Course Code & Title : MKT6 ( PRICING STRATEGY )

Lesson Number : 1
Topic : THE STRATEGY AND TACTICS OF PRICING

LEARNING OBJECTIVES:
After reading this lesson you will be able to:

 To identify the forces that determine the success of a pricing strategy,

 To develop strategies to address those forces proactively,
 To implement tactics to gain stimulate profit.

PRE-ASSESSMENT
Direction: Read the questions carefully. Write your answer at the back of your paper.

1. What are the advantages and disadvantages of cost-plus pricing?

LESSON PRESENTATION:

Strategic Pricing

Coordinating the Drivers of Profitability

https://www.tonyrobbins.com/career-business/make-a-profit/

The economic forces that determine profitability change whenever technology,

regulation, market information, consumer preferences, or relative costs change.
Consequently, companies that grow profitably in changing markets often need to break
old rules and create new pricing models.
For example, Netflix changed the model for renting films from the daily rate at video
stores to a time-independent membership model. Ryanair radically unbundled the
elements of passenger air travel—charging separately for baggage, seat selection, in-
person check in, beverages—enabling it to generate greater occupancy and more
revenue per plane per day than its established European competitors.
Producers of new online media created a new metric for pricing ads—cost per click—
that aligns the cost of an ad more closely to its value than was possible in traditional
media. Apple changed the market for music in part by pricing songs rather than albums.
Unfortunately, few managers, even those in marketing, have received practical training
in how to make strategic pricing decisions such as these. Most companies still make
pricing decisions in reaction to change rather than in anticipation of it. This is
unfortunate given that the need for rapid and thoughtful adaptations to changing
markets has never been greater. The information revolution has made prices
everywhere more transparent, making customers increasingly price sensitive. The
globalization of markets, even for services, has increased the number of competitors
and often lowered their cost of sales. The high rate of technological change in many
industries has created new sources of value for customers, but not necessarily led to
increases in profit for the producers. Still, those companies that have the capability to
create and implement strategies that take account of these changes are well rewarded
for their efforts. Our Value Scan survey, covering more than 200 companies in both
consumer and business markets, found that firms developing and effectively executing
value-based pricing strategies earn 31 percent higher operating income than
competitors whose pricing is driven by market share goals or target margins.
Specific examples abound that illustrate the power of strategic pricing to reward
innovation. One prominent example is the iPhone. When Apple launched the iPhone,
critics claimed that a price over $400 was way out of line when competitive products
could be bought outright for half as much or obtained “free” with a two- year contract
from a wireless service provider. Apple, however, understood that a hard-core group of
technology “innovators” would easily recognize and place a high value on the iPhone’s
unique differentiation. By focusing on meeting that group’s needs at a high price, Apple
established a high benchmark for the value of its easy-to-use interface. When Apple
later lowered the price to a still high $300, it seemed like a bargain in comparison to that
benchmark, causing still more people to buy the phone. Having established a high
value, the company now captures a dominant share at competitive prices while earning
more than $1 billion per year from the sale of third-party “apps.”

COST PLUS PRICING

 Full cost of making the product plus a % mark up
 Price is set by calculating the full costs ( variable/direct plus fixed/indirect
cost)
 It is relatively easy to calculate the direct costs, but some way has to be
devised to allocate the indirect costs
https://www.slideshare.net/JimBrod/the-pricing-pyramid-28681533
GENERALIZATION:
At the end of this module, the students should be able to know that pricing
strategically has become essential to the success of business, reflecting the rise of
global competition, the increase in information available to customers, and the
accelerating pace of change in the products and services available in most markets.
The simple, traditional models of cost-driven, customer-driven, or share driven pricing
can no longer sustain a profitable business in today’s dynamic and open markets. The
strategic pricing pyramid containing the five key elements of strategic pricing.
Experience has taught us that achieving sustainable improvements to pricing
performance requires ongoing evaluation of and adjustments to multiple elements of the
pyramid. Companies operating with a narrow view of what constitutes a pricing strategy
miss this crucial point, leading to incomplete solutions and lower profits. Building a
strategic pricing capability requires more than a common understanding of the elements
of an effective strategy. It requires careful development of organizational structure,
systems, individual skills, and ultimately culture. These things represent the foundation
upon which the strategic pricing pyramid rests and must be developed in concert with
the pricing strategy. But the first step toward strategic pricing is to understand each level
of the pyramid and how it supports those above it.
Course Code & Title : MKT6   ( PRICING STRATEGY )
Lesson     Number :  2
Topic        : THE VALUE CREATION

I. INTRODUCTION
Value is the over-all satisfaction that a customer can get in a product or service.
Measuring value is indeed challenging since it is subjective in nature and relies greatly on what
the customer perceived and experienced. Creating value on products and services could be a
great way to boost profitability.

II. LEARNING   OBJECTIVES

After studying this lesson, you should be able to understand- 
1. Recognize the importance of value creation in the Foundation of Business.
2. Describe the role of economic value in pricing.

III. PRE-ASSESSMENT
1.  Define Strategic Pricing & 5 elements of pricing strategy: 
(a) Value creation, (b) Price and offer structure, (c) Value communication, (d) Pricing
policy, and (e) Price setting.

IV. LESSON PRESENTATION

Value Creation
The Source of Pricing Advantage
Many firms assume that adding features or improving performance will lead to an
increase in price or volume of both. But more and better features will not lead to greater
profitability unless those features translate into higher monetary or psychological value to
customers.

Why does understanding the value of products or services lead to profit maximization?
Managers are enabled to make more profitable business choices:
1.Salespeople can defend price premiums
2. Enable marketing people to have a defined segmentation strategy that can be used for price
differentiation and bundling strategies.
3.Product development people can focus on features that customers would value rather than what
would the customer be happy to have.
4. Enables pricing setting based on profit maximization and not on internal cost calculation or
market share goals.
The role of Value in Pricing
The term Value:  Overall satisfaction that a customer receives from using a product or service
offering ( use-value )
Consumer surplus: Value to customer – Market price
Exchange or economic value:  depends on alternatives the customer has to satisfy the same
needs. ( Paying for convenience )
Differential product offering: differentiation of product or service from alternatives.
Differential value comes in two forms:
1. Monetary value: represents the total cost saving or income enhancement the customer accrues
as a result of purchasing a product. ( important for B2B).
2. Psychological value: refers to ways the product creates innate satisfaction for the customer.
-Consumer products focus more on psychological value than the monetary value because
they provide satisfaction and pleasure
-Differentiation value can be positive or negative.

Total economic value is calculated as:

Price of the best alternative to the customer ( reference value ) + the worth of whatever
differentiates the product from the alternative ( differentiation value )
-The maximum price a smart shopper who is fully informed about the
value of the product would pay.
-When the shopper is uninformed then it is a perceived value and it may fail short of the
economic value. That is why companies must communicate the value clearly and
highlight their differentiation.

Economic Value
-Refers to the contribution made to human welfare, measured in terms of each individual’s
assessment

-Is a comparative concept, defining the trade-off between two situations: that is, the answer to a
carefully defined question in which two alternatives are being compared
-Of a specific change is the amount the person would need to pay, or be paid, to be as well of as
he would have been without the change

Two ways to measure this:

-Willingness to pay ( WTP): how much are you willing to pay
-Willingness to accept (WTA): how much must you be paid

Compensation can be measured in any common units desired ( precious metal, seashells, cattle,
cigarettes )

 V. GENERALIZATION 
The foundation of a profitable pricing strategy begins with a complete understanding of
the economic value the product delivers to buyers because, ultimately, value is the primary
determinant of willingness-to-pay. This foundational understanding of value contributes to a
comprehensive pricing strategy in several ways. First, it provides insight into how willingness to-
pay differs across segments. As the commercial printing company example illustrates, a value-
based segmentation can inform not only pricing but offering design as well. Second,
understanding value is the only way to develop effective communications campaigns to increase
customer’s willingness-to-pay. Although a hot beachgoer probably recognizes the value of a cold
drink delivered to her blanket, most customers are not so well informed, and it is the job of the
seller to get the value message across

Course Code & Title : MKT6 ( PRICING STRATEGY )

Lesson Number : 3
Topic : PRICING TO MAXIMIZE PROFIT

I. INTRODUCTION
Perfectly competitive firm sells large quantity of products and services as what they
intended for as long as consumers accepts the prevailing market price. The idea of selling more
units will increase profitability depends greatly on the price of the product and service. In order
to achieve maximization of profit, appropriate pricing strategies must be applied.
II. LEARNING OBJECTIVES
After reading this lesson you will be able to:

 To identify pricing strategies that maximize profit;

 To reflect on the ethical aspect in selecting and applying pricing strategy;
 To present sample application of strategies observed in the market.

III. PRE-ASSESSMENT
Instructions: Using the Venn Diagram, list down common concepts of pricing in
the left side, profit in the right side and the relation of the two in business in the
intersecting part of the diagram. (10 points)

Pricing Profit

IV. PRESENTATION
1. Cost-Plus Pricing
Cost-plus pricing is one of the simplest and most common pricing strategies that businesses use.
With this method, simply add a percent-based markup to your product cost to identify the target
selling price.
Keystone pricing technique always doubles the product cost, is a particularly popular
subcategory of this strategy.
Cost-plus pricing is an easy way for retailers, especially those with large inventories like grocery
stores and department stores to simplify and even automate their pricing. It also guarantees a
satisfying profit margin.
However, this strategy does not do a great job at taking consideration of labor or external factors
like competition. It is not the best choice for companies that sell digital products or services
either.
2. Value Pricing
-Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived
value of a product or service, usually with external factors in mind. It considers how and how
much customers will benefit from what is being offered in the market, while taking into account
less easily quantifiable factors.
Value pricing may cause the prices and profits to fluctuate, for example, a swimsuit line carries
less value in the winter but it is still a good strategy for generating demand throughout the year.
It is a highly flexible strategy that focuses on keeping customers satisfied, not just covering your
cost of production.
3. Penetration Pricing
Penetration pricing strategy initially charge low prices, usually lower than the competitors then
make gradual price increases as market share grows. This helps launch with a high volume of
sales right away.
Penetration pricing can be highly effective for startups and small businesses that are still working
on growing their brand. Though it can certainly be risky, it's a great way to draw in shoppers
who may otherwise disregard the product or service. As the business gain brand recognition,
trust, and a solid customer base, other pricing strategies may be applied that provide a higher
profit.
It is vital to know that penetration pricing differs from loss leader pricing, which is illegal in
many states. Whereas penetration pricing quickly increases your prices, a loss leader strategy
continually uses low price points or sales to attract customers, sometimes in hopes of driving
competitors out of business. This can lead to a monopoly, allowing the company using the
strategy to set any prices they want.

4. Price Skimming
The other side of penetration pricing is price skimming strategy which launch products and
services with high prices and then lower prices over time.
Price skimming is an effective way to attract trendsetters and influencers who want to be the first
to try new products and services. Doing so can get consumers excited for products, while
keeping the high-income users as loyal customers.
This happens regularly in the world of smartphones. When new iPhone models first launch, they
can cost nearly Php 70,000 because they are extremely trendy. Over time, they become more
affordable for the masses, reaching people of various income levels. Another perk of price
skimming is that the business more quickly earns back your production costs instead of taking an
initial loss.
Price skimming does not work as well for companies offering professional services, such as
accounting firms and business consultancies, since they are not as heavily demand-driven.
However, price skimming can work well in industries that rely on trends, like technology and
fashion, or those with particularly high production costs, such as pharmaceuticals.
5. Bundle Pricing
Using a bundle pricing method means selling customers two or more products or services for a
lower cost than if they were to buy them separately. For example, if an online store sells
whitening soap for Php 50 and a moisturizer for Php 60, they could offer both for Php 100
instead of Php 110.
Bundling the hotel rooms, flights, and car rentals like Expedia, or bundling haircuts and styling
like your favorite salon, this is an effective pricing strategy that makes customers feel like they
are getting more for what they are paying. With bundles, shoppers are likely to spend more each
time they visit.
6. Premium Pricing
When target market is predominantly affluent shoppers, charging higher prices without a plan to
lower it significantly can make your brand more attractive. A premium pricing strategy is all
about charging more than your competition as a way to stand out.
Premium pricing can provide a sense of luxury, and it can enforce the idea that it is a brand
name, while creating a perception that it has the best quality products can offer. For example,
when shopping for hotdog, many customers are willing to pay more to purchase Purefoods
Tender Juicy. Likewise, consumers will pay more for brands like Nike and Adidas, even though
all their counterparts work exactly the same. This pricing model only works when customers are
well defined to willingly pay for high prices. It helps to quickly perceived value soar.
7. Competitive Pricing
If your business mostly targeting price-sensitive customers, you may consider a competitive
pricing strategy. With this strategy, prices are continuously kept lower than competitors' prices.
Brands like Best Buy and SM Bonus offer price match guarantees to keep their loyal customers,
even when other products have sales. This strategy is often paired with economy pricing, in
which companies focus on keeping production costs low to offer the best pricing possible. While
it will not make the brand feel exclusive in any way, competitive pricing will help to win over
the customers who are seeking a reliably affordable product.
8. Psychological Pricing
While the aforementioned strategies can have a big impact on the perceived value of your
product or service, psychological pricing alters the perceived price. It uses the following tactics
to make customers feel like they are saving more or paying less than they really are.
a. Offering prices just below a whole number (Odd pricing technique).
b. Placing an original price next to a sale price.
c. Launching a BOGO (Buy One Get One) sale that highlights a free item
instead of a 50% off sale.
The most significant benefit this strategy is that the business can successfully set the desired
prices, while also keeping customers happy. Moreover, it may be able to get a thrifty customer to
spend more than usual since they will feel like they are getting a good deal.

V. GENERALIZATION/ SUMMARY
The goal of every business is to make profit. Along side with it is to make profitability
sustainable and even maximize it. Understanding how to set price on the products and services
that you are selling can have a major impact on the success of the business. There are several
pricing strategies that can be applied. Each strategy must be carefully studied prior to its
implementation to secure that it is suitable for the business. A well-priced products and services
can beat out competition without diminishing the perceived value and quality.