Pricing Strategy

THE ROLE OF PRICING IN MARKETING MIX

Geroche, Alejandre Hayden Ses M.

Tisbe, Tristan Jay Group
Villavert, Bert John V.
Seven
OBJECTIVES

Gain understanding on the Learn and understand the Learn the various
function of price factors that need to be approaches and criteria in
considered in pricing pricing a particular
product
“Pricing is a critical ingredient in the
marketing mix that differentiates the brand
. In some cases, it is the major factor that
determines brand image”
-Alex Fernandez
Head of Consumer Health, Unilab, Inc
PRICING STRATEGY
“a reasoned choice from a set of alternative prices (or price schedules) that aim at profit
maximization within a planning period in response to a given scenario.”

Price
-is the amount of money asked or given
for “something”
- Price is also the twin element of sales
volume which when combined make up
sales revenues.
Pricing
is the twin component of product
quality which when combined
make up what is called product
value.
PRICING STRATEGY

Function of Price

PRICING has the dual marketing function of making

products affordable to its target market and at the same
time, reflecting the value of the product.
FACTORS TO CONSIDER IN PRICING

Internal Factor 1: PRODUCT COST

- Product Cost must be broken down to fixed and variable cost as most
companies sell more than one item and the fixed cost must be allocated
to different products in a sensible way.

- ANTICIPATED PRODUCT COST must also be taken into

consideration.
FACTORS TO CONSIDER IN PRICING

Internal Factor 1: PRODUCT COST

COST-BASED PRICING STRATEGY

- Used when there is relatively little, if any, direct competition or when
buyers are not price sensitive.
MARK UP
– standard percentage based on cost is adopted
TARGET PROFIT
– prices are set towards attaining a satisfactory rate of return
FACTORS TO CONSIDER IN PRICING

Internal Factor 1: PRODUCT COST

Target Profit Pricing

Unit Cost + Target Return of Investment (ROI) + Investment
Unit Sales

Unit Cost Pricing

Variable Cost + Fixed Cost
Unit Sales
FACTORS TO CONSIDER IN PRICING

Internal Factor 2: COMPANY’S OBJECTIVES

PRICING OBJECTIVE OF THE FIRM

Differential Pricing Strategy - same brand is sold at different prices to different market
segments
Competitive Pricing Strategy – prices are set to exploit a firm’s competitive position
Product Line Pricing Strategy – related brands or products are sold at prices that exploit
mutual dependencies or balance pricing over product line
FACTORS TO CONSIDER IN PRICING

Internal Factor 2: COMPANY’S OBJECTIVES

CHARACTERISTICS OF CONSUMERS

• Some consumers have high search cost

• Some consumers have a low reservation price for the product
• All consumers have certain special transaction costs other than search
costs
FACTORS TO CONSIDER IN PRICING

Pricing Strategies based on company’s objectives and consumer characteristics

Differential Pricing Competitive Pricing Product Line Pricing

Some have high search

Random Discounting Price Signalling Image Pricing
cost

Some have low Penetration/ Price Bundling/

Periodic Discounting
reservation price Experience Curve Premium

All have special Second Market

Geographic Pricing Complementary Pricing
transaction costs Discounting
FACTORS TO CONSIDER IN PRICING

DIFFERENTIAL PRICING
• Random Discounting – Random discounts cannot be predicted by consumers.
• Second Market Discounting - Only the second market segment enjoys through lower
price
• Periodic Discounting – the manner of discounting is predictable over time and known
to consumers and the discount can be used by consumers
• Price Skimming – High prices are set initially, especially for innovative products
without competition, and then lowered over time.
 FACTORS TO CONSIDER IN PRICING

COMPETITIVE PRICING

• Price Signaling – prices are set high regardless of high or basic product quality
• Image Pricing - under Product Line Pricing
• Reference Pricing - a firm places a high priced model (serving as a reference point) next to an
existing, much higher priced version.
• Penetration Pricing – Introduced by Joel Dean (November-December 1950)
– Exploits economies of scale by having cheaper cost, superior technology,
and an efficient organization.
• Experience Curve Pricing – exploits a firm’s production experience as cost decreases due to
cumulative volume
• Geographic Pricing (Zone Pricing Strategy) – can be adopted when there are adjacent markets
separated by transport costs rather than reservation or transaction costs.
FACTORS TO CONSIDER IN PRICING

PRODUCT LINE PRICING

• Image Pricing – use of high price to signal high quality and uses the profit it makes from higher
priced versions to subsidize the price of lower priced version.
• Price Bundling – The basic idea of price bundling is that buying the whole bundle is cheaper
than buying the parts separately
• Premium Pricing – the firm sets a high price emphasizing on unique product features
 FACTORS TO CONSIDER IN PRICING

PRODUCT LINE PRICING

● Complementary pricing - A pricing of one product at the optimum level, regardless of cost or
profit considerations, so that the demand for another product which is used with it will increase and
so maximise the profits from both products together
● Captive Pricing – the firm tries to price their product low to attract buyers and recover from the
bigger volume expected in the accessories or consumables.
● Two-part Pricing – pricing commonly used by service-based firms. There is a fixed fee plus a
variable fee charged to the customers.
 FACTORS TO CONSIDER IN PRICING

PRODUCT LINE PRICING

Loss Leader Pricing – retailers want to generate store traffic and recover from consumer’s
purchase on other items not included in the price off.
Generic Strategy: The Bigger Picture of Pricing
- Introduced by Prof. Michael Porter of Harvard University

Broad Cost Broad Differentiation

Focus Cost Focus Differentiation

In terms of product choice, firms can choose between having a basic product and be a low-cost producer or have
a superior or differentiated product and charge customers a higher price.
FACTORS TO CONSIDER IN PRICING

• Low-Cost Strategy
– a firm would concentrate on producing products with basic features
that are acceptable to their target costumers

• Differentiated Product
– a firm would offer distinct features that are readily perceived and
valued by its customers
FACTORS TO CONSIDER IN PRICING

PRICING CRITERIA BASED ON COMPANY’S OBECTIVES

OBJECTIVES WHEN TO CHARGE LOWER PRICE WHEN TO CHARGE HIGHER PRICE

Sales Volume Turnover Fast Slow

Market Dominance Low High

Profit Objective Long-term Short-term

 PRICING CRITERIA BASED ON COMPANY’S OBECTIVES

PRODUCT SPECIFICATIONS WHEN TO CHARGE LOWER PRICE WHEN TO CHARGE HIGHER PRICE

Product Type Commodity Patented

Product Usage Single Use Multiple Use

Product Obsolescence Slow Fast

Product Appeal Price Sensitive Price Insensitive

Production Method Mass Production Custom Made

Production Quantity Big Small

Production Capacity Excess Limited

Types of Service Regular Extra

Perceived Value Overpriced Underpriced

FACTORS TO CONSIDER IN PRICING

WHEN TO INCREASE PRICE:

1 . INFLATION
Inflation occurs when:
• Importation of raw materials
• High Production rate of money
• Exchange rate
• Exporting products
FACTORS TO CONSIDER IN PRICING

WHEN TO INCREASE PRICE:

2. FOREIGN EXCHANGE
• If devaluation occurs with the peso, cost of imported materials used for
production will also increase.
• DEVALUATION- lowering of the exchange value of country’s currency.

3. SHORTAGES
4. PRODUCT REPOSITIONING
• involves taking an existing product in the marketplace and substantially
changing its image or its target market.
FACTORS TO CONSIDER IN PRICING

WHEN TO CUT PRICE:

• lower cost
• falling market shares
• excess capacity
• excess inventory
• discourage competition
• socialized pricing
• new market segment
FACTORS TO CONSIDER IN PRICING

WHEN TO CUT PRICE:

8. Availability of new substitutes -A substitute product is a product from
another industry that offers similar benefits to the consumer as the product
produced by the firms within the industry.
9. Subsequent sales- Companies may cut prices of their products with the
knowledge that the price reduction in the product can recovered the repeat
business.
10. Competitive trends
11. Increase competitive vulnerability
FACTORS TO CONSIDER IN PRICING

WHEN TO SELL BELOW COST

• PERISHABLE GOODS
• PHASE-OUT PRODUCTS- Companies may dispose the leftover
inventories below cost with the objective of minimizing losses instead
of maximizing profit.
• DAMAGE PRODUCTS
FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

1. FLANKER BRAND
• Extension of an existing brand to create another product or brand with increased
market share. The new product may be a different size, flavor, or type but still
falls within the same category of products.
FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

2. FIGHT
3. SELECTIVE RESPONSE
• In responding to a competitor’s price attack, firms need not retaliate in the
entire industry. They can choose specific areas to protect and defend their
turf.
4. QUALITY
• Firms can warn consumers of the risk of buying at lower prices by
associating them with lower quality products.
FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

5. Alliance

6. Cost Advantages
THE PRACTICE OF “FOOLISH PENETRATION”

- Marketers may be tempted to price their products low during the introductory
period, regardless of product quality and choices of available distribution methods.
The obvious intention is to gain market shares quickly.

External Factor 1: Market Demand

Ways in setting prices under market demand-based pricing strategy:
Perceived Value – where marketers use the perception of customers in
establishing its prices.
Demand Differential – where marketers choose a price level that would
support their planned sales volume and profit
THE PRACTICE OF “FOOLISH PENETRATION”

External Factor 2: Competition

Ways in setting prices using competition-based pricing strategy:
Going rate
• Marketers begin and work within the prevailing market price
• Common practice with homogeneous products with very little variation
from one producer to another
Sealed bid
• Marketers price their product or services depending in how competitors are
expected to price theirs.
• Required by government offices
 THE PRACTICE OF “FOOLISH PENETRATION”

The Practice of “Foolish Fellowship”

• Different companies have different objectives, different cost structures and

different strengths. Abusing and overusing competitor’s price or “going
rate” pricing is common practice among lazy marketers. Marketers must
remember that the more unique their products are, the more flexible they
can be in formulating pricing.
INTERNATIONAL PRICING

INCOTERMS (International Commercial Terms)

• Are intended primarily to clearly communicate the tasks, costs, and risks
associated with the global or international transportation and delivery of
goods
FOB (Free on Board)
• Lowest quoted price
• Seller has to shoulder all the costs and risks of loss and damage to the goods
until the goods have finally arrived on board the vessel, and the buyer will
bear all costs from that moment onwards.
PSYCHOLOGICAL PRICING (NOTICEABLE PRICE DIFFERENCE)

• The practice of setting prices slightly lower than rounded numbers, in the
belief that customers do not round up these prices, and so will treat them as
lower prices than they really are.
• A technique used most especially in supermarkets and department stores to
create an impression of “good value”
PSYCHOLOGICAL PRICING (NOTICEABLE PRICE DIFFERENCE)

Advantages Disadvantages

Price bands Calculation

Non-rational pricing Rational Pricing

Control

Discount pricing
PRICE ELASTICITY

• Means that demand will change if change in pricing occurs

% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑜𝑙𝑑

𝑃𝑟𝑖𝑐𝑒 E𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 D𝑒𝑚𝑎𝑛𝑑
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
=
• If PED > 1, the demand is elastic.
• If PED < 1, the demand is inelastic
• PED = 1, the demand is unitary elastic or unit elastic
PRICE ELASTICITY

• Example:
• If price increases by 10% and consumers respond by decreasing purchases
by 20%, what is the elasticity of demand?
PRICE ELASTICITY

• Example:
• If price increases by 10% and consumers respond by decreasing purchases
by 20%, what is the elasticity of demand?

-20%
𝑃𝑟𝑖𝑐𝑒 E𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 = |-2| = 2
10%
D𝑒𝑚𝑎𝑛𝑑 =
If PED > 1, the demand is elastic.
PRICE ELASTICITY

• If the values are given separately and not in the percentages, we

should apply the following formula

QN - Q I Where as:
Q N + QI • QN = New Quantity
2 • QI = Initial Quantity
PED =
PN - PI • PN = New Price
PN + PI • PI = Initial Price
2
PRICE ELASTICITY

• Example:
• If you sell 10,000 reams of paper at $100 per ream and then raise the price
to $150 per ream and sell 7,000 reams, your elasticity of demand would be?
PRICE ELASTICITY

• Example:
• If you sell 10,000 reams of paper at $100 per ream and then raise the price
to $150 per ream and sell 7,000 reams, your elasticity of demand would be?

= | -0.8824| = 0.8824

If PED < 1, the demand is inelastic.

PRICE ELASTICITY

• Price Expectations
• Can be identified using pricing research.
• The objective is to know the fair range of the upper and lower
threshold limits of pricing.
• Price Sensitivity Meter
- The PSM is a chart of four lines with four intersections.
- A market technique for determining consumer price preferences.
It was introduced in 1976 by Dutch economist Peter Van Westendorp.
PRICE ELASTICITY

• Price Sensitivity Meter

• Point of marginal cheapness (PMC) means the lowest boundary of an
acceptable price range
• Indifference price point (IPP) means an equal number of respondents rating the
price point as either “cheap” or “expensive”.
• Optimal price point (OPP) means there is an equal trade-off in extreme
sensitivities to the price at both ends of the price spectrum.
• Point of marginal expensiveness (PME) means the upper boundary of an
acceptable price range.
PRICE ELASTICITY

• Westendorp 4-point price sensitivity meter research questionnaire:

1. “At what price would you think that (brand) is a bargain/ a great buy for the money?”
2. “At what price would you think that (brand) is starting to get too expensive that while
you might still consider it, you might have to give it more thought now before buying it?”
3. “At what price would you think that (brand) is so expensive that you would not consider
buying it at all?”
4. “Finally, at what price would you say that you will start to feel that (brand) is priced so
low that you would feel the quality could not be very good anymore?”
PRICE ELASTICITY

• Price Sensitivity Meter

PRICE ELASTICITY

• Brand-Price Trade Off (BPTO) Model

A statistical technique used in market research and marketing sciences. It models the
relationships between your brands and the prices they command relative to other
brands, providing a measure of relative ‘brand value’ or ‘brand equity.’

• Advantages:
Simplicity of the technique
• Disadvantages:
• Consumers may become conscious and may start playing around with the
lowest price
PRICING CRITERIA

PRICING CRITERIA BASED ON COMPANY’S OBECTIVES

OBJECTIVES WHEN TO CHARGE LOWER PRICE WHEN TO CHARGE HIGHER PRICE

Sales Volume Turnover Fast Slow

Market Dominance Low High

Profit Objective Long-term Short-term

 PRICING CRITERIA BASED ON COMPANY’S OBECTIVES

PRODUCT SPECIFICATIONS WHEN TO CHARGE LOWER PRICE WHEN TO CHARGE HIGHER PRICE

Product Type Commodity Patented

Product Usage Single Use Multiple Use

Product Obsolescence Slow Fast

Product Appeal Price Sensitive Price Insensitive

Production Method Mass Production Custom Made

Production Quantity Big Small

Production Capacity Excess Limited

Types of Service Regular Extra

Perceived Value Overpriced Underpriced

PRICING ADJUSTMENTS

WHEN TO SELL BELOW COST

• PERISHABLE GOODS
• PHASE-OUT PRODUCTS- Companies may dispose the leftover
inventories below cost with the objective of minimizing losses instead
of maximizing profit.
• DAMAGE PRODUCTS
 FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

1. FLANKER BRAND
• Extension of an existing brand to create another product or brand with increased
market share. The new product may be a different size, flavor, or type but still
falls within the same category of products.
The advantages of flanker brand
- Attracts new set of customers which is not served by existing product
- Protects the company, in case of one of the brands fail, other brands survive
- Can introduce lower quality brand without compromising on existing high quality brands
FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

2. FIGHT
3. SELECTIVE RESPONSE
• In responding to a competitor’s price attack, firms need not retaliate in the
entire industry. They can choose specific areas to protect and defend their
turf.
4. QUALITY
• Firms can warn consumers of the risk of buying at lower prices by
associating them with lower quality products.
FACTORS TO CONSIDER IN PRICING

CONDITIONS OF THE CONSUMER TO MAKE THE PRICE AS HIS

CUE FOR PRODUCT QUALITY:
• When the consumer sees price as a concrete measurable variable and,
therefore, a more trustworthy cue than other cues of quality
• When the consumer relates price to the needed effort to acquire the product,
which, in turn, is related to his satisfaction
• When the consumer implicitly or explicitly wants others to know that he
could afford to spend.
FACTORS TO CONSIDER IN PRICING

FIGHTING PRICE ATTACKS

5. Alliance
6. Cost Advantages
Short Assessment
MULTIPLE CHOICE:

Geroche, Alejandre Hayden Ses M.

Tisbe, Tristan Jay Group
Villavert, Bert John V.
Seven
Short Assessment
MULTIPLE CHOICE:

1. It is the amount of money asked or given for “something".

A. Cost
B. Charge
C. Price
D. Payment
Short Assessment
MULTIPLE CHOICE:

1. It is the amount of money asked or given for “something".

A. Cost
B. Charge
C. Price
D. Payment
Short Assessment
MULTIPLE CHOICE:

2. It is the standard percentage based on cost is adopted.

A. Mark-up
B. Mark-down
C. Unit Cost Pricing
D. Target Profit Pricing
Short Assessment
MULTIPLE CHOICE:

2. It is the standard percentage based on cost is adopted.

A. Mark-up
B. Mark-down
C. Unit Cost Pricing
D. Target Profit Pricing
Short Assessment
MULTIPLE CHOICE:

3. Which of these does not belong to the group?

A. Importation of raw materials

B. Prices of goods and services decreases
C. Exchange rate
D. High Production rate of money
Short Assessment
MULTIPLE CHOICE:

3. Which of these does not belong to the group?

A. Importation of raw materials

B. Prices of goods and services decreases
C. Exchange rate
D. High Production rate of money
Short Assessment
MULTIPLE CHOICE:

4. What are the products that have a limited shelf life?

A. Perishable Goods/Products
B. Phase-Out Products
C. Exchange rate
Short Assessment
MULTIPLE CHOICE:

4. What are the products that have a limited shelf life?

A. Perishable Goods/Products
B. Phase-Out Products
C. Damaged Products
Short Assessment
MULTIPLE CHOICE:

5. This is also called a price war used in marketing to indicate a

state of intense competition followed by a series of price
reductions.

A. PRICING ADJUSTMENTS
B. PRICING CRITERIA
C. PRICE ELASTICITY
D. FIGHTING PRICE ATTACKS
Short Assessment
MULTIPLE CHOICE:

5. This is also called a price war used in marketing to indicate a

state of intense competition followed by a series of price
reductions.

A. PRICING ADJUSTMENTS
B. PRICING CRITERIA
C. PRICE ELASTICITY
D. FIGHTING PRICE ATTACKS
Thank You!
MAY YOU HAVE LEARNED MANY THINGS!

Geroche, Alejandre Hayden Ses M.

Tisbe, Tristan Jay Group
Villavert, Bert John V.
Seven
Sources:
HTTPS://SITES.GOOGLE.COM/SITE/ECONOMICSBASICS/PROBLEM-ON-PED
HTTPS://CORPORATEFINANCEINSTITUTE.COM/RESOURCES/ECONOMICS/
HTTPS://THEMAYKIN.COM/BLOG/A-COMPLETE-GUIDE-TO-VAN-WESTENDORP-HOW-TO-GRAPH-IT-IN-EXCEL

Geroche, Alejandre Hayden Ses M.

Tisbe, Tristan Jay Group
Villavert, Bert John V.
Seven