginal costs. Likewise, the marginal
revenue associated with the production
division can be separated from the
marginal revenue for the total firm.
This is referred to as the Net Marginal
Revenue in production (NMR) and is
calculated as the marginal revenue
from the firm minus the marginal costs of distribution.
It can be shown algebraically that the intersection of the firm’s marginal cost curve and
marginal revenue curve (point A) must occur at the same quantity as the intersection of the
production division’s marginal cost curve with the net marginal revenue from production (point
C).
Consumer Penalties
Penalties, in the form of fees and restricted user access, exist for consumers who violate
terms in contracts.
Consumer Penalties
Penalties, in the form of fees and restricted user access, exist for consumers who violate
terms in contracts. Terms of service are rules which one must agree to abide by in order to use a
service.
Certain websites are noted for having carefully designed terms of service, particularly
eBay and PayPal, which need to maintain a high level of community trust because of
transactions involving money. Terms of service can cover a range of issues, including 10
4
acceptable user behavior online, a company’s marketing policies, and copyright notices. Some
organizations, such as Yahoo!, can change their terms of service without notice to the users.
Most organizations reserve the right to restrict a user’s access to the service if they
violate the terms in the agreement. In serious cases, the user may have his or her account
terminated. In extreme cases, the company may pursue legal action.

SECOND QUARTER
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Lesson Title: Pricing Legal Concerns
1. Explain the concept of unfair trade practices relative to legal concern and pricing
2. Describe the concept and types of illegal price advertising
3. Examine the characteristics of predatory pricing relative to legal concerns
4. Construct the concept of price discrimination relative to legal concerns in pricing
MODULE CONTENT:
Unfair Trade Practices
Unfair business practices are oppressive or unconscionable acts by companies against

consumers or other stakeholders.
Unfair Trade Practices
Unfair business practices include oppressive or unconscionable acts by companies against

consumers and others. In most countries, such practices are prohibited under the law. Unfair
trade practices can occur in many different areas such as insurance claims and settlement, debt
collection, and tenancy issues.
Unfair trade practices also include such acts as:
 Fraud: This is an intentional deception made for the company’s gain or to damage the
other party.
 Misrepresentation: This is a false statement of fact made by one party to another party,
which has the effect of inducing that party into the contract. For example, under certain
circumstances, false statements or promises made by a seller of goods regarding the
quality or nature of the product may constitute misrepresentation.
In addition to providing for the award of compensatory damages, laws may also provide for the
award of punitive damages as well as the payment of the plaintiff’s legal fees. When statutes
prohibiting unfair and deceptive business practices provide for the award of punitive damages
and attorneys fees to injured parties, they provide a powerful incentive for businesses to resolve
the claim through the settlement process rather than risk a more costly judgment in court.
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In the European Union, each member state must regulate unfair business practices in
accordance with the Unfair Commercial Practices Directive, subject to transitional periods. This
is a major reform of the law concerning unfair business practices in the European Union.
Unfair trade practices not only affect consumers, but other stakeholders as well. Unfair
competition in a sense means that the competitors compete on unequal terms, because favorable
or disadvantageous conditions are applied to some competitors but not to others; or that the
actions of some competitors actively harm the position of others with respect to their ability to
compete on equal and fair terms. Often, unfair competition means that the gains of some
participants are conditional on the losses of others, when the gains are made in ways which are
illegitimate or unjust.
Illegal Price Advertising
Deceptive price advertising uses misleading or false statements in advertising and

promotion and is usually illegal.
Illegal Price Advertising
Deceptive or false advertising is the use of misleading or outright false statements by companies
in their advertising and promotional material. Depending on the type and the severity, deceptive
advertising is usually illegal, because it is recognized that advertising has the potential to
persuade people to enter into commercial transactions that they may otherwise avoid. However,
advertisers still find ways to deceive consumers in ways that are legal or technically illegal but
unenforceable.
Types of Illegal Price Advertising
Hidden fees and surcharges
These are fees that are not stated in the advertised price. These are particularly common
for services, such as cell phone activation, broadband, gym memberships, and air travel.
Generally, companies get away with it, because the fees are hidden in fine print and obfuscated
by technical language.
“Going out of business” sales
Often, companies that supposedly are liquidating will raise prices on items marked for
clearance, meaning that the company increases the price and “discounts” it. Thus, the discount
is less than advertised. Another case, at liquidating stores (if it is a retail chain), the sales prices
at the chain’s other stores is lower than the liquidator’s prices at the closing stores. On top of
this, sale items are often “final sale,” meaning returns are not accepted. Thus, there is no
recourse for customers. 10
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Manipulation of measurement units and standards
Sellers may manipulate standards to mean something different than their widely
understood meaning. One example is the personal computer’s hard drive. By stating the sizes of
hard drives in “megabytes” of 1,000,000 bytes, instead of 1,048,576, they overstate capacity by
nearly 5%. With gigabytes, the error increases to over 7% (1,073,741,824, instead of
1,000,000,000) and nearly 10% for the newer terabyte. Seagate Technology and Western
Digital were sued in a class-action suit for this deception. Both companies agreed to settle the
suit and reimburse customers in kind, yet they still continue to advertise this way.
In another example, Fretter Appliance stores claimed “I’ll give you five pounds of coffee
if I can’t beat your best deal. ” While initially they gave away that quantity, they later redefined
them as “Fretter pounds,” which, unsurprisingly, were much lighter than standard pounds.
Fillers and oversized packaging
Some products are sold with fillers, which increase the legal weight of the product with
something that costs the producer very little compared to what the consumer thinks that he or
she is buying. Food is an example of this, where TV dinners are filled with gravy or other sauce
instead of meat. Malt and cocoa butter have been used as filler in peanut butter.
Manipulation of terms
Many terms do have some meaning, but the specific extent is not legally defined, leading
to their abuse. A frequent example (until the term gained a legal definition) was “organic” food.
“Light” food also is an even more common manipulation: The term has been variously used to
mean low in calories, sugars, carbohydrates, salt, texture, thickness (viscosity), or even light in
color. Tobacco companies, for many years, used terms like “low tar,” “light,” “ultra-light,”
“mild,” or “natural” in order to imply that products with such labels have less detrimental
effects on health but in recent years, it was proven that those terms were considered misleading.
Naturally, these manipulations of terms are used to charge a higher price, particularly on
“‘organic” products.
Incomplete/inconsistent comparison
“Better” means one item is superior to another in some

way, while “best” means it is superior to all others in some
way. However, advertisers frequently fail to list in what way
the items are being compared (price, size, quality, etc.) and, in
the case of “better,” to what they are comparing. In an
inconsistent comparison, an item is compared with many
others, but only compared with each on the attributes where it
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wins, leaving the false impression that it is the best of all products, in all ways. This is common
with price-comparing Internet websites.
Bait-and-switch
Advertisers advertise an item that is unavailable when the consumer arrives at the store
and is then sold a similar product at higher price. Bait-and-switch is legal in the United States,
provided that ads state that there is a limited supply and that no rain checks will be offered.
Legal regulations
Advertising is regulated by the authority of the Federal Trade Commission to prohibit “unfair
and deceptive acts or practices in commerce. ” What is illegal is the potential to deceive, which
is interpreted to occur when consumers see the advertising to be stating to them, explicitly or
implicitly, a claim that they may not realize is false and material. The goal is prevention rather
than punishment, reflecting the purpose of civil law in setting things right rather than that of
criminal law.
Predatory Pricing
Predatory pricing is the practice of selling a product or service at a very low price, with
the intention of driving competitors out of the market, or create barriers to entry for potential
new competitors. Since competitors cannot sustain equal or lower prices without incurring
losses, they may be forced out of business. After chasing competitors out of the market, the
incumbent would have fewer competitors (and may in fact be a monopoly), and can then – in
theory – raise prices above what the market would otherwise bear.
In many countries, predatory pricing is considered anti-competitive and is illegal under

competition laws. However, It is usually difficult to prove that prices dropped because of
deliberate predatory pricing rather than legitimate price competition. In any case, competitors
may be driven out of the market before the case is ever heard. Thus, many economists are
doubtful that the concept of predatory pricing is actually practical and transferable to the real
world.
Economic Rationale
In the short run, profits for the incumbent will fall due to predatory pricing, possibly even
into negative territory. The incumbent will not mind so long as they can maintain these losses,
which can be made up for once they raise prices above the would-be market level: after the
weaker competitors are driven out, the surviving business can raise prices above competitive
levels (to supra competitive pricing). The predator hopes to generate revenues and profits in the
future that will more than offset the losses it incurred during the predatory pricing period. There
must be substantial barriers to entry for new competitors for predatory pricing to succeed. But
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the strategy may fail if competitors are stronger than expected, or are driven out but replaced by
others. In either case, this may force the predator to prolong or abandon the price reductions.
The strategy may fail if the predator cannot endure the short-term losses, either because it takes
longer than expected or simply because the loss was not properly estimated. So the predator
should hope this strategy to works only when it is much stronger than its competitors and when
barriers to entry are high. The barriers prevent new entrants to the market replacing others
driven out, thereby allowing supra competitive pricing to prevail long enough to dwarf the
initial loss.
Criticism and Support
Criticism
Some economists claim that true predatory pricing is rare because it is an irrational
practice and that laws designed to prevent it only inhibit competition. This stance was taken by
the US Supreme Court in the 1993 case Brooke Group v. Brown & Williamson Tobacco. The
Federal Trade Commission has not successfully prosecuted any company for predatory pricing
since. Economists argue that the competitors (the ‘prey’) know that the predator cannot sustain
low prices forever, so it is essentially a game of chicken. If they can ride it out, they will
survive. And even if they cannot, bankrupcy does not by itself eliminate the fallen prey’s ability
to produce: the physical plant and people whose skills made it a viable business will exist, and
will be available – perhaps at very low prices – to others who may replace the fallen prey once
supra-competitive prices set in.Critics of laws against predatory pricing may support their case
empirically by arguing that there has been no instance where such a practice has actually led to
a monopoly. Conversely, they argue that there is much evidence that predatory pricing has
failed miserably.
Support
Prey may not see it as a game of chicken, if they truly believe that the prey has actually
found a way to achieve a lower cost of production than them. Thus, they would not know
predatory pricing is occurring. They would exit the market, thinking it is no longer profitable.
This is known as ‘ low-cost signalling ‘. However, this does not support the idea that the new
virtual monopoly could raise and sustain prices at monopoly levels, even though there are
certain barriers to entering monopolized markets that could, in theory, prevent the entry of
competition.
Examples
According to an International Herald Tribune article, the French government ordered

Amazon.com to stop offering free shipping to its customers, because it was in violation of
French predatory pricing laws. After Amazon refused to obey the order, the government
proceeded to fine them €1,000 per day. Amazon continued to pay the fines instead of ending its
policy of offering free shipping. Low oil prices during the 1990s, while being financially
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unsustainable, effectively stifled exploration to increase production, delayed innovation of
alternative energy sources and eliminated competition from other more expensive yet
productive sources of petroleum such as stripper wells. It is important to note that in both these
and other cases, the predatory pricing policy is alleged, and difficult to prove comprehensively.
Price Discrimination
Although there are legal concerns around monopolistic practices, price discrimination is a
popular tactic for capturing consumer surplus.
Price discrimination is the sale of identical goods or services at different prices from the
same provider. Price discrimination also occurs when the same price is charged for goods with
different supply costs.
Price discrimination’s effects on social efficiency are unclear; typically such behavior
leads to lower prices for some consumers and higher prices for others. Output can be expanded
when price discrimination is very efficient, but output can decline when discrimination is more
effective at extracting surplus from high-valued users than expanding sales to low valued users.
Even if output remains constant, price discrimination can reduce efficiency by misallocating
output among consumers.
Legal Concerns
Although price discrimination is the producer’s or seller’s legal attempt to charge varying
prices for the same product based on consumer demand, price discrimination can be illegal in
some cases. For example, it is illegal for manufacturers to set different prices for anti-
competitive purposes. Beer companies during the 1960’s attempted to price discriminate based
on location to price below competitors and run them out of business.
Economic Rationale
In theoretical markets there exists perfect information, no transaction costs, and perfect
substitutes. In these cases price discrimination can only exist in monopolistic or oligopolistic
markets: otherwise, a buyer can buy the good at a lower price and sell it immediately at a
slightly higher place (but lower than the price discrimination level), making a profit. In the real
world, product heterogeneity, market frictions and moderate fixed costs allow for a level of
price description in many markets.
Two conditions are necessary for price discrimination:
1. Companies must be able to identify market segments by their price elasticity of demand;
2. They must be able to enforce the scheme.
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For example, airlines routinely engage in price discrimination by charging high prices for
customers with relatively inelastic demand–business travelers –and discount prices for tourists
who have relatively elastic demand. The airlines enforce the scheme by making the tickets non-
transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to
a business traveler (arbitrage). Airlines must also prevent business travelers from directly
buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or
minimum stay requirements conditions that would be difficult for average business traveler to
meet.
Types of Price Discrimination
First degree
Here, the monopoly seller knows the maximum price each individual buyer is willing to
pay, allowing them to absorb the entire consumer surplus. More is produced than the non-
discriminating monopoly case, and there is no deadweight loss. This is mostly a theoretical
outcome.
Second degree
Price varies according to demand: larger quantities are available at a lower unit price.
Unlike first degree, sellers are unable to differentiate between individual consumers, and so
they provide incentives for consumers to differentiate themselves. For example, airlines
differentiate according to first, business and coach passengers.
Third degree
Price varies by attributes such as location or by customer segment, or in the most extreme
case, by the individual customer’s identity; where the attribute in question is used as a proxy for
ability/ willingness to pay. Sellers are able to differentiate between different types of
consumers. An example is student discounts. In third degree discrimination, it is not always
advantageous to discriminate.
Fourth degree/reverse price discrimination
Prices are the same for different customers, even if organizational costs may vary. For
example, a coach class airplane passenger may order a vegetarian meal. Their ticket cost is the
same, but it may cost more to the airline to obtain a vegetarian meal for them.
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SECOND QUARTER
Lesson Title: Branding
Lesson Objectives:
1. Discuss the characteristics and connotations around branding products and services
2. Explain why a strong branding strategy is essential to the success of a company
3. Describe the conditions that must be met to achieve brand loyalty, and the consumer
behaviors associates with brand loyalty 10
4
MODULE CONTENT:
Defining a Brand
A brand refers to a name, term, symbol, or any other type of feature that defines or
identifies a seller’s product or service.
A brand consists of any name, term, design, style, words, symbols or any other feature
that distinguishes the goods and services of one seller from another. A brand also distinguishes
one product from another in the eyes of the customer. All of its elements (i.e., logo, color,
shape, letters, images) work as a psychological trigger or stimulus that causes an association to
all other thoughts we have about this brand. Tunes, celebrities, and catchphrases are also
oftentimes considered brands.
History
The word “brand” is derived from the Old Norse ‘brand’ meaning “to burn,” which refers to the
practice of producers burning their mark (or brand) onto their products. Italians are considered
among the first to use brands in the form of watermarks on paper in the 1200s. However, in
mass-marketing, this concept originated in the 19th century with the introduction of packaged
goods.
Coca-Cola: The Coca-Cola is as example of
a widely – recognized trademark and global
brand.
During the Industrial Revolution, the
production of many household items, such as
soap, was moved from local communities to
centralized factories to be mass-produced and sold to the wider market. When shipping their
items, factories branded their logo or insignia on the barrels used, thereby extending the
meaning of “brand” to that of trademark. This enabled the packaged goods manufacturers to
communicate that their products should be trusted as much as local competitors. Campbell
Soup, Coca-Cola, Juicy Fruit gum, Aunt Jemima, and Quaker Oats were among the first
products to be “branded.”
Connotations
A successful brand can create and sustain a strong, positive, and lasting impression in the mind
of a consumer. Brands provide external cues to taste, design, performance, quality, value and
prestige if they are developed and managed properly. Brands convey positive or negative
messages about a product, along with indicating the company or service to the consumer, which
is a direct result of past advertising, promotion, and product reputation. 10
4
A brand can convey up to six levels of meaning:
 Attributes: The Mercedes-Benz brand, for example, suggests expensive, well-built, well-
engineered, durable, high-prestige automobiles.
 Benefits: attributes must be translated into functional and emotional benefits.
 Values: Mercedes stands for high performance, safety, and prestige.
 Culture: Mercedes represents German culture, organized, efficient, high quality.
 Personality: the brand projects a certain personality.
 User: the brand suggests the kind of consumer who buys and uses the product.
Value of Branding
Branding is a long term exercise, but one that reaps long-term profitability through
increased customer loyalty.
What is the Purpose of Branding and Why Is It So Important?
Branding involves researching, developing, and implementing brand names, brand marks,
trade characters, and trademarks. It undoubtedly requires a significant contribution from
marketing communications and is a long term exercise, but one that reaps long-term
profitability.
Branding is crucial to the success of any tangible product. In consumer markets, branding
can influence whether consumers will buy the product. Branding can also help in the
development of a new product by facilitating the extension of a product line or mix, through
building on the consumer’s perceptions of the values and character represented by the brand
name.
Benefits of Branding for the Consumer
Effective branding of a product enables the consumer to easily identify the product
because the features and benefits have been communicated effectively. This will increase the
probability that the product will be accessible and therefore purchased and consumed. Dunkin’
Donuts, for example, is a brand that has an established logo and imagery that is familiar to most
consumers. The vivid colors and image of a DD cup are easily recognized and distinguished
from competitors.
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Dunkin’ Donuts: The Dunkin’ Donuts logo, which includes an image of a DD cup of coffee,
makes it easy to spot anywhere.
Benefits of Branding for the Manufacturer
Branding helps create loyalty, decreases the risk of losing market share to the competition
by establishing a differential advantage, and allow premium pricing that is acceptable by the
consumer because of the perceived value of the brand. Good branding also allows for effective
targeting and positioning. For example, Starbucks is a brand known its premium coffee.
Starbucks has a loyal fan base due to its established global branding that communicates value.
Starbucks: Starbucks is a brand associated with premium, high-priced coffee.
Benefits of Branding for the Retailer
Branding enables the retailer to benefit from brand marketing support by helping to
attract more customers (ideally ones who normally don’t frequent the establishment). For
example, a customer who truly values organic brands might decide to visit a Babies R Us to
shop for organic household cleaners that are safe to use around babies. This customer might
have learned that a company called Baby Ganics, which brands itself as making “safe, effective,
natural household solutions”, was only available at this particular retailer.
10
4

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Sibugay Technical Institute Inc.

“Always deliver more than expected”

Lesson Title: Target Market

What Is a Target Market?

Consumers who make up a target market share similar

Understanding Target Markets

What is the purpose of target markets?

Direction: Identify the target market of the following famous

Business Name Who are their Target Customers?

Sibugay Technical Institute Inc.

“Price is what you pay, Value is what you get”

Buying something means paying a price. But what exactly is “price?”

 Price is the money charged for a good or service. For example,

Different Perspectives on Price

The Customer’s View

The price of an item is also called the price point,

For example, Dollar General is a general store or “five and

The Importance of Price to Marketers

Price is important to marketers because it represents marketers’ assessment of the value

Value and Relative Value

The Buyer’s Utility

The Seller’s Utility

Relative Value and Pricing

Relative value in the marketing context is attractiveness measured in terms of utility of

Sibugay Technical Institute Inc.

“Price is what you pay, Value is what you get”

Lesson Title: Price Competition and Non-price Competition

Pricing to Meet Competition

The keys to implementing a strategy of meeting competitive prices are an accurate

Pricing Above Competitors

Pricing above competition generally requires a clear advantage on some non-price

Pricing Below Competitors

Another possible drawback

Since price competition can only go

The firm can also distinguish its

The Benefits of Non-price Competition

Non-price competition typically involves promotional expenditures (such as advertising,

“Price is what you pay, Value is what you get”

Lesson Title: Specific Pricing Strategies

New Product Pricing

(1) Penetration pricing

A penetration strategy would generally be supported by the following conditions: price-

Product Line Pricing

Line pricing is the use of a limited number of price points

Line pricing is the use of a limited number of prices for all

Line pricing serves several purposes that benefit both

Products and services frequently have

“Price is what you pay, Value is what you get”

Lesson Title: Pricing during difficult economic Times

Pricing During Difficult Economic Times

Pricing During Difficult Economic Times

Cutting prices can quieten customer

A smart pricing strategy during a recession can become a competitive advantage. By

When the strategy works, a fighter brand not only

Everyday Low Pricing

Apart from the many strengths of Trader

There are many big firms using this type of pricing

Other Pricing Strategies

A flexible pricing mechanism made possible by advances in information technology, and

Pricing Above Competitors

“Price is what you pay, Value is what you get”

Lesson Title: Pricing Tactics

1. Analyze the use and types of discounts as part of pricing tactics