Marketing

PRICE
Mix:
 What is
PRICE?
A price is the quantity of payment
or compensation expected,
required, or given by one party to
another in return for goods or
services.
A marketer's price for a product or service is a vital decision
with far-reaching consequences. From the point of view of
the business, products, and services are offered to make a
profit. However, the customer has a specific price in mind
that he considers as “fair and profitable”. This is related to
the value or benefit that he expects to derive from the
product or service. This makes pricing tricky and
challenging for marketers.
 Two types of
Production
unit variable cost
Cost
fixed cost
refers to all expenses incurred in the unit of operating and
manufacturing one unit of a product.
This includes the cost of direct
other expenses.
materials, direct labor and direct
overhead.
 UNIT VARIABLE COST
1 Direct 3 Direct
Mate rials
2 Direct Overhead
refers to the raw materials
that are directly used in the Labor
refers to the employees
is the amount that was
production process of goods spent in the
and temporary staff who manufacturing overhead
and services of a company
work directly on a (energy, water and other
and are an essential
manufacturer's products. utility costs).
component of the finished
goods manufactured.
 FIXED COST

Are expenses incurred by the organization

that are not related to the manufacture of the
product. These include executive and staff
salaries, office rental, advertising, and
promotions, professional fees and other
similar expenses.
 Pricing
Strategies
are the methods and procedures
companies employ to determine the
rates they charge for their goods and
services.
The following are strategies that can be used in

1. Mark –pricingup a product.

pricing
is a pricing strategy that allows the seller a fixed mark-up every
time the product is sold. The biggest weakness of this pricing
strategy is the inclusion of unit sales in determining the
product’s mark-up price. Total unit sales is affected by the
product’s final mark-up price
Where:
UC - Unit Cost MUP = UC__
(1-DMU)
VC/U- Variable Cost per Unit
FC - Fixed Cost UC = VC/U + FC
US - Unit Sales US
DMU- Desired Mark- up
 2. Target Return
isa pricingPricing
method that allows a product manufacturer to
recover a certain portion of his/her investment every year.
Because unit sales are also included in its target price
determination, target return pricing has the same weakness as
mark-up pricing.
Where:
TRP - Target Return Price
UC - Unit Cost TRP = UC + DR x
DR - Desired Return IC US
IC - Invested Capital
US - Unit Sales
 3. Odd pricing or Psychological
pricing

is a pricing method premised on the

theory that consumers will perceive
products with odd price endings as
lower than they are.
 4. Loss leader pricing

a pricing strategy frequently utilized by supermarkets. It is based on the

practice of housewives to use only a few selected essential products (e.g.
sugar, coffee, eggs, laundry detergents, and some canned food products)
as their sole basis for price comparison. Supermarket retailers will
deliberately price these “loss leaders” or compare items low to make
their products appear more affordable than others. The mark-up lost on
these loss leader items is recovered from other items where mark-ups are
higher.
 5. Price lining

a pricing strategy designed to simplify a

consumer’s buying decision. This method
involves reducing the number of price points on
merchandise to as little as possible, in extreme
cases to only one price point.
 6. Prestige pricing
a pricing strategy that disregards the unit
cost of a product or service. Instead, it
capitalizes on the high-value perception or
positive brand reputation of a product or
service. It charges a price much higher than
its unit cost.
 7. Marginal pricing

where a business organization prices its product at a range below

its unit cost but higher than its unit variable cost.

This is to offer the lowest price in sealed bidding or other highly competitive
situations. The failure to adequately cover some or all the company’s fixed costs is
justified by citing that these fixed costs are “sunk” or would be incurred whether the
order is required. The main objective of marginal pricing is to outmaneuver
competition, expand the customer base, and increase market share.
 8. Predatory pricing

a pricing strategy where the firm prices its product

lower than unit variable cost, initially resulting in short-
term losses.

The objective of this pricing strategy is to price a new or persistent competitor

out of the market. After its purpose is achieved, the product’s original selling price
is restored, and short-term losses recovered. Predatory pricing is illegal in most
countries including the Philippines (under Republic Act 8479)
 9. Going rate pricing

a pricing strategy where a company prices its product at the

same level as or very close to its competitors’ prices.

This effectively maintains the product’s price competitiveness in its

market. The danger of going rate pricing is that it may result in price wars,
with each company trying to outprice another, to the detriment of all
industry participants.
 10. Promotional pricing

a pricing strategy involving a temporary

reduction in the selling price of a product/service
to induce trial or to encourage repeat purchases.
Almost all companies, especially those involved
in fast-moving consumer goods (FMCGs),
implement promotional pricing at one time or
another.
When new products are introduced into the market,
one of the two pricing strategies can be used:

Price skimming Penetration pricing

where the product’s selling price is way
above its unit cost, this allows the a pricing strategy where the new
company to recover its research and
product is priced only
development costs and expenses. This is
usually accompanied by intense marginally above its unit cost.
expensive advertising and promotional
campaigns.
 Pricing Strategy Selection
The choice of pricing strategy depends almost exclusively on a company’s objectives.
The correspondence between pricing strategy and objective is illustrated below:
Pricing Objective Pricing Strategy
Maximum revenue Penetration pricing
Marginal pricing
Going rate pricing
Promotional pricing
Maximum market share Penetration pricing
Marginal pricing
Going rate pricing
Promotional pricing
Maximum profit Price skimming ; Prestige Pricing
Survival Marginal pricing