Chapter 6, Lesson 3:

Pricing Methods
Learning Objectives
To be familiar with the different price-
quality points
• To have alternative methods for
setting a product’s price
• To have a greater understanding of
using price as a communication
tool
Some Concepts to Consider in Terms of
Pricing High or Pricing Low
 In highly competitive markets, having higher prices
can indeed lead to lower sales, thereby putting your
business at risk as you have probably priced
yourself out of the market. This is especially true if
your brand is not differentiated from the
competition.

 On the other hand, if your product has no

substitutes and no competition, then high
markups can be sustained and the market may
learn to accept the set prices as givens. This gives
you a great opportunity to generate extraordinary
profits.
Some Concepts to Consider in Terms of
Pricing High or Pricing Low
 While offering low prices can indeed be a tool for
attracting the market to your products, what you do
not want is a situation where you offer low prices
and attract a lot of buyers yet without realizing that
your low margins actually do not even cover your
total costs.
 Price is a very sensitive element because it
actually can make or break your product’s
profitability. If the price is too low, you could lose
money and at worst be driven out of business. If
the price is too high, you could price your product
out of the market and you could lose buyers.
Some Concepts to Consider in Terms of
Pricing High or Pricing Low
 Communication plays a vital role in this balancing
act. A higher price helps to communicate higher
quality, while a lower price, if done right, can
communicate good value.

 In the end, pricing is not just about recovering

your investment but also all about communication.
How Can You Tell If the Price of a Produc
t Is High, Low or Medium?

 The fact is, you really cannot tell if a price is high or

low until you get to compare it with a point of
reference.

 For most cases, the point of reference will be the

market leader because, by definition, it is the most
popular product in the category.
General Price-Quality Matrix
Pricing Objectives

• Survival

• Current profit maximization

• Market share leadership

• Product quality leadership

Different Approaches in Setting the Price
• Markup Pricing
 Steps:
1. Here, the cost of producing the product is first
estimated, with cost often being primarily defined as
the variable costs of a product or the costs of its
direct components.
2. Once the cost is estimated, a standard
markup percentage is pegged on.
 Q: Why use a standard markup in the first place?
A: It’s because it makes the pricing process
easier.
Different Approaches in Setting the Price
• Target Return Pricing
 Similar to markup pricing, except that it is based
on the Return on Investment requirements of the
firm.
 The formula for this is:
Different Approaches in Setting the Price
• Perceived Value Pricing
 A proactive and marketing-based pricing method
whereby the value of the product to the market
becomes the basis for the price
 Require some market research in order to
determine just how much the target market
believes the product is worth to them
 Q: What if the market undervalues the product?
A: Marketers’ would have to revamp the
product—packaging, quality, and other
communication points—in order to convince the
market that it is actually worth far more.
Different Approaches in Setting the Price
• Going-rate Pricing
 Basing price on industry rates rather than on
either costs or market perceptions
 Is proactive because it uses price as a
communication tool to inform the market about
the value of the product
 Can be used to aggressively send messages
about your product vis-à-vis the competition