Pricing Strategy (2:00-3:30)

Kim Nicole A. Cornejo

MODULE 2
PRICING AND COSTING
INTRODUCTION
This module covers the following topics: Definition of Price and Cost, Different Perspectives on
Price, Terms Used to Describe Price, Types of Cost and Importance of Price to Marketers. This
lesson is intended to give learners an in-depth understanding of price and cost including
approaches and types.
This lesson will be delivered offline where you are expected to read concepts and validate
through taking quizzes and submission of reports and/or case studies and examinations.
Further, you will be given a pretest to determine your prior knowledge of the topic and post-test
to validate your learnings from this module. Finally, I will be available for consultation in order to
guide you in the preparation of the assigned task as well as in providing feedback with regards
to submitted output and participation.

LEARNING OUTCOMES
At the end of this module, you should be able to:
1. explain the different perspective of price, terms used to describe price, cost and its types
2. explain and provide example of the different types of cost
3. explain the importance of pricing to marketers

ACTIVITIES AND RESOURCES

Self-directed, reflective and collaborative learning characterize the printed modular approach in
this course. This means that you as learners will work at your own pace within the time frame for
this module. You are expected to read concepts, take quizzes, examinations and written reports.
In preparing your written report you are encouraged to read other published references and it
should also present your understanding on the topic.
Deadline is set for the completion of the requirements in this module in order to move further
with the lessons on the course. This lesson utilizes open resources and free educational tools
as identified in this section.

ACTIVITY 2.1.
Draw a venn diagram, using this diagram write your explanation of the concept/definition of
pricing and costing.
Read: Philip Kotler et.al (2018), Principles of Marketing, Seventh Edition, Pearson Education
Limited Edition, page 308, HYPERLINK
https://courses.lumenlearning.com/boundless-marketing/chapter/introduction-to-price and
HYPERLINK http://www.inc.com/encyclopaedia/cost.
Note: Don’t forget to read the above mentioned reading material on the link provided this will
help you answer the activity 2.1 of this module.

ACTIVITY 2.2.
Using a chart, explain the Different Perspectives on Price and Terms Used to Describe Price.
Price
In the chart, In customer’s view, a customer can be the end user of the final product or a
company that buys components from the finished product. The client is the one who attempts to
fulfill a demand or set of requirements by purchasing a certain product or collection of products.
As a result, the client employs a variety of factors to determine how much they are willing to
spend, or how much they are willing to pay, to meet their needs. The customer would prefer to
spend as little money as feasible. To increase value, the company can either increase perceived
advantages or decrease perceived expenses. Both of these factors should be considered when
determining the pricing. Perceived advantages are, in some ways, the polar opposite of
perceived costs. In Society’s view, The historical idea of value has been based on price, at least
in dollars and cents. The monetary system of each society is derived from a bartering system
(exchanging products of equal worth) and provides a more convenient means to purchase
goods and accumulate wealth. Price has also evolved into a variable that society uses to
manage its economic health. The cost can be all-inclusive or all-exclusive. The role of pricing in
a society can be viewed from two perspectives: rational and irrational. The former is the most
fundamental premise in economic theory, implying that the outcomes of pricing manipulation are
foreseeable. The latter function for price recognizes that man's reaction to price might be
unpredictable at times, and therefore price manipulation testing is an essential activity.

Price point - The price of an item is also referred to as the price point, particularly in stores with
a restricted number of pricing points.
Charge - “How much do you charge?” is a common question when someone wants to know the
cost of a service. The word "charge" is a synonym for "price" in this context.
Value - Value is the sole reason for price in the eyes of the client. Customers frequently lack a
knowledge of the costs of materials and other costs associated with the production of a product.
Those customers, on the other hand, are aware of what the product does for them in terms of
creating value. Customers make product purchasing decisions based on this information.
Fee - If you inquire about the cost of their services (service providers), they may give you a
charge list rather than a price tag.
Fare - Flying, taking the bus, and taking the train all come at a cost. In many businesses, the
price is expressed as a fare.
Read: article on price at HYPERLINK
https://courses.lumenlearning.com/boundless-marketing/chapter/introduction-to-price.

Note: You are encouraged to read additional open references for additional information. Also,
Don’t forget to read the above mentioned reading material on the link provided this will help you
answer the activity 2.2 of this module.

ACTIVITY 2.3.
Explain the different Types of Cost and provide examples.

Types of Cost
To be able to control costs, you must first learn more about them and where they come from.
We'll look at the nature of costs and how they're classified in this part. Costs are often
categorised based on their relationship to the firm's output level. When a result, the following
expenses are described in terms of how their value changes as the level of output changes.

1. Fixed Costs - In the short term, fixed costs are costs that do not vary with the level of
output.

Examples of fixed costs

● Rent
● Office salaries
● Advertising
● Insurance
● Depreciation

2. Variable Costs - The cost of a variable item varies in direct proportion to the amount of
output. Directly varying means that the total variable cost is entirely determined by the
level of output. When output doubles, the variable cost doubles as well. The variable
expenses would be cut in half if the fixed costs were cut in half. No variable expenses
would be incurred if output was zero.

Example of variable costs

● Direct labour
● Raw materials and components
● Packaging costs
● Royalties

3. Semi-variable costs - A semi-variable cost is one that consists of both fixed and
variable components. These costs vary (change) in direct proportion to output, but not in
a linear fashion. The fixed cost factor is the portion of the cost that must be paid
regardless of activity level. The variable component of the cost, on the other hand, is
paid in accordance to the degree of activity. Mixed costs are a term used to describe
these expenditures. Costs may be constant for a certain level of production before
becoming variable if that level is exceeded in some instances.

In actuality, almost all costs are difficult to categorize as either fixed or variable. The
majority of costs will fall somewhere in the middle of the two categories. These are
classified as semi-variable costs in this scenario.

For example, The pay of production workers may appear to be variable costs, but in
reality, they will fluctuate with the level of output, but not in a direct way. It's
improbable that the direct relationship will last for a long time. Similarly, many costs
will have both a fixed and a variable component (for example, most bills for gas and
electricity will consist of a standing charge, which is fixed and a variable element,
which will depend on the usage). A set line rental is frequently included in phone
bills, however call prices vary depending on the number dialed, the distance
traveled, and the amount of time spent on the call. These charges will be summed
up on a phone bill.
4. Total Costs - For every given level of output, total costs are the sum of fixed,
semi-variable, and variable costs. When the production level is zero, total costs are
made up entirely of fixed costs.

In nearly all cases, total costs will be the addition of total fixed costs and total
variable costs (where total variable cost is the variable cost per unit multiplied
by the level of output).

Total variable costs = variable cost per unit x output level

Total costs = fixed costs + variable costs
 5. Direct Costs - In the same way that a variable cost relates the cost to the amount of
output, a direct cost does the same. A direct cost, on the other hand, is any cost that is
directly tied to the output level of a specific product or department. Direct cost is more
appropriate for a company that produces a variety of products.

For example, assume a company makes both chairs and tables. The chairs are made of
one sort of wood, while the tables are made of another. Both types of wood would then
be direct costs, as they are directly tied to the level of output of a specific product rather
than the overall level of output.

6. Indirect Costs - Any expense that is not directly related to the output of a certain
product or department is referred to as an indirect cost. Indirect overheads and
administrative costs are terms used to describe these expenses. They are tied to the
firm's output, but not in a direct way, and not for any particular product.

For example, the cost of powering machinery will be related to the level of output,
but not to a particular product.

When a company produces a variety of items, the terms indirect and direct costs
are more commonly employed. In a break-even analysis, the company will only
produce one sort of product. As a result, phrases like fixed and variable costs are
increasingly commonly utilized.

Read: article on Cost at HYPERLINK http://www.inc.com/encyclopaedia/cost.

Note: Don’t forget to read the above mentioned link provided this will help you answer the
activity 2.3 of this module. Also, You are encouraged to read additional open references for
additional information.
ACTIVITY 2.4.
Based on your readings and the previous activities, write a report on the importance of price to
marketers. Words used should not exceed 500.

Price is significant to marketers because it reflects their evaluation of the value customers see in
a product or service and their willingness to pay for it. Although the other aspects of the
marketing mix (product, place, and promotion) may appear to be more glamorous and thus
receive more attention, choosing the price of a product or service is one of the most critical
management choices. It is important that a company sets the right price. A company’s
success can depend on it.

WRAP-UP AND CONSULTATION

You are expected to actively participate in the weekly consultation to address your difficulties in
this subject. We will use your preferred available communication channels.

ASSESSMENT
Formative assessments are in the form of pre-test and post-test.

Summative assessments are in the form of quizzes and a written report will be graded through a
Rubric. These are all graded assessments.

KEY TAKEAWAYS
1. Created reflective written reports discussing the importance of price to marketer will give
learners and co-learners an in-depth understanding of price as a tool of delivering value to
customers.
2. Demonstrate an understanding of pricing and costing as a marketing tool to deliver value
to customers.

REFERENCES

Kotler. P. et.al. (2018). Principles of marketing, seventh edition, Pearson Education Limited
Edition

Lumen Learning (n.d). Introduction to price. Retrieved from

https://courses.lumenlearning.com/boundless-marketing/chapter/introduction-to-price