CHAPTER 4:

PRODUCT PRICING
LEARNING OBJECTIVES
On successful completion of this
chapter, the students should be
able to do the following:
1. Explain the importance of cost in
determining and establishing the
price of a product/ service.
2. Identify the major types of
pricing strategies.
3. Calculate and analyze how to price
a product/ service.
 TOPICS
review on the components of product cost/ unit.
The importance of cost in determining and establishing the price of a
product/ service.
Major Product Pricing Strategies
Cost Based Pricing
Cost - Plus Pricing
Break Even Pricing
Mark Up Pricing
Target Return Pricing
Customer Based Value Pricing
Competition based Pricing
Penetration and Discount Pricing
Premium Pricing
Price Skimming
REVIEW!
Components of Product Cost/Unit.
 THE IMPORTANCE OF COST IN DETERMINING AND
ESTABLISHING THE PRICE OF A PRODUCT/ SERVICE.
UNDERSTANDING PRICE

SETTING THE PRICE

ADAPTING THE PRICE

INITIATING AND RESPONDING TO

PRICE CHANGES
UNDERSTANDING PRICE

01 A Changing Pricing
Environment

02 How Companies Price

03 Consumer Psychology and

Pricing
01 A Changing Pricing Environment

Pricing practices have

changed significantly over
the years.
Internet has allowed sellers
to differentiate between
buyers and buyers to
differentiate sellers.
 BUYERS CAN:
(1) Get instant price
comparisons from
thousands of vendors.
(2) Name their price and
have it met.
(3) Get products free.
SELLERS CAN:
(1) Monitor customer
behaviour and tailor offers
to individuals.
(2) Give certain customers
access to special prices.

BUYERS AND SELLERS CAN:

Negotiate prices in online auctions and
exchanges.
02 How Companies Price

IN SMALL COMPANIES: the boss often

sets the price.
IN BIG COMPANIES: division and product
line managers.
There are also companies who have pricing
departments.
03 Consumer Psychology
and Pricing

ECONOMISTS - Consumers are “price

takers”.
MARKETERS - Consumers are actively
process price information.

three key topics—reference prices, price-

quality inferences, and price endings.
Reference prices Price-Quality Inferences Price Endings

A reference price Some consumers

(RP) is the price would denote the A technique that
that a purchaser quality of a allows consumers
announces that it product/service to think that it is
is willing to pay for according to its not high of a price.
a good or service. price.
SETTING THE PRICE

01 Selecting the Pricing Objective

02 Determining Demand

03 Estimating Costs

04 Analyzing Competitors’ Costs,

Prices and Offers

05 Selecting a Pricing Method

06 Selecting the Final Price

 01 Selecting the Pricing Objective

The company first decides where it wants to position

its market offering. The clearer a firm’s objectives,
the easier it is to set price.

Five major objectives are:

Survival
Maximum current profit
Maximum market share
Maximum market skimming
Product-quality leadership
 02 Determining Demand

Each price will lead to a different level of demand

and have a different impact on a company’s
marketing objectives.

The three factors when determining demand:

Price Sensitivity
Estimating Demand Curves
Price Elasticity of Demand
03 Estimating Costs

Demand sets a ceiling on the price the company can

charge for its product. Costs set the floor.

Type of Costs - Fixed costs (rent, utilities) Variable

costs

Accumulated Production - refers to the gain a

company experiences in producing a product over a
period of time.

Target Costing - Final cost is determined after market

analysis, and the product is designed or redesigned to
meet it.
04 Analyzing Competitors’ Costs,
Prices and Offers

Within the range of possible

prices determined by market
demand and company costs, the
firm must take into account the
competitors’ costs, prices and
offers.
05 Selecting a Pricing Method

This is the time when the company decides how

to price their product/service.

Examples of Pricing Methods: Markup Pricing,

Target-Return Pricing, Perceived Value Pricing,
Value Pricing, Going-Rate Pricing, and Auction-
Type Pricing
 06 Selecting the Final Price

This is the time when the company

decides how much to price their
product/service.

In selecting that price, these factor may

be considered:
impact of other marketing activities
company pricing policies
gain-and-risk-sharing pricing
ADAPTING THE PRICE

01 Geographical Pricing

02 Price Discounts and Allowances

03 Promotional Pricing

04 Differentiated Pricing
 01 Geographical Pricing

Barter - The buyer and seller directly exchange goods,

with no money and no third party involved.

Compensation deal - The seller receives some percentage

of the payment in cash and the rest in products.

Buyback arrangement - The seller sells a plant,

equipment, or technology to another country and agrees
to accept as partial payment products manufactured with
the supplied equipment.

Offset - The seller receives full payment in cash but agrees

to spend a substantial amount of the money in that
country within a stated time period.
02 Price Discounts and Allowances

Different kinds of price

discount and allowances:
Discount
Quantity Discount
Functional Discount
Seasonal Discount
Allowance
03 Promotional Pricing

Different kinds of promotional pricing:

Loss-leader pricing
Special event pricing
Special customer pricing
Cash rebates, low interest financing
longer payment terms
warranties and service contracts
psychological discounting.
 04 Differentiated Pricing

Companies often adjust their basic price to

accommodate differences in customers,
products, locations, and so on.

first-degree price discrimination

second-degree price discrimination
third-degree price discrimination
INITIATING AND
RESPONDING TO PRICE
CHANGES

01 Initiating Price Cuts

02 Initiating Price Increases

03 Responding to Competitors’
Price Changes
01 Initiating Price Cuts

Several circumstances might lead a firm to cut

prices.

One is excess plant capacity

Two is to dominate the market through lower
costs.

Risks:
Low-quality trap.
Fragile-market-share trap.
Shallow-pockets trap.
Price-war trap.
02 Initiating Price Increases

A successful price increase can raise profits

considerably.

Reasons:
Inflation
Overdemand
Anticipatory Pricing
03 Responding to Competitors’
Price Changes

The company must consider the following:

(1) Product’s stage in the life cycle.
(2) Product’s importance in the company’s
portfolio.
(3) Competitor’s Intention and resources.
(4) Market’s Price and Quality Sensitivity.
(5) Behavior of costs with volume.
(6) Alternative Opportunities.
MAJOR PRODUCT PRICING
STRATEGIES

01 Cost-plus pricing

02 Breakeven Pricing

03 Mark-up Pricing

04 Target-Return Pricing
01 Cost-plus Pricing

Cost-based pricing involves calculating the

cost of the product and then adding a
percentage mark-up to determine the price.

Cost based pricing is the easiest way to

calculate what a product should be priced at
.
There are two types which are full cost pricing
and direct-cost pricing. Full cost pricing takes
into consideration both variable, fixed costs,
and a % markup. Direct-cost pricing is variable
costs plus a % markup.
01 Cost-plus Pricing

Cost-plus pricing is a pricing method used by

companies to maximize their profits. The
firms accomplish profit maximization by
increasing their production until marginal
revenue equals marginal cost, and then
charging a price which is determined by the
demand curve.

Cost-plus pricing is used primarily because it

is easy to calculate and requires little
information.
01 Cost-plus Pricing

Formula: Cost + Markup = Price

Example:
A shoemaker produces a pair of shoes for 350
Php. He then sells those shoes for 500 Php.
Cost + Markup = Price
350+ Markup = 500
Markup = 500 - 350
Markup = 150
 02 Breakeven Pricing

The break-even point (BEP) is the point

where expenses and revenue intersect.

There is no loss or gain to the company.

On a graph, it is the point where the

cost and revenue curves intersect.

In an instance when costs are linear,

the break-even point is equal to the
fixed costs divided by the contribution
margin per unit.
 02 Breakeven Pricing

The break-even point is one of the

simplest yet least used analytical tools
in management. It helps to provide a
dynamic view of the relationships
between sales, costs, and profits.
Formula: Cost = Selling Price
Example:
A restaurant producers 1 burger for 20
Php and sells it for 20 Php
 03 Mark-up Pricing

Mark-up refers to the value that a seller

adds to the cost price of a product. The
value added is called the mark-up.

The mark-up added to the cost price usually

equals retail price.

The amount of markup allowed to the

retailer determines the money he makes
from selling every unit of the product.

The higher the markup, the greater the cost

to the consumer, and the greater the
retailer's profit
 EXAMPLE:
((30 - 23)/ 23)X100 = MARKUP%
A CAN OF COCA-COLA IS
SOLD FOR RETAIL AT 30PHP (7/23)X100 = MARKUP%
AND COSTS 23 PHP TO
PRODUCE. MARK UP = 30.4 %

FORMULA:
(RETAIL PRICE – PRODUCT COST) / PRODUCT COST) X 100
= MARKUP %.
04 Target-Return Pricing

A pricing method that uses a formula

to calculate the price of a product to
return a desired profit or rate of
return on investment assuming that a
particular quantity of the product is
sold.
Calculate the amount invested in the
business activities and then determine
the return they expect from these
assuming a particular quantity of the
product is sold
 04 Target-Return Pricing

Formula:
Target-Return Pricing = unit cost + (desired return x invested capital) /unit sales

Example:
A bamboo cup manufacturer has invested 2 million Php in his venture and he expects
to earn 20% as an ROI. Therefore, he will set the price accordingly. The cost and sales
expectation are:
Unit cost: 20
Expected sales: 50,000 units
 04 Target-Return Pricing

Target-Return Pricing = unit cost + (desired return x invested capital) /unit sale

= 20 + (0.20 x 2,000,000) / 50,000

= 28
Therefore the Bamboo cup manufacturer should sell each cup for 28 Php for a 20%
return on the investment.
 Competion Based
Pricing
- Uses prices as a competitive tool to gain additional sales
volume
- Set prices based not on only costs or value but also on the
prices of a business’s direct competitors
Objective:
Often companies using this pricing method lower prices below
competitors to gain market share

Formula:
Market based pricing= cost of product + market
factor price + premium
 Advantages: Disadvantages:

Fairly Drop-in profits

simple Easy to match the
Low risk prices
COMPETITION BASED
PRICING STRATEGIES

01 Price Leadership

02 Predatory Pricing

03 Going Rate Pricing

 01 Price Leadership

The dominant firm can set its own prices

Few substitutes, in the eye of the
customer
Competitors follow the leader by
establishing their prices based on the
price set by the price leader
Example: The iPhone 11
 Advantages:
If a market leader increases the price
and another small firm follows it,
then it will lead to an increase in
probability for all the small firms
along with the big firm.
Disadvantages:
As the profitability of the smaller
firms decreases, the salary of the
employees is affected, and the
future sustainability of the firm is in
question, which will lead to more
unemployment in the economy.
02 Predatory Pricing

It involves temporarily reducing price in an attempt to force rivals out

of the industry since the competitors can not compete profitably
The strategy often stems from an extension of a price war
A similar strategy is called “Limit Pricing” or “Pre-Emptive Pricing’. It
involves setting prices just low enough to discourage potential rivals.
Example: Firm A and Firm B are both selling cornetto
 Advantages: Disadvantages:

Dominant position Illegal practice

Minimizes competition
03 Going Rate Pricing

When a business sets the price of

their product or service based on the
market price
Businesses that choose a going rate
pricing strategy often set their prices
based on the leader of the market.
Example: The fee of a doctor’s
consolation
 Premium Pricing
- Refers to the brand’s price to the consumer relative to a key
competitor’s price or relative to the average price charged in the
marketplace.
- Often of interest to firms with strong brand equity that are
looking to charge a price above the marketplace – and price
premium is a metric that compares the brand’s price to key
competitors
- Example: Gucci,Rolex, Rolls-Royce

Formula:

Price Premium= revenue market share divided by unit

market share
Example:
If a brand has a 25% revenue market share
and a 20% unit market share

= 25% / 20%
= 1.20
= 20% price premium over the marketplace
 Advantages: Disadvantages:
Difference from the
Limited product
competitors
Reduce in sale volume
High-profit margin
Face with a huge
Build a high status in
competition
society
CUSTOMER BASED
VALUE PRICING
Customer value-based
pricing uses buyers’
perceptions of value (not
the seller’s cost!) as the key
to pricing. Customer value-
based pricing is setting
price based on buyers’
perceptions of value.
THE PROCESS OF CUSTOMER
VALUE BASED PRICING
TYPES OF CUSTOMER
VALUE- BASED PRICING
Good Value Pricing

Good-value pricing is the first customer value-

based pricing strategy. It refers to offering the
right combination of quality and good service at a
fair price – fair in terms of the relation between
price and delivered customer value.

Value Added Pricing

An alternative customer value-based pricing

strategy, means attaching value-added features
and services to differentiate the product and
charging higher prices.
 Penetration Pricing
Penetration pricing is a strategy used by businesses to attract
customers to a new product or service by offering a lower
price initially.

The lower price helps a new product or service penetrate the

market and attract customers away from competitors.

Penetration pricing comes with the risk that new customers

may choose the brand initially, but once prices increase,
switch to a competitor.
Example:

Robinsons and Rustans, two major grocery store chains

use market penetration pricing for the organic foods
they sell. Traditionally, the margin on groceries is
minimal. But the margin on organic foods tends to be
higher.

Robinsons and Rustans use a penetration pricing

strategy. They are selling organic foods at lower prices.
Effectively, they are leveraging penetration pricing to
increase their wallet share.

The lower costs allow Kroger and Costco to maintain

their profit margins even while undercutting the pricing
of their competition.
 ADVANTAGE: DISADVANTAGE:

The pricing strategy generates a When a firm uses a penetration

high sales quantity that enables pricing strategy, customers
a firm to realize economies of often expect permanently
scale and lower its marginal low prices.
cost.
 Price Skimming
Price skimming is a product pricing strategy by which a firm
charges the highest initial price that customers will pay and
then lowers it over time.

As the demand of the first customers is satisfied and

competition enters the market, the firm lowers the price to
attract another, the more price-sensitive segment of the
population.

This approach contrasts with the penetration pricing model,

which focuses on releasing a lower-priced product to grab as
much market share as possible.
Example:

Company A is a phone manufacturing company that

recently developed a new proprietary technology for its
phones. Company A follows a price skimming strategy
and sets a skim price at P1 to recover its research and
development cost. After satisfying demand at P1, the
company sets a follow-on price at P2 to capture price-
sensitive customers and to put pricing pressure on
competitors that enter the market.
 ADVANTAGE: DISADVANTAGE:

- Perceived quality - Inefficient long-term strategy

- High profitability - Deterrence
- Cost recuperation - Limitation of sales volume
End of presentation.

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