MODULE 4-5

PRICING PROCESS AND STRATEGY

Week 10-12 (March 29- April 16)
Week 13-15 (April 19- May 07)

Pricing and Costing Cristy T. Dioneda-Docdocos

2nd Semester SY 2020-2021 Instructor

Introduction

Setting a price for a product or service can be a challenge, as many variables factor into
determination of a price. Additionally, accurate pricing can be based on values that can be difficult to
know without extensive research. As a result, many companies make costly mistakes when incorrectly
attempting to price a product or service. A large portion of pricing is determined by the customer segment
a company is targeting or the market it is entering. It is important to have strongly supported and reliable
knowledge of a targeted customer segment before determining price.

The Extension publication starting a New Business: Pre-Launch Research, can help with
preliminary business research. It will help identify the characteristics, demographics, and buying habits of
the targeted customer. It is strongly suggested that this document, or other materials on business and
customer research, be used as a reference to the pricing tactics introduced in this circular.

Learning Objectives

After studying this topic, the students must be able to:

1. Explain what is pricing process
2. Describe importance of the product pricing
3. Distinguish the three types of pricing objectives
4. Understand the different types of pricing strategies.

Pre-test

1. What is the pricing process?

2. What are the different types of pricing objectives?
3. Enumerates the types of pricing strategy

Key Concepts

⮚ WHAT IS PRICING PROCESS

Pricing can be defined as a process of determining the value that is received by an organization in
exchange of its products or services.

⮚ THE IMPORTANCE OF THE PRODUCT PRICING

Setting prices as per the level where marginal revenue is equal to marginal cost is called marginality
rule. However, there is evidence produced by some researchers that most of the organizations do not
follow marginality rules rather they follow different pricing methods and strategies based on different
market conditions. Pricing decisions play an important role in an organization since they help in generating
revenue.

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 Pricing contributes to the success or failure of the organization’s marketing strategy. Price is also
called a demand regulator. Setting the prices involves a deep understanding of factors that affect the
marketing environment. Every organization sets the prices of its products for fulfilling various objectives.

⮚ THREE TYPES OF PRICING OBJECTIVE

Figure-1 shows the three types of pricing objectives

I. Profit-Oriented Objectives

Include the following objectives:

a. Maximizing Profit:

Implies that prices are set in such a way that they help in achieving maximum profit. According to Stanton,
Etzel and Walker, “The pricing objective of making as much money as possible is probably followed more
than any other goal.” Profit maximization is more beneficial in the long run as compared to short run. For
instance, an organization selling a new product tries to build a customer base by selling the product at low
prices in the short run. This helps the organization to gain profit in the long run by winning loyal customers.

b. Achieving a Target Return:

Refers to earn an adequate rate of return on the investment done by an organization in manufacturing a
product. The main focus of marketers is on maintaining a specific return on sales or investment. This is
done by adding extra cost to the product for earning a desired profit.

II. Sales- Oriented Objectives:

Include the following objectives:

a. Increasing the sales volume:

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 Implies sales expansion by giving discounts to customers. In the short run, an organization might be ready
to bear losses by reducing the prices to increase the sales volume. For instance the hotel industry faces low
demand during off–season; therefore, it prefers to decrease its prices and offers discounts to increase sales.

b. Increasing or maintaining market share:

Plays a crucial role in the success of an organization. The organization tries to gain market share by lowering
down the prices as compared to its competitors.

III. Status quo-Oriented Objectives:

Includes the following objectives:

a. Stabilizing the Prices:

Prevents price wars between competitors. The prices are stabilized in those industries where product is
standardized in nature. The stabilization of the prices helps in maintaining the demand and reducing
competitive threats.

b. Meeting the Competition:

Implies that the changes made in the price of a product help an organization to gain competitive advantage.
Sometimes, the organization also tries to neutralize competitive pressures by price movement.

c. Determining prices according to consumer’s paying capacity:

Implies that the purchasing power of the consumers should be taken into consideration while setting prices.
The sales of an organization depend entirely upon the purchasing power of consumers.

An organization also adopts pricing objectives to promote developmental activities in the society. For
instance, an organization may reduce the prices of a product for the low-income sections of the society.
Thus, the pricing objectives play a significant role in the overall growth of the organization.

⮚ PRICING STRATEGY

Pricing is the process where a business sets a specific price for selling its products and services. This
price is arrived at after considering a few things, such as how much it cost to manufacture the products or
services, the marketplace and conditions; the business brand; the competition; the quality of the goods
and services; and how much they can get the products or services for. There are four main aspects of
financial modelling, and pricing is just one of them. The others are product, promotion, and place.

Pricing is a very important aspect of marketing. Wholesale businesses also need to select the
pricing strategies that will enable them to grow and expand in the long-term. How you price your products
and services can actually determine if your wholesale business will stay open or flop due to low returns and
possible bankruptcy.

There are different types of pricing strategies you can use in wholesale marketing. The list is rather
long, but a few will be outlined for you to see what pricing strategies would work best for your wholesale
business.

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⮚ DIFFERENT TYPES OF PRICING STRATEGY

Demand Pricing
Demand pricing is also called demand-based pricing, or customer-based pricing. This pricing
method uses consumer demand of a product or service as the main element of setting a price for a
product or service. Also known as dynamic pricing. It is affected by consumer demand. Which is based on
the perceived value of a product or service. Includes price skimming, price point, bundle pricing,
penetration pricing, and other pricing strategies. Prices of products or services can increase due to bad
weather, festive periods, or in the case of natural disasters. The price of a product or service increases as
there is a likelihood that the price will also increase.

Competitive Pricing
Also called the strategic pricing. Competitive pricing is a method that uses the prices set by other
businesses (i.e. the competition). More or less using competitor’s price to price your own products. Give
or take a little percentage to fit what your product or service is worth.

Cost-Plus Pricing
This pricing strategy is a cost-based one for setting prices of products and services. When setting
the cost-plus price, you take the cost of the raw materials and the cost of production and add them to the
overhead costs of a product or service. To this total, you add a markup percentage (this is your profit
margin) and this total sum is your cost-plus price. As long as all the costs and sales have been accurately
calculated, you will always run at a profit.

Penetration Pricing
This pricing strategy uses low prices to enter a new market or to launch a new product or service.
This strategy is used to entice customers to patronise a certain product or service. It also serves as a
deterrent to the competition. To prevent them from entering the market with a similar product, because
they will have to make their prices lower. Once a customer base has been established, you can subtly
move your prices higher, to a moderate price for a longer-term strategy.

Price Skimming
Also called the skim-the-cream pricing. This pricing strategy is used by businesses with a strong
competitive advantage. They enter the market with high-priced products and services. This is to gain the
most revenue. To get an immediate return on production costs before other businesses can come in with
similar, cheaper products or services. Later in the product cycle, the companies will gradually moderate
their prices to accommodate customers with more moderate price tastes.

Economy Pricing
A very familiar pricing strategy with retailers and wholesalers. Economy pricing is a basic, low-cost
marketing method. It keeps the prices of goods low, targeting sales at a particular segment of the market
that is very price-sensitive.

Psychological Pricing
This is a common pricing technique used by businesses. A minor difference in prices is a huge
difference for customers. For example, an item whose price is listed as $399.98 may be seen as much
cheaper than a product or service priced at $400.

Discount Pricing
A pricing strategy that offers products and services at a reduced price. Discount prices can come
in the form of seasonal discounts, loyalty rebates, et cetera.

Geographic Pricing
This pricing strategy is one where different prices are charged in different geographical locations
or markets for the exact same product or service. For example, instructional materials sold in Canada will
be sold at a cheaper rate in Cameroun due to the disparity in wages, the economy, et cetera.

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Price Bundling
Also known as product bundling. This is a strategy is used when two or more products or services
a priced together as a package, with a single price. These product bundles come in two types: pure
bundles are products or services that are sold and bought only as a package; and mixed bundles, which
are products or services that can be bought and sold as a package, or as individual products. Usually, the
bundle prices are less when the products or services are bought separately.

These various types of pricing strategies are some that you can use in your wholesale marketing to
see what works for your business, and which ones to discard. For instance, the cost-plus pricing strategy is
more effective when used in a contractual agreement, while a demand-based pricing strategy may cause
customer dissatisfaction and threaten your customer loyalty. Make sure you carefully study the market
and customers’ reactions to certain products and calculate what you want to get from your product and
try to achieve that with the right pricing strategy.

References

A. Online References
▪ https://www.businessnewsdaily.com/5498-direct-costs-indirect-costs.html
▪ https://www.economicsdiscussion.net/price/pricing-process-concept-of-product-pricing-
pricing-
objectives/3837#:~:text=ADVERTISEMENTS%3A,of%20its%20products%20or%20services.
&text=The%20price%20of%20a%20product,and%20quality%20of%20the%20product.
▪ https://www.shopify.com.ph/blog/break-even-
analysis#:~:text=Break%2Deven%20analysis%20formula&text=Your%20break%2Deven%2
0point%20is,fixed%20costs%20by%20that%20number.

B. Book References
● Entrepreneurship and Small Business Management; Roberto G. Medina
● Strategic Marketing Management Felina C. Young

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