Module 1 PRICING AS AN ELEMENT OF THE MARKETING MIX

Learning Objectives
At the end of this module, students are expected to;
 Understand the definition of price from different prospective
 Identify the different pricing objectives and pricing issues
 Understand the relationship of price on the other variables of marketing mix ✓
Familiarize on the early pricing practices

1.1. The Commercial Exchange

Although people often think of marketing as synonymous with advertising or
salesmanship, it is actually much broader. Marketing consists of the full range of
activities involved in facilitating commercial exchanges and having all of these
activities be guided by a concern for customer needs.

Figure 1.1 The Commercial Exchange

 The product could be something tangible, which is referred to as a good, or the
product could be the result of human or mechanical effort, which is referred to
as a service.
 The buyer could be a consumer—an individual who purchases a product for
his or her own use—or the buyer could be a business customer— an
individual or group who purchases the product in order to resell it or for
other business purposes.

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 1.2. What is a Price?
This essential role of price in commerce is sometimes disguised by the use of
traditional terms. If the product in the commercial exchange is a good, then the
product’s price will most likely be called “price.” However, if the product is a service,
then the product’s price may well go by one of a variety of other possible names.

Figure 1.2 Some Terms Used to Mean “Price”

1.2.1. The Customer’s View of Price

Figure 1.3 The customer's view of price

 A customer can be either the ultimate user of the finished product or a
business that purchases components of the finished product.

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  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.
 The customer uses several criteria to determine how much they are willing to
expend in order to satisfy these needs. Ideally, the customer would like to
pay as little as possible to satisfy these needs.
 For the business to increase value (i.e., create the competitive advantage), it can
either increase the perceived benefits or reduce the perceived costs.
All profit and non-profit organizations must set prices on their product and services
PRICING is the amount of money charged for a product or service or the sum of the
values that consumers exchange for the benefits of having or using the product or
service.
PRICE- means the money value of a product or service expressed in terms of peso and
or centavos. It is also the amount needed in order to acquire a product or service and its
accompanying services.
Throughout most of history, prices were set by negotiation between buyers and sellers.
1. Fixed price policy, or setting one price for all buyers, is a relatively modern idea
that has evolved with the development of large-scale retailing at the end of the
nineteenth century
2. The internet promises to reverse the fixed pricing trend and take us back to an
era of dynamic pricing, i.e. charging different pricing depending on individual
customers and situations
3. Through the internet, buyers and sellers negotiate prices on thousands of items
daily
Many companies do not handle pricing well. Common mistakes that they make are:
1. Pricing is too cost-oriented
2. Prices are not revised often enough to reflect market changes
3. Prices do not take into account the other elements of the marketing mix.
4. Prices are nor varied for different product, market segment, and purchase
occasions

ROLE OF PRICE

The basic problem of an economic society is to allocate resources among the

members of the society as to maximize the welfare of the society as a whole.

To achieve this welfare objective, each resource should be used to perform the function
by which it contributes most efficiently to society.

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 In a market economy, the price system allocates these resources. That is, prices
furnish the guideposts that indicate how resources should be used.

Price determines WHAT products and services should be produced and what
amounts

Price determines HOW these products and services should be produced.

Price determine FOR WHOM the products and services should be produced.

1.2.2. From a Societal Perspective

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.
1.2.2.1. Rational Man Pricing: Economic Perspective
Basically, economics assumes that the consumer is a rational decision maker
and has perfect information. Therefore, if a price for a particular product goes up
and the customer is aware of all relevant information, demand will be reduced for
that product. Should price decline, demand would increase. That is, the quantity
demanded typically rises causing a downward sloping demand curve.

Figure 1.4 Price and Demand

 A demand curve shows the quantity demanded at various price levels.
 As a seller changes the price requested to a lower level, the product or service
may become an attractive use of financial resources to a larger number of
buyers, thus expanding the total market for the item.

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 1.2.2.2. Irrational Man Pricing: Freedom Rules
There are simply too many examples to the contrary to believe that the economic
assumptions posited under the rational man model are valid.
 Prices go up and people buy more.
 Prices go down and people become suspicious and buy less.
The ability of paying a price few others can afford may be irrational, but it
provides important personal status. There are even people who refuse to buy anything
on sale. Or, others who buy everything on sale. In many societies, an additional
irrational phenomenon may exist-support of those that cannot pay.
1.2.3. The Marketers View of Price
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. A number of factors have changed the way marketers undertake
the pricing of their products and services.
1. Foreign competition has put considerable pressure on local firms'
pricing strategies. Many foreign-made products are high in quality and
compete in local markets on the basis of lower price for good value.
2. Competitors often try to gain market share by reducing their prices. The
price reduction is intended to increase demand from customers who are
judged to be sensitive to changes in price.
3. New products are far more prevalent today than in the past. If a new
product is priced incorrectly, the marketplace will react unfavorably and the
"wrong" price can do long-term damage to a product's chances for
marketplace success.
4. Technology has led to existing products having shorter marketplace
lives. New products are introduced to the market more frequently, reducing
the "shelf life" of existing products. As a result, marketers face pressures to
price products to recover costs more quickly.

1.3. Pricing Objectives

1. Survival: It is apparent that most managers wish to pursue strategies that
enable their organizations to continue in operation for the long term. If
revenue falls below cost for a long period of time, the firm cannot survive.
2. Profit: Survival is closely linked to profitability. For many businesses,
longterm profitability also allows the business to satisfy their most important

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 constituents-stockholders. Lower-than-expected or no profits will drive
down stock prices and may prove disastrous for the company.
3. Sales: Just as survival requires a long-term profit for a business enterprise,
profit requires sales. Demand must be managed in order to regulate
exchanges or sales.
4. Market: Pricing strategy is one of the tools that is significant in creating and
sustaining market share. Prices must be set to attract the appropriate
market segment in significant numbers.
5. Image: Price is a highly visible communicator. It must convey the message to
the community that the firm offers good value, that it is fair in its dealings with
the public, that it is a reliable place to patronize, and that it stands behind its
products and services.

1.4. Pricing as Marketing Activity

Marketing activities are those actions an organization can take for the purpose of
facilitating commercial exchanges. There are four categories of marketing activities that
are particularly important, which are traditionally known as the four elements of the
marketing mix:
 Product—designing, naming, and packaging goods and/or services that satisfy
customer needs
 Distribution—efforts to make the product available at the times and places that
customers want
 Promotion—communicating about the product and/or the organization that
produces it
 Pricing—determining what must be provided by a customer in return for the
product

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 Figure 1.5 Pricing Harvests the Value Created by the Other Three Marketing
Mix
Elements
Product, distribution, and promotion are all part of the process of providing
something satisfying to the customer.
 Product activities concern the design and packaging of the good or service
itself.
 Distribution involves getting the product to the customer.
 Promotion involves communicating the product’s existence and benefits to
customers and potential customers.
All three of these types of marketing activities contribute to the product being of
value to customers.
1.5. Early Pricing Practices
The oldest records of prices ever found are clay tablets with pictographic
symbols found in a town known as Uruk, in what was ancient Sumer and
what is now southern Iraq. These price records are from 3300 BC—
they’ve survived 5,300 years. The documents—records of payment for
barley and wheat, for sheep, and for beer—are really receipts. “Uruk was
a large city, at a minimum 40,000 people,” says UCLA professor Robert
Englund, one of the few experts on the Uruk documents. “So some of the
quantities are very high—hundreds of thousands of pounds of barley, for
instance.”
But here’s the really remarkable thing. The earliest Uruk tablets aren’t
just the oldest pricing records ever found. They are the oldest examples
of human writing yet discovered. In other words, when humans first took
stylus to wet clay, the first things that they were compelled to record
were . . . prices.
 In the earliest commercial exchanges, goods or services were exchanged
for other goods or services. For example, the price that a farmer might pay for
a bolt of cloth could be a bushel of corn. This practice, termed barter, still goes
on today, especially in less developed countries.
 A medium of exchange could be anything that the buyers and sellers in a
society agree upon. In the past, items such as cattle, seashells, dried cod, and
tobacco have been used as a medium of exchange.
 Over time, it became clear that the best medium of exchange is one that is
finely divisible, such as the metals of various weights used in coins.
 The use of coins and notes represents to national systems of money as times
passes by, such as dollars, yen, or euros

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 1.6. Three Categories of Pricing Issue
As the use of prices in monetary terms proliferated among human societies,
various questions that required pricing decisions began to arise. Most of these issues
fall into one of the following three categories: (1) buyer–seller interactivity, (2) price
structure, and (3) price format.

1.6.1. Buyer-Seller Interactivity

Throughout most of history, prices were not the fixed amounts displayed in
stores unlike advertising that are so familiar today. Rather, prices were negotiated
during an interaction between the buyer and the seller. The basic elements of price
negotiation can be illustrated by imagining how, for many centuries, the price
determination process typically occurred:
A customer arrives at the seller’s stall in the local marketplace and
examines the merchandise. When he finds something he wants, the
customer asks the seller, “How much?” The seller then states an asking
price, which is higher than his reservation price, the lowest price at which
he would sell the item: “23 ducats.” The customer then states his initial
offer. This, of course, is lower than the customer’s reservation price (the
highest price that the customer would pay for the item): “I can’t pay more
than 14.”
The seller and the customer would then try to arrive at an amount they
can both agree on by haggling, a process involving some number of
prices and offers and statements supporting the validity of each. “This
item is really of the very highest quality,” the seller might argue, “but
since I’m in a good mood today, I’ll let you have it for 21.” The customer
might respond, “I’ve seen items at least as good as this in other shops,
but since I’m here, I’ll give you 16.
A price arrived at by the buyer–seller interactions of negotiation or the
interactions of auction bidding would be referred to as an interactive price.
1.6.2. Price Structure
Although there are benefits to moving from negotiated prices to fixed prices,
there are also disadvantages. One strength of interactive pricing is that it makes it easy
for the seller to charge different prices to different buyers. Fixed price is the practice of
stating to the customer the price that they actually expected to receive and sticking to it.
For example, a product may have one price when purchased alone and another
price when purchased in large quantity or when purchased along with other items. The

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 product may have one price when purchased during the week and another when
purchased on a weekend. It may have one price when purchased in the city and
another when purchased in a rural area. These numerous prices for an item are part of
the pattern of the seller’s prices.
In general, the pattern of an organization’s prices is known as its price structure.
Various products are interrelated such that the price charged for one item should take
into account the prices charged for other items sold by the organization.
Thus in using fixed price the buyer has no choice to bargain on the fixed price offer by
the seller
1.6.3. Price Format
The third category of pricing issues involves how a price is expressed when it
is communicated to potential customers. For example, early fixed prices tended to
be round numbers, such as $1.00, $5.00, or $2.50. The form of expression of a price is
known as the price format. Expressing a price in a “just-below” format often has the
effect of lowering the price’s leftmost digit. 1180 retail advertisements began to appear
showing items priced at a penny or two below the round number based on the figure
below.

Figure 1.6 Macy’s Ad From 1880, Showing 9-Ending Prices

Research on early price advertising has indicated that just below prices were
more likely to be used when the advertised item was claimed to be a discount or an
otherwise low price. This suggests that the use of the just-below price format was, from
the start, motivated by managerial intuitions about its effects on the perceptions of the
consumer.
Price format also involves the question of how many numbers are required to
express an item’s price. For example, a price advertisement could directly show the

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 price of a mushroom and pepperoni pizza, or it could express that price as a base price
plus an additional amount for the two toppings. See figure below.

Figure 1.7 Alternative Price Formats for a Mushroom and Pepperoni Pizza
The question of whether a price should be expressed as a single number or as
the sum of more than one number is the issue of price partitioning.

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