Pricing Strategy Introduction ●​ Evaluate competitors' prices

●​ Select pricing strategy & tactics

What is Price?
●​ Decide on price
-​ The money charged for a product or
Some Pricing Objectives
service
-​ Everything that a customer has to give Financial Marketing
up in order to acquire a product or ●​ Maximise profit ●​ Maintain/improve
service ●​ Achieve a target market share
-​ Usually expressed in terms of £ level of profits ●​ Beat/prevent
●​ Achieve a target competition
Four views of price
rate of return ●​ Increase sales
Economists view Price is set by the forces ●​ Maximise sales ●​ Build a brand
of supply and demand revenue
●​ Improve cash flow
Accountant's view Price should cover costs
so that a profit can be
made
Customer's view Price has to represent Who takes the lead?
good value
Price takers Have no option but to
Marketer's view Pricing is an opportunity
charge the ruling
to gain a competitive
market price
advantage
Price makers Able to fix their own
price
Price leaders Market leaders
Many Factors Affect Price whose price changes
are followed by rivals
●​ Costs of production Price followers Follow the
●​ Competitors' prices price-changing lead
●​ Customer perception of value of the market leader
●​ The firm's objectives
●​ Customer demand
●​ Price elasticity of demand
●​ Target market
●​ Marketing mix
●​ Stage in the product life cycle
●​ State of the economy
●​ Expectations of distributors
●​ State of competition in the market
●​ Likely reaction from customers

Setting Prices

Stages of price setting

●​ Develop pricing objectives

●​ Assess of target market's ability to
purchase
●​ Determine demand for product
●​ Analyse demand, cost and profit
relationship
❖​ Basic computations: computing cost basis x 1,000) and a fixed cost of $1,500 per
for price month, bringing the total cost to
$10,500.
Computing for the cost of production for
manufacturing business

1. Fixed costs 4. Average cost

-​ are expenses that do not change with -​ refers to the total cost of production
the amount of output produced. This divided by the number of units
means that the costs remain unchanged produced. It can also be obtained by
even when there is zero production or summing the average variable costs and
when the business has reached its the average fixed costs. Management
maximum production capacity. For uses average costs to make decisions
example, a restaurant business must pricing its products for maximum
pay its monthly, quarterly, or yearly rent revenue or profit.
regardless of the number of customers it
serves. Other examples of fixed costs
include salaries and equipment leases.
Fixed costs tend to be time-limited, and
they are only fixed in relation to the
production for a certain period. In the
Understanding the Costs in Product Costs
long term, the costs of producing a
product are variable and will change Product costs are the costs directly incurred
from one period to another. from the manufacturing process. The three basic
categories of product costs are detailed below:
2. Variable costs
1. Direct material
-​ are costs that change with the
changes in the level of production. -​ costs are the costs of raw materials or
That is, they rise as the production parts that go directly into producing
volume increases and decrease as the products. For example, if Company A is
production volume decreases. If the a toy manufacturer, an example of a
production volume is zero, then no direct material cost would be the plastic
variable costs are incurred. Examples of used to make the toys.
variable costs include sales
2. Direct labor
commissions, utility costs, raw materials,
and direct labor costs. -​ are the wages, benefits,
and insurance that are paid to
3. Total cost
employees who are directly involved in
-​ encompasses both variable and fixed manufacturing and producing the goods
costs. It takes into account all the costs – for example, workers on the assembly
incurred in the production process or line or those who use the machinery to
when offering a service. For example, make the products.
assume that a textile company incurs a
3. Manufacturing overhead
production cost of $9 per shirt, and it
produced 1,000 units during the last -​ include direct factory-related costs that
month. The company also pays a rent of are incurred when producing a product,
$1,500 per month. The total cost such as the cost of machinery and the
includes the variable cost of $9,000 ($9 cost to operate the machinery.
 Manufacturing overhead costs also A sales target is a goal set for a salesperson or
include some indirect costs, such as the sales department measured in revenue or units
following: sold for a specific time.

Indirect materials: Indirect materials are Mark up refers to the value that a player adds to
materials that are used in the production the cost price of a product
process but that are not directly traceable to the
product. For example, glue, oil, tape, cleaning
supplies, etc. are classified as indirect materials.

Example of Product Costs Gross VS Net

•​ Company A is a manufacturer of tables. Its Gross means the total or whole amount of
product costs may include: something, whereas Net means what remains
from the whole after certain deductions are
Direct material: The cost of wood used to
made
create the tables.
Setting a Target Profit and Computing for the
Direct labor: The cost of wages and benefits for
Target Sales
the carpenters to create the tables.
•​ Based on the computed total cost you
Manufacturing overhead (indirect
should also set a target profit.
material): The cost of nails used to hold the
tables together. Example: rent- 20,000
Manufacturing overhead (indirect labor): The Salaries of 2 employees 16,000
@ 8,000 each.
cost of wages and benefits for the security
guards to overlook the manufacturing facility Utilities (electricity, 6,000
water,internet,telephone)
Manufacturing overhead (other): The cost of . On an ave.
factory utilities. Other expenses 3,000
(retainers fee,
Break Even analysis
insurance, cost of goods
•​ Break Even Analysis in economics, etc).
Total cost of goods 45,000
business, and cost accounting refers to the
point in which total cost and total
revenue are equal. A break-even point Total cost of goods = 45,000
analysis is used to determine the number of
units or dollars of revenue needed to cover Target Net Profit = 40,000
total costs (fixed and variable costs).
TARGET SALES = 85,000

•​ Net income (NI), also called net earnings,

is calculated as sales minus cost of goods
sold, selling, general and administrative
expenses, operating expenses,
depreciation, interest, taxes, and other
expenses.

Computing for Target Units Sold

Assuming your item is priced at 300 (unit cost at
150 at 100% mark up, selling price is at 300
pesos)

•​ Target Sales – 85,000

•​ Divide by the Number of days of operation

- (Ave. number of days)

•​ Target gross income per day = 2,833.3330

/day

•​ Target units sold per day = 2,833.33/ 150

(mark up) =18.8 or 19 units per day

•​ Target units sold per month = 19 (target

sales per day) x 30 days (ave. days of
operation) =570 units

•​ Target gross sales per month= 2,833.33 (

daily target gross sales per day) x 30 days
(ave. number of operations) = 84,999.9 or
85,000
PRICE SEGMENTATION
- Also known as price discrimination in
economics.
- Is charging different customers different prices
for an otherwise identical or similar product. PRICE SEGMENTATION CLASSIFICATION

MARKET HOMOGENEITY
- Refer to a market situation where the
prospective buyers of any product are found to
be uniform in their needs, habits, choices,
nature, etc.

MARKET HETEROGENEITY
-​ refers to the existence of different
needs, preferences, and behaviors
among consumers in a market. This can
lead to a fragmented market structure
with many consumer segments.
-​ Seats are the same, but price varies
-​ Can be seen in terms of brand affinity,
based on type of customer making the
benefits demanded, or willingness to
purchase.
pay.

THE 3 POPULAR PRICE SEGMENTATION

LIMITED TRANSFERABILITY
CLASSIFICATION STRATEGIES
-​ Once sold to a customer, that customer
-​ First Degree Price Discrimination
should find it difficult to resell to another
-​ Second Degree Price Discrimination
customer.
-​ Third Degree Price Discrimination
ARTHUR CECIL PIGOU (1920)
VALUE OF PRICE SEGMENTATION
Price segmentation enables 2 key developments
within an industry:
-​ It can improve the firm's profits.
-​ It can improve the number of customers
served by actually lowering the market
entry price for some customers.
FIRST DEGREE PRICE DISCRIMINATION
THE SEGMENTATION HEDGES KEY -​ Also known as PERFECT PRICE
-​ The key to price segmentation is the DISCRIMINATION
ability to separate customers who are -​ Charging every customer at the price
willing to pay more from those who are that matches their willingness to pay.
not. -​ EX: STORE
-​ To accomplish this feat, firms construct
segmentation hedges to segment the SECOND DEGREE PRICE DISCRIMINATION
market according to willingness to pay. -​ Also known as QUANTITY BASED
SECOND-DEGREE DISCRIMINATION
-​ Charging different customer different
prices according to the quantity
purchase.
-​ Example: WHOLESALERS
THIRD DEGREE PRICE DISCRIMINATION
-​ Charging different markets or different FIRMOGRAPHIC SEGMENTATION -
segments BUSINESSES
different prices. ▪ Industry
-​ With a greater benefit cost a higher ▪ Location
price. ▪ Company Size
▪ Status
STRATEGIC OR TACTICAL ▪ Performance
Tactical Price Segmentation ▪ Executive Title
-​ Use to capture marginal and sometimes ▪ Sales Cycles Stage
even specific customers in unique Industry
situations. -​ is based on the primary activities of an
Strategic Price Segmentation organization, such as
-​ Approaches are those in which the the products they create or the services they
definition of the price structure itself offer.
enables different customers to pay Location
different price. -​ is an organization factors such as city,
country, continent, climate, culture, etc.
Company Size
Strategy Tactics
-​ is defined by two things: annual
• Planning • Doing revenue and number of employees.
• Large Scale • Smaller Scale Status
• Why • How -​ refer to the relation of one business to
• Difficult to copy • Easy to copy another but most often refers to an
• Long time frame • Short time frame organization’s legal status.
Performance
DESIGNING SEGMENTATION HEDGES -​ refers to how an organization has
-​ are barriers that prevent customers who behaved, and what they have
are willing to pay a higher price from accomplished.
paying a lower price. Executive title
Requirements for Effective Segmentation -​ refers to a person, or people, rather than
Hedges a business itself.
-​ Highly correlated with customer Sales Cycles Stage
willingness to pay -​ is the position where a person or
-​ Culturally acceptable business sits within the sales cycle.
COMMON PRICE SEGMENTATION HEDGE
●​ Price the same or similar product TIME OF PURCHASE
differently for different customer -​ indirectly tracks customer behavior that
segments. is suspected to be correlated with
CUSTOMER willingness to pay.
DEMOGRAPHICS/FIRMOGRAPHICS
Demographic Segmentation PURCHASE LOCATION
-​ Consumers -​ The price that these customers would
• Gender expect to pay would vary greatly
• Age between the location of purchase.
• Income -​ Variations in prices based on purchase
• Profession location can be driven purely by
• Family structure (married/single, kids/no heterogeneity in willingness to pay.
kids, etc.
 -​ Saturday stay over requirements
BUYER SELF IDENTIFICATION -​ Advance notice requirements
- Rely upon buyer self identification of -​ Time of the day and seasonal issues
willingness to pay.
EXAMPLES:
• Promotional Sales (PUREGOLD, ALING
PURING)
• Buyer’s Club
• Coupons
• Rebates

BUYER SELF IDENTITFICATION

• Measures willingness to buy
• Customer loyalty
• Signals price sensitivity

QUANTITY PURCHASED
-​ either in a single transaction or in
multiple transactions.
-​ common price segmentation hedge.
●​ Order Size
●​ Frequent Purchases

CUSTOMER USAGE
-​ Price segmentation based on product
usage relies on the heterogeneity of
value that customers place on a product
in relation to their usage patterns.

BANK FEES
-​ Are charges to a customer with a bank
account for various services provided by
a bank or as a penalties for specific
activities of the customer fees for a
variety of account.

Sample list of bank fees:

• Cashier Checks
• Money Orders
• Safety Deposit
Boxes and etc.

AIRLINES
-​ Airlines segment customers according
to willingness to pay in 3 major classes:
• First Class
• Business Class
• Coach
PRICING STRATEGY : product because it's available at a lower
PRICE PROMOTION cost.
2. It helps companies stay competitive
PRICE PROMOTIONS -​ Promotional pricing is a great way for a
-​ The act of offering a lower price company to differentiate itself from the
temporarily in order to enhance the competition. More affordable products
effectiveness of product sales efforts to can encourage existing customers to
cost sensitive consumers. stay and even attract other companies'
Manufacturers customers. When a business
-​ to make customers aware of a outperforms competing prices, it can
particular product line or services or generate more sales.
a particular brand. 3. It can increase short-term sales
Retailers -​ More consumers buying a product that's
-​ instead of a particular product or brand, on sale leads to increased short-term
the price discount is given on many sales. This additional revenue can help
products so as to get the consumer to a company generate the necessary
buy a variety of things from the shop. cash for immediate expenses or debt
Promotional pricing payments. If the extra income comes at
-​ is a strategy that sells a product for less the end of the year, it can help a
than its normal price. The "normal" price company achieve its annual revenue
might be the company’s regular price for goals and impress investors.
the product or the average price among 4. It may increase customer loyalty
competitors. -​ Businesses strive to build relationships
-​ Regardless, the affordability encourages with customers by recognizing their
consumers to buy the product and needs. If customers prioritize affordable
makes them feel like they are getting a products, a promotional pricing strategy
good deal. can appeal to them and increase
-​ This strategy benefits companies in customer loyalty. Consumers recognize
many ways, including fostering when businesses listen to their
consumer loyalty and clearing out preferences and continue to buy from
inventory. them over competitors.
5. It can make product marketing easy
Note: The rationale behind giving price discount -​ Little marketing effort is necessary for a
is that any loss experienced would be promotional pricing strategy, as most
compensated by the increase in sales volume consumers appreciate low costs.
and the addition of new loyal customers. Affordable prices alone are often
enough to get customers to buy. Even if
Positive and Negative Aspects of Price customers visit the website or shop
Promotions in-store because of the advertised low
prices, they might increase sales by
Advantages of Price Promotion buying other products that aren't on
1. It can convince customers to buy sale.
-​ If a customer is unsure of whether they 6. It generates excitement about a product
want a product, a lower price can -​ If a product isn't selling as well as it
convince them to make the purchase. used to, a promotional pricing strategy
This strategy urges customers to buy can rejuvenate consumer excitement.
before the sale is over. It might also This strategy is also effective for
attract new customers who may try the generating sales for new products. If a
consumer is hesitant to try a new
 product because they're unfamiliar with company's reputation. It's important for
it, a low price might convince them to marketing campaigns to emphasize a
buy. company's ability to offer high- quality
7. It can help liquidate inventory products at affordable prices.
-​ Because low prices encourage users to 4. It may limit product options for customers
buy, a promotional pricing strategy helps -​ Some companies only offer promotions
you liquidate inventory. You can sell on certain products, leading to
items quickly. Fewer items can mean customers having limited options. This
more room to expand an organization's lack of choice may result in frustration,
product line. but a company can prioritize consumer
8. It's customizable to an organization preferences by offering promotions on
-​ One of the most common promotional several products. If it's not possible to
pricing strategies is discounting include multiple products in a single
products, but organizations can choose promotion, a company can run single-
the method that suits consumer product promotions throughout the year.
preferences. For instance, a company 5. It might undermine local businesses
might offer a buy-one-get-one-free deal -​ Local businesses may not appreciate a
or encourage customers to sign up for company that runs continual
loyalty cards. Coupons are another promotions. They may not have the
effective way to offer products at resources to compete, which can make
discounted prices. it challenging to build positive industry
relationships. Businesses can address
Disadvantage of Price Promotion this issue by meeting with company
1. It requires more complicated calculations leaders and developing policies that
-​ Normal product prices ensure the promote fair competition.
company operates within its budget and 6. It can affect your long-term profits
caters to consumer budgets. When a -​ Offering a product at less than full price
company discounts an item, it uses may affect long- term profits. It's
more complicated calculations to ensure important for companies to set
continued success. Organizations can discounted prices that allow them to
create realistic discounts by considering remain within their budgets. If a
factors like profit margins, target promotional pricing strategy results in a
customers and offer durations. loss, note that increased customer
2. It may alter a customer's price loyalty and low marketing prices may
expectations compensate.
-​ Customers may enjoy low prices so
much that they come to expect them Positive
from the company. If customer Market Size and Market Share Increase
expectations change, they may wait to ✓ Market size increases, or increased
make a repeat purchase until the item category-level spending,
goes on sale again. Companies can ✓ Brand switching
encourage continuous sales by Traffic or Attracts Customer
highlighting the product's usefulness Increased Value Perception
and regularly running promotions. Revenue Growth
3. It may make customers question the Retention and Loyalty
quality
-​ Some products view discounted
products as being of lesser quality. This
perception can impact sales or even the
Negative PRICING STRATEGY
Imperfect Segmentation Hedge NOW YOU KNOW! PRICE PROMOTION
Customer Churn Examples
Reference Price Effect -​ Discount Coupons
Loss Of Price Credibility -​ Free Shipping Coupons
Increase Of Price Sensitivity -​ Expiring Coupons
-​ Printable Coupons
Managing Vagueness -​ E-Coupons
-​ In a similar manner, it is clear that price -​ Presale Coupons
promotions can improve profits by -​ Automatic Coupons
driving marginal sales from customers -​ Reserve Coupons
with a lower willingness to pay. -​ Gift Certificates
However, it is also clear that excess
price promotions can have a negative
impact on profits by decreasing price
credibility and encouraging loyal
customers to buy on price rather than
value.

Questions like “How many price promotions are

too many?” and “How deep a price promotion is
too deep?” are somewhat vague. It is hard to
say that the last price promotion was exactly one
too many, but at some point, there clearly were
too many price promotions. When there are too
many price promotions, taking just one away
won’t make it right.

Price Promotion Design

-​ TARGETED
-​ TEMPORARY
-​ SPECIAL
-​ IRREGULAR
Examination of Popular Forms of Price
Promotions
-​ COUPONS
-​ TRIAL OFFERS
-​ REBATES
-​ PROMOTIONAL
-​ BUNDLES
4 Psychological Pricing Strategies
-​ Artificial Time Constraints
-​ Charm Pricing
-​ Innumeracy
-​ Price Appearance
DISCOUNT MANAGEMENT DISPARITY ABOUNDS
What is Discount ? -​ The disparity the incentives and
-​ reduction in price of a good or knowledge between field and
commodity Centralized executive s leads to a
natural conflict between then regarding
DIFFERENT TYPES OF DISCOUNT discounts.
-​ 1. CASH DISCOUNT EXECUTIVE REACT
-​ incentiv e offered by the seller in return -​ To stop prices from falling due to
for paying the bill owned before the discounting, some executives quickly
schedule payment deadline. decide to stop all discounts. However,
-​ 2. TRADE DISCOUNT this approach is both disruptive and
-​ reduction from list price typically offered unprofitable.
between manufacturer and wholesaler
or the wholesaler and retailer. DISCOUNT PRICING
-​ 3. RETAIL DISCOUNT DISCOUNTS AND ALLOWANCES
-​ similar to trade discount amount offered • Cash discounts
by merchants to customers or between • Quantity discounts
wholesaler and retailer. • Trade discounts
• Seasonal discounts
CHALLENGES DISCOUNT MANAGEMENT • Special allowances
-​ decision have challenged organizational
unity and design for decades. One of CASH DISCOUNTS
the most common discount -​ Offered to encourage quick payment
management challenges facing -​ Terms 2/10, n/30 means
organization is the difference in -​ Pay within 10 days of the date of the
incentives and knowledge between field invoice, and you may deduct 2% off the
centralized executives price
-​ Otherwise, net or n is due within 30
FIELD EXECUTIVES PUSH MORE days of the date of the invoice
DISCOUNTS
-​ Salespeople and marketing QUANTITY DISCOUNTS
communication executive in the field, -​ Large orders receive bigger discounts
are encouraged to pursue market share -​ The more you buy, the less you pay
their incentives which take the form of -​ Could be the same item or different
bonuses and promotion as well aspect items
recognition are often tied to their ability Example:
to increase sales volume and achieve • 1-24 = $1.00 each
targets. • 25-48 = $.95 each
CENTRALIZED EXECUTIVES PUSH FOR • 49-72 = $.90 each
HIGHER PRICE
-​ Method of organizing and management EMPLOYEE DISCOUNTS
where management and -​ Sometimes given as a perk for being
decision-making powers are employed at that business
concentrated in the hands of the top -​ Usually varies between 10 and 30%
management of the organization. -​ Can be a certain dollar/ peso figure
Centralization may concern all decisions
and powers, or may be centralized only TRADE DISCOUNTS
selected managerial functions
 -​ Granted to wholesalers and retailers for -​For instance, a retailer offers to do an
performing for that trade or company aisle display of the product in exchange
-​ Multiply the price by the discount for a discount or the manufacturer offers
amount and subtract from the price a shelving allowance.
-​ $40 X 10% = $4 discount; Price is PROMOTIONAL DISCOUNTS AND
$40-$4 =$36 ALLOWANCES

a supplier may offer a 10% trade discount to Offered to consumers also in the form of
customers who purchase 100 units of a product -​ Rebate- a partial refund of the cost of
or service. This means the customer will pay an item. It acts as an incentive to help
only 90% of the list price for each unit. Trade sell the product.
discounts differ from other discounts because -​ a refund offered to a customer by a
they are not usually advertised publicly. manufacturer, distributor or retailer when
a customer makes a purchase.
SERIES DISCOUNTING Sometimes referred to as a retroactive
-​ Sometimes trade discounts are offered discount, rebates are often used as an
in a series. incentive or marketing tactic to attract
-​ For example, if a wholesaler was offered customers.
trade discounts of 20% and 10%, you -​ Trade Ins- turn in as payment or part
would first determine the 20% and then payment for a purchase
take 10% off of that amount. -​ the dealer determines the vehicle's
-​ It would not be a 30% discount total. value based on the market and then
FOR EXAMPLE deducts that amount from your new
• Price of a product is $5,700 and the trade car's purchase price.
series discounts are 20% and 10% -​ Coupons- is a ticket or document that
• Take 20% off can be redeemed for a financial
• 20% X 5700 = 1140, and then discount or rebate when purchasing a
5700-1140=4560 product.
• Then, take 10% of 4560 -​ Coupons can be used to strategically
• What is the final amount due for the product?= encourage customers to buy a new,
4,104 more profitable product to help boost
• VS 30% of 5,700= 1,710 your profit margin
• 5700- 1710= 3,990

SEASONAL DISCOUNTS
-​ For products purchased outside the
customary season
-​ To Reduce costs by selling at lower
price instead of paying the cost for
warehousing.

PROMOTIONAL DISCOUNTS AND

ALLOWANCES
-​ To wholesalers and retailers
-​ Willing to advertise or promote a
manufacturer’s product
-​ Could be free merchandise to sell or a
price reduction in the cost