INITAO COLLEGE

Jampason, Initao, Misamis Oriental

1st Semester, SY: 2022-2023

Chapter4
ENTREPRENEURIAL PRICING STRATEGY

Topics & Desired Learning Outcomes:

 Identify the different style of Pricing Strategy
 Discuss the objective of Entrepreneurial Pricing Strategy
 Evaluate how price are quoted

INTRODUCTION
The price, or the amount a customer pays for the product, is very important as it determines the
company’s profit and hence, survival. Adjusting the price has a profound impact on the marketing strategy
and, depending on the price elasticity of the product, often will affect the demand and sales as well. The
marketer should set a price that complements the other elements of the marketing mix.

ABSTRACTION
When setting a price, the marketer must be aware of the customer perceived value for the product.
Three basic pricing strategies are: market skimming pricing, market penetration pricing and neutral pricing.
The ‘reference value’ (where the consumer refers to the prices of competing products) and the ‘differential
value’ (the consumer’s view of this product’s attributes versus the attributes of other products) must be taken
into account

ANALYSIS:

PRICE
What is Price? In the narrowest sense, price is the amount of money charged for a product or service.
More broadly, price is the sum of all values that the buyers exchange for the benefits of having, owning or
using the product or service. During most of history, prices were set between buyers and sellers negotiating
with each other.

A marketing and pricing expert said “Good pricing involves finding a balance between the customer’s
desire to obtain good value, and the company’s need to cover costs and earn profits.”

Factors in Setting Prices:

1.Competitors – a huge impact on pricing decisions. The relative market shares (or market strength) of
competitors influences whether a business can set prices independently, or whether it has to follow
the lead shown by competitors.
2. Costs – a business cannot ignore the cost of production or buying a product when it comes to setting
a selling price. In the long-term, a business will fail if it sells for less than cost, of if its gross profit
margin is too low to cover the fixed costs of the business.
3. The state of the market for the product – if there is a high demand for the product, but a shortage
of supply, then the business can put prices up.
4. The state of the economy – some products are more sensitive to changes in unemployment and
worker’s wages than others/ Makers of luxury products will need to drop prices especially when the
economy is in a downturn.
5. The bargaining power of customers in the target market – who are the buyers of the product? Do
they have any bargaining power over the price set? An individual consumer has little bargaining power
over a supermarket (though they can take their custom elsewhere). However, an industrial customer
that buys substantial quantities of a product from a business may be able to negotiate lower or special
prices.
6. Other elements of the marketing mix – it is important to understand that prices cannot be set
without reference to other parts of the marketing mix. The distribution channels used will affect price-
different prices might be charged for the same product sold direct to consumers or via intermediaries.
The price of a product in the decline stage of its product life-cycle will need to be lower than when it
was first launched.
FP 3: Entrepreneurial Marketing Strategies
Instructor: Mr. Zharee C. Ramirez
 INITAO COLLEGE
Jampason, Initao, Misamis Oriental
1st Semester, SY: 2022-2023

NEW PRODUCT PRICING:

With a totally new product, competition does not exist or is minimal. Two general strategies are most
common for setting prices:

1. Penetration pricing – is the pricing technique of setting a relatively low initial entry price, often lower
than the eventual technique of setting a relatively low initial entry price, often lower than the eventual
market price, to attract new customers. The strategy works on the expectation that customers will
switch to the new brand because of the lower price. Penetration pricing is most commonly associated
with a marketing objective of increasing market shares or sales volume, rather than to make profit in
the short term.

A penetration strategy would generally be supported by the following conditions: price-sensitive

consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high
likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the
new demand and sales.
Market-penetration pricing- is when sellers set a low initial price in order to penetrate the market easily
and deeply, gain a foothold, win a large market share. The high-sales volume results in lower costs, which may
allow the seller to cut prices further.
Example: Wal-mart and other discount retailers use penetration pricing. A few Philippine producers of
snacks (potato.corn chips, crackers) introduce lower-priced products to compete with Jack&Jill, Oishi and even
imported brands, hoping that sari-sari stores and shopping mall buyers get to taste and like their products.
The penetration pricer must maintain its low-price position; otherwise, the price advantage may be only
temporary.
2. Skimming – involves goods being sold at higher prices so that fewer sales are needed to break eve.
Selling a product at a high price and sacrificing high sales to gain a high profit is therefore “ skimming”
the market. This is usually employed to reimburse the cost of investment of the original research into
the product.

Market Skimming Pricing – is used by companies that invent new products and initially set high prices to
“skim” revenues layer by layer from the market.
Example: when Sony introduced the first High-Definition TV (HDTV) to the Japanese market in 1990, the
set cost $43,000. The HDTVs were brough only by people who could afford high prices for the new technology.
Sony reduced the set’s TV price over the next years to attract more buyers; 3 years later, a 23-inch HDTV can
be purchased by a buyer in Japan for only $6,000. Even later, in 2005 an entry-level HDTV set now sells for
over $1,000 in the U.S Market skimming makes sense only under certain conditions: the product quality and
image must support its higher price and enough buyers want the product at that price; and, competitors
should not be able to enter the market easily and undercut the high price.

GENERAL PRICING APPROACHES:

The major considerations in setting the price are:
1. Product costs
2. Consumer value perceptions
3. Competitors’ prices and other internal and external factors.

Companies set prices by choosing a pricing approach that includes one or more of the above factors. The
pricing approaches are:
1. Cost-Plus Pricing or Mark-up Pricing – is to have a fixed mark-up on the cost of the product to set the
price, ex: retail stores. This is the simplest method, i.e., adding a standard markup to the cost of the
product.
2. Value-based pricing (demand-based) – is setting price based on buyers’ perceptions of value
independent of cost. Seller sets its target price based on customers’ perception of the product value.
FP 3: Entrepreneurial Marketing Strategies
Instructor: Mr. Zharee C. Ramirez
 INITAO COLLEGE
Jampason, Initao, Misamis Oriental
1st Semester, SY: 2022-2023

The target value and price then drive decisions about product design and what costs to be incurred.
This applies well to unique items or those perceived as exclusive or with status.
3. Value Pricing – is offering the right combination of quality and good service at a fair price. Fast food
outlets have “value menus” priced lower than their regular fare.
4. Competition-based pricing- is to set price following that of the industry leader ex: breakfast cereal.
This exists when sellers base their judgement on their product value on the prices their competitors
charge for similar items. One form of this is going-rate pricing in which seller bases his price on the
current price of his rivals, in short, a follow-the-competitor approach which some sellers do to hold on
to the going price to avoid harmful price wars.

PRICE-ADJUSTMENT STRATEGIES:
Companies usually adjust their prices to account for various customer differences and changing
conditions/situations/ Here are some price-adjustment strategies:
1. Discount and allowance pricing – where sellers adjust their price to reward customers for certain
responses- such as early payment of bills, volume purchases, and off-season buying. These are called
discount and allowances.
2. Allowances – are another price-reduction type. Example is trade-in allowance where a price reduction
is given for turning in an old item when buying a new one. This is common for the car and battery
purchases, etc.
3. Promotional or promo offers -are payments or price reductions for participating in advertising and
sales support programs. Airline companies give special fares when introducing new routes, others give
“freebies” to announce/celebrate their anniversaries, etc.
4. Segmented pricing – is tied in to and allow for differences in customers, products and locations. There
are senior citizen discounts. In location pricing, a seller charges different prices for different location (in
the U.S., many items are priced differently for West Coast and for East Coast markets.) There’s even
time pricing – for instance, bakeries sell their bread at lower prices near store-closing hours.
5. Promotional pricing -is used when sellers temporarily price products below list price and sometimes
even below cost to create buying excitement and urgency. Stores and supermarkets sometimes have
few ‘loss leader’ sold at low prices to attract customers in the hope that they will buy many other items
at normal markups. They use “family items” as loss leaders to attract family buyers who make larger
average purchases per trip. Special-events pricing is common during Christmas and national holidays.

RESPONDING TO PRICE CHANGES:

How should one respond to a price change by a competitor? Issues to consider: (a) Why did the
competitor change the price? Was it to grab market share? To meet changing cost conditions? To use excess
capacity? (b) Is the price change temporary? If so, why? If not, why also? (c) Are other companies going to
respond? If so, how? Besides these issues, the company has to make a broader analysis – its own product’s
stage in the life cycle; the importance of its product in the company’s product mix; the possible reaction of the
company’s partners (resellers, etc.).
Once the company has made a careful and deliberate study of all related factors, it has to make a
decision to either:
1. Reduce its price to match the competitor
2. Maintain its price, but increase the perceived product value.
3. Improve quality and increase price
4. Launch a low-price “fighting brand”

Companies are not usually free to change whatever prices they wish. They should be very wary and
fearful of being charged by uninformed or malicious parties with discriminatory pricing, deceptive pricing,
price-fixing, and predatory pricing.

FP 3: Entrepreneurial Marketing Strategies

Instructor: Mr. Zharee C. Ramirez
 INITAO COLLEGE
Jampason, Initao, Misamis Oriental
1st Semester, SY: 2022-2023

APPLICATION
The customer’s perception of value is an important determinant of the price charged. Customers draw
their own mental picture of what product is worth. A product is more than a physical item; it also has
psychological connotations for the customers. The danger of using low price as a marketing tool is that the
customer may feel that quality is being compromised. It is important when deciding on price to be fully aware
of the brand being compromised. It is important when deciding on price to be fully aware of the brand and its
integrity, a further consequence of price reduction is that competitors match prices resulting in no extra
demand. This means the profit margin has been reduced without increasing sales.

FP 3: Entrepreneurial Marketing Strategies

Instructor: Mr. Zharee C. Ramirez