Pricing Strategy Module SY16-17

Pricing Strategy
SY2016-2017
Marketing Department
College of Business Administration and Accountancy
De La Salle University - Dasmarinas
PRICING STRATEGY SY 2016-2017 1
I. Course Title: PRICING STRATEGY
II. Course Description: This course explains the role of marketing in generating income for
the business by explaining to the students the basic tools used and psychological influences
considered when setting the right price. The students are expected to develop the
computational and analytical skills needed to place the numerical value of a product in the
marketing mix.
III. Learning Objectives:
LO1: Discuss the concept of pricing using the Standard Profit Equation and the role of
consumer preference using the Conjoint Analysis for part-worth and customer utility.
LO1a: Compute and compare profits using Standard Profit Equation.
LO1b: Compute for Part-Worth and Customer Utility using Conjoint Analysis
LO2: Discuss the psychological influences on consumer price perception, Relevant

Costs, Exchange Value Model and Price-to-Benefit Map
LO2a: Identify incremental and avoidable costs
LO2b: Compute the price range using the Exchange Value Model
LO2c: Construct price comparison using Price-to-Benefit Map
LO3: Explain Price Positioning and revisit Product Life Cycle and Ansoff Product and
Market Growth Matrix.
LO3a: Identify the appropriate price positioning technique for each stage in
the Product Life Cycle Model and for each quadrant of the Ansoff Product
and Market Growth Matrix
LO4: Discuss the price structures and explain Profit Sensitivity Analysis and Price
Elasticity.
LO4a: Compute for the acceptable price adjustments.
LO4b: Compute for the price elasticity.
IV. Course Expectations: Students are expected to be knowledgeable of the product models,
namely: Product Life Cycle and Ansoff Product and Market Growth Matrix. Equally, they
are expected to understand economic variables, namely: profit, sales volume or quantity
sold, income, variable cost, fixed cost, marginal cost, break-even, demand elasticity.
V. Course Outline and Timetable: This course is following the topic sequence and timing
shown below:
A. Preliminary Period
1. Topics
1.1.Introduction to Price and Pricing
1.2.Standard Profit Equation
1.3.Part-Worth and Customer Utility using Conjoint Analysis
This instructional material is prepared by Mary Felidora Florinor M. Amparo, Ph.D., RME for use in the classroom
and online classes. Use the required textbook cited (Smith, 2012) for a more detailed discussion on each topic.
Note: May need to review economic concepts: profit, sales volume or

quantity sold, income, variable cost, fixed cost, break-even, demand
elasticity.
2.Learning Activities
2.1.Classroom and Online Discussions
2.2.Graded Group Output (30%)
2.3.Graded Online Assessments (40%)
2.4.Major Examination (30%)
B. Midterm Period
1. Topics
1.1 Psychological influences on consumer price perception
1.2 Exchange Value Model
1.3 Price-to-Benefit Map
1.4 Pricing Positioning Techniques
Note: May need to review the economic concept marginal cost and
product models namely: Product Life Cycle and Ansoff Price and
Market Growth Matrix.
C. Final Period
1. Topics
1.1 Price Structures
1.2 Profit Sensitivity Analysis
1.3 Price Elasticity
Note: May need to review the economic concept of demand elasticity.
Important: You are required to bring in class the following: pencil, eraser, white
intermediate pad, calculator, and a copy of this module. Failure to do so, you will be asked
to leave the room, marked absent and will only be allowed in class with complete materials.
INTRODUCTION TO PRICE AND PRICING
Learning Objective 1: Discuss the concept of pricing using the Standard Profit Equation and
Conjoint Analysis for part-worth and customer utility.
Learning Output: Students can compute and compare profits using Standard Profit Equation and
quantitatively determine part-worth and customer utility using Conjoint Analysis.
Price is the only element in the marketing mix that directly affects profits. This is the value firms
assign to the product and the amount paid by the consumers during the exchange process. Smith
(2012) teaches us that it is crucial to set the price correctly because if the price is too high, we lose
customers, while if we price too low, we lose profit potential. One of the crucial responsibilities
of a marketer that is most important to a business is the setting of the right price.
Setting the right price is both a science and an art. It is a science because it uses quantitative tools
and can be tested. It is an art because it anticipates customers’ perception on various elements
surrounding the purchase of a product and predicts the value given to a product.
Several of the marketing books teach us break-even analysis and cost plus pricing as tools for
setting a price. Although these are necessary economic variables that a business student needs to
understand, they are insufficient tools in setting the right price. First, break-even analysis tells us
that an incremental price increase or a unit of product sold on top of the break-even point generates
profit. Second, cost plus pricing teaches us that setting a mark-up from the cost incurred in
developing the product generates profit. Although there is a mathematical truth in break-even
analysis and cost plus pricing, these tools however fail to consider customer utility or the total
value customers give to a product. There is always the question “how much is the acceptable mark-
up?”
Customer utility has an equivalent willingness to pay. The idea of pricing too high or too low is
based on customer utility or the perceived value of the product and not the cost of producing a
product. Let us always remember that consumers are unaware of the actual costs of producing the
products they buy, their willingness to pay a price is based on the value they give to a product.
The willingness to pay by the consumers is influenced by many psychological factors creating an
idea of acceptable price. Marketers perform several tasks in framing the consumers’ perceived
price range such as: First, Marketers communicate well the value of the product through its
promotion and adept about the product value. Second, at any point during a negotiation, sellers
price aggressively and give discounts reluctantly because the price first mentioned or the price of
the immediate previous purchase serves as a reference for the consumers’ transaction price.
To appreciate the importance of price on profitability, let us look at the standard profit equation.
The standard profit equation has four variables, fixed cost, variable cost, quantity sold (sales
volume) and price.
Standard Profit Equation
Concept to Learn: Revenue
Let us assume that company ABC is selling an alphabet book for $12 and was able to sell 500
copies for one month. The revenue generated from the sale of the books in a month is $6,000, we
calculated our revenue by multiplying the quantity of books sold and the selling price (also referred
to as list price), Q x P = Revenue.
Concept to Learn: Income
Revenue is different from income. The amount left after deducting variable costs from the revenue
is called income. In the standard profit equation it is the first half of the equation π = Q (P - V) -
F, where the variable costs are deducted from the price. Costs are deducted from revenue because
in principle, costs are supposed to be recovered from the exchange.
Notice that in the standard profit equation variable cost is immediately deducted from price, π =
Q (P - V) – F prior to multiplying the price to quantity sold. This tells us that variable cost is
relevant to price and it is actually a component of price. Fixed cost is excluded from the price for
the following reasons: 1.) Fixed cost is incurred whether there is a sale or none, it is not a relevant
cost and must not be passed on to the consumers. 2.) If fixed cost is factored in the cost when
setting the price, we will end up with higher prices and may lose price competitiveness.
In the alphabet book, variable cost is $0.75, performing the equation, (P - V) we do this $12 - $0.75
= $11.25. Multiplying $11.25 to 500 copies sold in a month Q (P - V) will give us an income of
$5,625 for that particular month.
Concept to Learn: Profit
Profit is important because it drives business growth. In principle, profit is the amount that goes
back to the business. Some parts of the profit earned may be declared as dividends or known as
the earnings stockholders get from investing their resources to the business or declared as retained
earnings which is cash re-invested to any activity intended to grow the business, e.g. expansion of
the manufacturing plant, research and development for new products or product innovation, etc.
Completing the standard profit equation π = Q (P - V) - F, we now deduct the fixed cost from the
income $5,625 - $5,000 leaving us with $625 profit. Positive profit means that the revenue is
greater than all the costs incurred in producing the good. Negative profit means financial losses
that the exchange failed to recover the costs and leave the business with nothing to invest for
product innovation, new products or expanded distribution.
This is the most relevant role of marketing in business. Marketing contributes directly to the profits
of the business by way of setting the right price.
Using the alphabet book example above, let us see how price affects profit when we adjust any of
the item in the equation (see Table 1.) Notice the percent change in profit when we improve the
items in the standard profit equation one-at-a-time. For quantity and price an improvement means
increasing the existing number, while for variable and fixed costs an improvement means
decreasing the costs.
Table 1. Comparative Values of the Standard Profit Equation Variables: Increasing Quantity
Sold and Price, Decreasing Variable Cost and Fixed Cost
5% Increase 5% Decrease 5% Decrease
5% Increase
on Quantity on Variable on Fixed
on Price
Items Base Rate Sold) Cost Cost
Quantity Sold 500 525 500 500 500
Price 12.00 12.00 12.60 12.00 12.00
Variable Cost 0.75 0.75 0.75 0.71 0.75
Fixed Cost 5,000.00 5,000.00 5,000.00 5,000.00 4,750.00
Profit 625.00 906.25 925.00 645.00 875.00
% Increase 45% 48% 3% 40%
on Profit
Adjusting each of the item in the standard profit equation one-at-a-time will each improve the
profit. If we increase our sales from 500 units to 525 profit grows by as much as 45%. If we
increase price from $12.00 to $12.60 profit improves by as much as 48%. If we cut our variable
cost from $0.75 to $0.71 profit rises by as much as 3%. If we reduce our fixed cost from $5,000 to
$4,750 profit expands by as much as 40%. Improvements on the variables contribute to the profit
growth, but it is the improvement in price that generated the highest percent increase on profit.
→ Solution to Table 1:
Each time you are given a problem that uses the standard profit equation always compute for the
base profit (π1) or the computed profit using the given variables. Always remember that pricing
decisions are based on the impact of price adjustment on profit.
When you are tasked to solve any pricing problem, use the following steps, otherwise 5 points will
be deducted for each missing step.
Step 1, write the given variables and formula because this will guide you when setting up your
equation or substituting values in the formula.
Given:
500 units = Q or quantity sold
$12.00 = P or price
$0.75 = V or variable cost
$5,000 = F or fixed cost
Formula: π = Q (P - V) - F
Step 2, substitute the values for each variables in the formula and show your solution.
π = 500 (12.00 – 0.75) – 5,000

π = 500 (11.25) – 5,000
π = 5,625 – 5,000
π = $625
Note: Final answers must have its unit of measure or currency symbol. In case of answers
with decimal values, round your final answer to two decimal places. In the case of Q or
quantity sold, always round-up the number to a whole number if the number after the
decimal point is 5 and above, if the number after the decimal point is below 5 disregard
the decimal numbers.
Step 3, proceed with the computation by responding to the conditions required by the case.
Condition#1, Increase Q or quantity sold by 5%. Note: Show your solution for the adjusted value
of the variables. All other variables will take on their original values.
500 x 1.05 = 525 units
π = 525 (12.00 – 0.75) – 5,000

π = 525 (11.25) – 5,000
π = 5,906.25 – 5,000
π = $906.25
Note: Final answers must have its unit of measure or currency symbol. In case of answers
with decimal values, round your final answer to two decimal places. In the case of Q or
quantity sold, always round-up the number to a whole number if the number after the
decimal point is 5 and above, if the number after the decimal point is below 5 disregard
the decimal numbers.
Step 4, compute for the ∆π or change in profit using this formula:
∆π = π2 – π1
π1
∆π=906.25 – 625
625
∆π= 281.25
625
∆π= 0.45 ≈ 45% Note: Always round to two decimal places.
Interpretation: Increasing Q or quantity sold will generate $906.25 profit or 45% increase in profit.
Condition#2, Increase P or price by 5%. Note: Show your solution for the adjusted value of the
variables. All other variables will take on their original values.
$12.00 x 1.05 = $12.60 Why use 1.05 when increasing by 5%?

Increasing is adding from to the whole (100% or 1.00).
π = 500 (12.60 – 0.75) – 5,000 100% (1.00) + 5% (.05) = 1.05

π = 500 (11.85) – 5,000
π = 5,925 – 5,000
π = $925
∆π = π2 – π1
π1
∆π=925 – 625
625
∆π= 300
625
Interpretation: Increasing P or price will generate $925 profit or 48% increase in profit.
Condition#3, Decrease V or variable cost by 5%. Note: Show your solution for the adjusted value
of the variables. All other variables will take on their original values.
$0.75 x 0.95 = $71 Why use 0.95 when decreasing by 5%?

Decreasing is subtracting from the whole (100% or
π = 500 (12.60 – 0.71) – 5,000 1.00).
π = 500 (11.29) – 5,000 100% (1.00) - 5% (.05) = 0.95
π = 5,645 – 5,000
π = $645
∆π = π2 – π1
π1
∆π=645 – 625
625
∆π= 20
625
Interpretation: Decreasing V or variable cost will generate $645 profit or 3% increase in profit.
Condition#3, Decrease F or fixed cost by 5%. Note: Show your solution for the adjusted value of
the variables. All other variables will take on their original values.
$5,000 x 0.95 = $4,750
π = 500 (12.60 – 0.75) – 4,750

π = 500 (11.25) – 4,750
π = 5,625 – 4,750
π = $875 Note: Final answers must have its unit of measure or currency symbol. In
case of answers with decimal values, round your final answer to two
decimal places.
∆π = π2 – π1
π1
∆π=875– 625
625
∆π= 250
625
Interpretation: Decreasing F or fixed cost will generate $875 profit or 40% increase in profit.
Exercise #1: Standard Profit Equation
Name: _______________________________________________________ Score: __________
Instructions:
1. Print this page and using a pencil, write your name and class schedule.
2. Read the short case on Frosting Café.
3. Write down the given and formula (equation).
4. Compute for the profits.
5. KEEP a clean paper.
Frosting Café is a popular snack place serving cupcakes made from all-organic ingredients. It
prides itself as a healthy alternative to more popular international brands like Starbucks yet the
product and service experience is comparable.
Jane Doe the owner of Frosting Café is presently enjoying weekly sales of 250 cupcakes at P75 a
piece. Frosting Café operates on a variable cost of P5.50 and fixed cost of P10,000.
Compute for the following:
1. Generated weekly profit with the present weekly sales

2. Generated weekly profit should Jane Doe improves her price by 5%.
3. Generated weekly profit should Jane Doe improves her quantity sold (volume sales) by
5%.
4. Which option makes Jane Doe better off: improving price or increasing sales volume?
Exercise #1: Standard Profit Equation
Name: ________________________________________________________ Score: __________
Instructions:
1. Print this page and using a pencil, write your name and class schedule.
2. Read the short case on Frosting Café.
3. Write down the given and formula (equation).
4. Compute for the profits.
5. KEEP a clean paper.
Jane Doe decided to increase her price to P79 per cupcake while operating on the same variable
cost P5.50 and fixed cost P10,000. She is surprised to find out that her sales volume is unaffected
by the price adjustment and still sells 250 pieces of cupcakes weekly.
Jane Doe wants to improve her profits by cutting on variable costs and fixed costs.
Compute for the following:
1. Generated weekly profit with the present weekly sales

2. Generated weekly profit should Jane Doe reduces her variable cost by 2.5%.
3. Generated weekly profit should Jane Doe reduces her fixed cost by 2.5%.
4. Which option makes Jane Doe better off: improving price or increasing sales volume?
Conjoint Analysis: Customer Utility and Part-Worth Utility
Pricing as a scientific exercise requires marketers to gather information and conduct quantitative
analysis to identify the range of profit-yielding price. However, even with empirical data, pricing
uncertainties are always present. These uncertainties occur because pricing structure, price point
and price discount varies depending on geography and customer situation and the heterogeneity of
the consumers. These uncertainty-causing variables demand for an understanding of how
consumers value a product.
Consistent with the purpose of creating value demands that we know our customers well. Value is
created when we are able to satisfy consumer preferences. One simple way of understanding the
value customers place on a product is by determining the part-worth utility or the value customer
place on each product feature, attribute and benefit. The collective part-worth utilities is called
customer utility.
Assume that we are marketing fresh fruit blends cold beverage using only the finest fruit of the
season and milk. We are deciding whether to use fresh milk or vanilla ice cream for extra sweetness
and creaminess. We also considered the existing price range in the market, P95 to P60. We know
that marketing decisions are based on consumer preferences so we decided to conduct a survey.
1. Setting-Up the Table for Product Features and Attributes
The first step is to set-up your table of product features and attributes. We are choosing
between fresh milk and vanilla ice cream and based on the market prices of fresh fruit
blends range from P95 to P60. Other marketing decisions are affected by the kind of brand
that we intend to build for the product. Given these variables we are able to create eight
possible combinations, see Table 2.
Table 2. Product Features and Attributes

Fresh Fruit Blends Fresh Fruit Blends Fresh Fruit Blends Fresh Fruit Blends
Fresh Milk Fresh Milk Vanilla Ice Cream Vanilla Ice Cream
Premium Brand Premium Brand Premium Brand Premium Brand
P95 P60 P95 P60
Niche Brand Niche Brand Niche Brand Niche Brand
P95 P60 P95 P60
2. Preparing the questionnaire
In marketing we commonly use the Likert Scale and assign a numerical interpretation that
excludes “Neutral” as a choice because “Neutral” may mean “No Choice” or “No
Response”. Response choices must be written using simple sentences to avoid confusion.
The questionnaire may appear like our example below:
Encircle the score that best represents your choice. (5 most likely and 1 least likely)
Numerical Interpretation:
5- I will choose this 5 out of 5 times.
1. I prefer fresh milk over other creamer for my fruit blends. 5 4 3 2 1

2. I enjoy my fruit blends if I am certain that all ingredients are 5 4 3 2 1
fresh.
3. I want my fruit blends to be made of natural ingredients. 5 4 3 2 1
4. I want a creamy texture to my fruit blends. 5 4 3 2 1
5. I prefer fruit blends that are sweet. 5 4 3 2 1
6. I think a fruit blend that is similar to a milkshake can be 5 4 3 2 1
equally satisfying.
7. I prefer my fruit blends while hanging out with friends and 5 4 3 2 1
enjoying conversation with them.
8. I am confident with my fruit blend if it is sold by a known 5 4 3 2 1
brands.
9. I certainly prefer y fruit blend served in a nice looking cup. 5 4 3 2 1
10. I normally take my fruit blend while walking. 5 4 3 2 1
11. As soon as available, I take my cup of fruit blend and leave. 5 4 3 2 1
12. It doesn’t really matter if my fruit blend is served in a clear 5 4 3 2 1
cup as long as it is clean.
13. I am willing to spend P95 for a 16oz cup of fruit blend. 5 4 3 2 1
14. I am willing to spend P60 for a 16oz cup of fruit blend. 5 4 3 2 1
Note that we prepared three questions for each of the product attribute, they are as follows:
Questions 1 to 3, Fresh Milk

Questions 4 to 6, Vanilla Ice Cream
Questions 7 to 9, Premium Brand
Questions 10 to 12, Niche Brand
Question 13, willingness to pay P95
Question 14, willingness to pay P60
It is important that we know which item measures the preference on a product feature,
attribute or benefit because we are going to group the items when getting a single mean or
part-worth utility.
3. Computing the Part-Worth Utilities and Customer Utility
After retrieving the accomplished questionnaires, tally the scores for each number. Get the
mean of the score for each number by adding all tallied scores and dividing the total scores
to the number of respondents. We have 14 items, we should have 14 mean scores. Since
we have three questions for each product attribute, we will add up all the means of the
items pertaining to the product attribute and divide each sum of means to three. The
quotient of the sum of means is the part-worth utility, see Table 3.
Table 3. Tallied Responses and Computed Scores (hypothetical)

Sum Part-
Total of Worth
Respondents Score Mean Means Utilities
Questions 1 2 3 4 5 6 7 8 9 10
Q1. 4 5 3 3 4 5 3 5 3 3 38 3.8 4.2
Q2. 5 5 4 4 5 5 4 5 4 4 45 4.5 Fresh
Q3. 4 5 4 3 4 5 4 5 4 4 42 4.2 12.5 Milk
Q4. 3 3 5 4 3 4 5 3 4 5 39 3.9 3.6
Q5. 3 3 5 4 3 4 5 3 4 5 39 3.9 Vanilla
Q6. 2 2 5 2 2 2 5 2 2 5 29 2.9 10.7 Ice Cream
Q7. 4 2 4 5 4 4 4 2 2 4 35 3.5 3.7
Q8. 5 4 4 5 5 5 4 4 4 4 44 4.4 Premium
Q9. 4 3 2 4 4 4 2 3 3 2 31 3.1 11.0 Brand
Q10. 3 3 4 4 3 3 4 3 3 4 34 3.4 3.2
Q11. 2 3 4 3 2 2 4 3 3 4 30 3.0 Niche
Q12. 3 3 4 2 3 3 4 3 3 4 32 3.2 9.6 Brand
3.2
Q13.
5 3 2 2 5 5 2 3 3 2 32 3.2 P95
4.0
Q14.
3 4 5 4 3 3 5 4 4 5 40 4.0 P60
Now we get back to our first table and distribute the part-worth utilities. Adding up all part-worth
utilities will give you customer utility. The highest customer utility 11.9 will be ranked 1 and the
lowest will be ranked 8. See Table 4.
Table 4. Product Features and Attributes with Part-Worth Utilities and Customer Utility
P95 P60 P95 P60
4.2 + 3.7 + 3.2 = 11.1 4.2 + 3.7 + 4.0 = 11.9 3.6 + 3.7 + 3.2 = 10.5 3.6 + 3.7 + 4.0 = 11.3
Rank 4 Rank 1 Rank 7 Rank 3
P95 P60 P95 P60
4.2 + 3.2 + 3.2 = 10.6 4.2 + 3.2 + 4.0 = 11.4 3.6 + 3.2 + 3.2 = 10.0 3.6 + 3.2 + 4.0 = 10.8
This information guides us when determining the direction to take when marketing our fresh fruit
blends. We identified the preference for fresh milk, premium brand, priced at P60 for a 16oz cup
(see Rank=1). This means that it will be valuable for both the customers and the firm to use fresh
milk, invest in the branding efforts for the product, and set the price at P60 per 16oz.
Now let us explore the monetary value of each of the part-worth measured using the economic unit
util.
Price is always one of the attributes measured in conjoint analysis. According to Smith (2012),
“the ratio of price disparity in the study design to util disparity between the two price points found
from the customer preferences reveals the dollar value per util.” (p.51)
Step 1: Get the given:

Price ranging from P60 - P95
Part-worth utilities are 4.0 utils and 3.2 utils
Step 2: Set up the equation, always subtract the smaller number from the bigger number:
P43.75/util = P95 - P60

4.0 utils – 3.2 utils
Using P43.75/util as our valuation, we can now determine the value of other attributes. For
instance, the difference in the part-worth of premium brand (3.7) and niche brand (3.2) is 0.5 util,
or P21.88. In the case of fresh milk (4.2) and vanilla ice cream (3.6) is 0.6 util, or P26.25. This
means that both premium brand and fresh milk add value to the product.
Computations:
Premium brand 3.7 utils – Niche brand 3.2 utils = 0.5 utils
0.5 utils x P43.75/util = P21.88
Interpretation: Premium brand adds value to the product.
Fresh milk 4.2 utils – Vanilla ice cream 3.6 utils = 0.6 utils
0.6 utils x P43.75/util = P26.25
Interpretation: Fresh milk adds value to the product.
Table 5. Fresh Fruit Blends Part-Worth Utility

Attribute Level Part-Worth (utils) Difference
Brand Premium Brand 3.7 0.5
Niche Brand 3.2
Ingredient Fresh Milk 4.2 0.6
Vanilla Ice Cream 3.6
Price P95 3.2 n/a
P60 4.0
With our available information, we can say that our fresh fruit blends is best marketed as a
premium brand using fresh milk and priced at P60 (see Table 6).
Table 6. Product Features and Attributes with Part-Worth Utilities and Customer Utility
P95 P60 P95 P60
4.2 + 3.7 + 3.2 = 11.1 4.2 + 3.7 + 4.0 = 11.9 3.6 + 3.7 + 3.2 = 10.5 3.6 + 3.7 + 4.0 = 11.3
P95 P60 P95 P60
4.2 + 3.2 + 3.2 = 10.6 4.2 + 3.2 + 4.0 = 11.4 3.6 + 3.2 + 3.2 = 10.0 3.6 + 3.2 + 4.0 = 10.8
Let us say, we decide to offer a choice of premium brand with vanilla ice cream, what will be the
price consideration? We get the product valuation by adding the difference of the part-worth
utilities premium brand and niche brand (0.5utils), fresh milk and vanilla ice cream (0.6utils),
giving you 1.1utils or in monetary value P48.13 (1.1 x P43.75). Add the price with the higher part-
worth utlity P60 and product valuation P48.13 and you will get P108.13. Interpretation: This new
variant can attract the customers away from P60 if the new variant is priced at or lower than
P108.13 (Smith, 2012). Application: If you want to price your new fresh fruit blend with vanilla
ice cream and remain within customer preference you can price it at > P60 or ≤ P108.13.
Completing the Conjoint Analysis with Statistics
Although the computed part-worth (util) and customer utility are useful bases for predicting
consumer preferences it is still worth the while to use statistical tools for better interpretation. To
aid us in our conjoint analysis, we will use the conjoint analysis calculator of Klaus Goepel, screen
shots are shown below. Follow the next series of instructions.
Step 1, Download from our SchoolBook and open the Goepel Conjoint Analysis calculator.
Picture 1. Goepel Conjoint Analysis Calculator
Step 2, Enter the product attributes that we used in our example. We only have three attributes so
we leave the column for Factor 4 empty. Goepel calculator will generate combination of attributes,
which is the same combination of attributes we generated manually. Input our computed rank on
the fields for each combination.
Picture 2. Goepel Conjoint Analysis Calculator with Encoded Product Attributes and Ranking
Step 3, Goepel calculator will do the regression analysis for us. Scroll down and you will find -1
and 1 values which tells us which attribute that when added or removed either adds (1) or reduces
the value of the product.
Picture 3. Goepel Conjoint Analysis Calculator with Linear Regression Correlation
Step 4, the last table shows the results of the conjoint analysis. The table says that the price of the
fresh fruit blends is the most valued product attribute; -1.75 tells us that consumers may move
away from the fresh fruits blends 1.75% of the time if the price is perceived to be a mismatch. The
choice between fresh milk and vanilla ice cream adds value to the product.
Picture 4. Goepel Conjoint Analysis Calculator Table of Results
Definition of Terms:
Customer Utility is the sum of all part-worth utilities given to a product by the costumers.
Income is the revenue generated less the costs incurred when producing the product.
Fixed Costs are costs on rent, advertising, insurance, office supplies, utilities (electricity, water,
phone and internet), etc., which tend to remain the same regardless of production output.
Part-worth utility is the value given to each product feature, attribute and benefit.
Price is the value firms assign to the product and the amount paid by the consumers during the
exchange process.
Profit is the financial benefit that is realized when the amount of revenue gained from a business
activity exceeds the expenses, costs, taxes needed to sustain the activity. Any profit that is gained
goes to business owners who may or may not decide to spend it on the business.
Revenue is the amount generated by multiplying the quantity sold to the price of the product. This
is the sales generated expressed in monetary terms.
Util is the unit of measure to part-worth utility
Variable Costs are those costs that vary depending on a company’s production volume; they rise
as production increases as in peak months and fall as production decreases as in lean months.
Concept Review:
Learning Objective 1: Discuss the concept of pricing using the Standard Profit Equation and
Conjoint Analysis for part-worth and customer utility.
1.1.What are the risks in wrong pricing?

1.2.What is the drawback of break-even analysis and cost plus pricing?
1.3.What is the appropriate basis for setting the right price?
1.4.Is it possible to set the price correctly without consumer research? Why?
1.5.How is value created in pricing?
Exercise #3 Part-Worth Utility and Customer Utility
Name: ________________________________________________________ Score: __________
Instructions:
1. Using this questionnaire, conduct a consumer response survey online.
2. Subscribe to an online survey site and upload our questions.
3. Run the survey for one week.
4. Compute for the part-worth utility and customer utility.
5. Do a conjoint analysis. Submit a research report.
a. Contents of the Consumer Response Survey using Conjoint Analysis
i. 1st Paragraph (page 1): Describe of the project.
ii. 2nd Paragraph (page 1): Describe the research methodology
iii. 3rd Paragraph (page 1): Describe the data gathering
iv. 1st Paragraph with table (page 2): Part-worth Utility and Customer Utility
v. 1st Paragraph with table (page 3): Conjoint Analysis Result and Data
Interpretation
Project Description:
The consumer response survey is measuring consumer preference on online shopping. We are
using the following product attributes: Price (uniform and discounted), Product Variety (extensive
and selective), Delivery Days (5-10 days and 3 weeks), Payment (cash-on-delivery and credit/debit
cards).
Project Title: A Consumer Response Survey on Online Shopping Preferences using Four-Factor
Conjoint Analysis
Research Report Format:

The research report takes on the article format with the research title and a by-line. Using Arial
or Times New Roman 12, double-space, narrative with tables. First page will look like the one
below:
A Consumer Response Survey on Online Shopping Preferences using Four-Factor

Conjoint Analysis
By: Juana Dela Cruz, MKA3-0
The consumer response survey is measuring the consumer preference for online shopping.
We are using the following product attributes: Price (uniform and discounted), Product Variety
(extensive and selective), Delivery Days (5-10 days and 3 weeks), Payment (cash-on-delivery and
credit/debit cards).
6. Title, by-line and tables are centered, narratives are full justified. First line of each
paragraph are indented.
7. Make sure to follow the instructions. Failure to comply with the instruction, 5 points will
be deducted for each missed instruction.
Numerical Interpretation:
1. I am buying online if the price of the products is less than the

price set by the leading retailers. 5 4 3 2 1
2. I am shopping online if the price is discounted. 5 4 3 2 1
3. I prefer online shopping because the prices are reasonably
affordable than the prices set by the leading retailers. 5 4 3 2 1
4. I am shopping online and paying the same price set by the
leading retailers. 5 4 3 2 1
5. Products sold for both online and offline must have the same
price. 5 4 3 2 1
6. Prices of the product must be uniform at all times. 5 4 3 2 1
7. I enjoy shopping if there are variety of products to choose from. 5 4 3 2 1
8. Shopping is like browsing the web, I search for many different
things. 5 4 3 2 1
9. My eyes feast on the number of different products displayed. 5 4 3 2 1
10. I prefer specialty stores because the variety of products are
minimal. 5 4 3 2 1
11. I find it fun to shop for products in stores that carries only the
specific product line that I am searching for. 5 4 3 2 1
12. I like stores that focus on a specific product line. 5 4 3 2 1
13. When shopping online I expect the items within 5 to 10 days. 5 4 3 2 1
14. I find it reasonable to receive the item I purchased online 3
weeks upon placing the order. 5 4 3 2 1
15. Online shopping is preferable if cash-on-delivery is available as
a payment option. 5 4 3 2 1
16. I feel comfortable ordering online if I am allowed to pay in cash-
on-delivery. 5 4 3 2 1
17. I only buy products online if the site accepts cash-on-delivery
payment. 5 4 3 2 1
18. When I shop online I prefer PayPal and direct credit or debit card
transactions. 5 4 3 2 1
19. Shopping online is convenient because I get to pay using my
credit or debit card. 5 4 3 2 1
20. I use my credit or debit card every time I shop online. 5 4 3 2 1
PSYCHOLOGICAL INFLUENCES ON PRICING
Learning Objective 2: Discuss the psychological influences on consumer price perception,

Relevant Costs, Exchange Value Model and Price-to-Benefit Map.
Learning Output: Compute the price range using the Exchange Value Model and construct price
comparison using Price-to-Benefit Map
Consumers’ perceived value is dependent on their perception about the product and the
alternatives. Marketers do branding to reduce consumer price sensitivity. The human brain
responds to heuristics or symbols produced by memory and consumers’ perception of value are
influenced by heuristics produced by true economic costs, perceptual challenges, prospect theory
and effects of prospect theory.
 True Economic Costs. Our premise on consumer behavior is that consumers are rational
beings with a tendency toward problem-solution approach in their purchasing decisions
and the likely attention on the implicit economic cost associated with the trade-offs as they
buy. Interestingly, perceived value varies due to the shared cost effect.
o Shared cost effect implies that consumers’ price sensitivity eases when other
people’s money is used to pay for a product. There are four classifications of
buying behavior distinguished according to whose money is spent (Smith,
2012).
 People spending their own money for themselves. There is high

attention on gaining utility from the product and the money paid.
Consumers choose well and ensure the value of their money.
 People spending their own money on someone else. Consumers seek
utility for the receiver and the utility of giving for themselves. Just like
buying a birthday cake to a friend, consumer will most likely more than
willing to trade-off cake flavors and variants.
 People spending someone else’s money for themselves. Consumers are
more benefit oriented, but less price sensitive. An example is when a
company buys an employee a car, employee will most likely maximize
the utility by choosing the best car brand that is viable with the allocated
budget.
 People spending someone else’s money on someone else. Consumers
are neither price sensitive nor benefit sensitive.
o Switching Costs is a psychological cost associated when changing brands

commonly occurring with products that require user-knowledge. Switching cost
arise from product-specific investment like learning how to operate a new
product. The adjustments on the new technology requires from the consumers
makes them price sensitive. The greater the product-specific investment on a
product the higher the price sensitivity of the consumers (Micu & Micu, 2007).
o Expenditure Effect refers to the tendency of consumers to be more price

sensitive at higher prices and so they are more than willing to invest on
evaluating the alternatives. Other factors that comprise the idea of economic
incentives are time and effort in acquiring a product. For instance, high-income
segment may have the income to spend but lacks the time to evaluate the
alternatives and so opt to pay a higher price. Low income households prefers to
buy in smaller volume like the sachet packed alternative because they are more
price sensitive with large-expenditure items. Business markets purchase in
volume orders because of the savings incentives from volume discounts (Micu
& Micu, 2007).
o Difficult Comparison Effect is when consumers encounter difficulty comparing

prices and benefits which may be caused by limited information, limited
knowledge on the points of comparison just as in branded and generic drugs.
Even size changes cause difficult comparison effect like a slice of an S&R
priced at P99 and whole box containing 8 huge slices at P599, consumers most
likely have a relaxed price sensitivity on a box of pizza because it appears
cheaper than buying on a per slice basis.
 Perceptual Challenges, social norms, cultural beliefs and traditions have psychological
influences on price sensitivity.
o Prices Ending in 9. Have you ever wondered why there are prices that end in
9? According to Smith (2012), studies have shown that digits as 5 and 0 are
easily stored and retrieved from memory due to familiarity. Between P595 and
P600, it is easier for the consumers to choose between two prices because both
last digits are easily retrieved from memory when comparing alternatives. The
ability to compare prices increases the likelihood of price sensitivity. Using the
difficult comparison effect, we choose an odd number like 9 and priced the
product at P599 because consumers will likely have a hard time recalling the
price, thus reduces price sensitivity.
Have you ever wondered why the last digit? Societies using the Arabic numeral
system (1,2,3,4…) numbers are encoded from left to right. The most important
number is the one on the left (Smith, 2012). Customers will remember that the
product is priced somewhere at P500+ and most likely forget the other two
digits. Pricing set at P599 will maximize profit potential than with another odd
number as P597.
Some cultures have number belief, Western is 9, Asian is 8 (for good luck),
Poland is 5.
o The Fairness Effect is the consumers’ idea of a “fair price” and use this as the basis
for acceptable price. When evaluating the fairness of a price, consumers include the
motive of the seller. If the motive is perceived to be good, consumers are less price
sensitive. Companies with good reputation works well for this purpose. In the case
of individual consumers, they expect a uniform price and the same choices made
available for all. Marketers must exercise caution when giving away discount to
some customers. Apart from the potential loss in profit, too much variation in price
discount may result of price credibility problem (Smith, 2012) and customers may
feel bad about the difference in price offerings.
o Overconfidence of Control over Future Behavior refers to the tendency to over-

estimate the ability to modify ones behavior such as the case of availing a one-year
magazine subscription. Those who buy magazines on a per-copy basis do so
because of the magazine’s editorial content. Subscribing to the magazine for a
period is purely a purchase decision motivated by the discounted price. This is the
same with membership to fitness club instead of paying its services on a per-visit
basis, some choose to avail a year of membership. Studies show that those who pay
on a per-visit basis went frequently than those with paid membership (Smith, 2012).
o Small-Pie Bias occurs when sellers and buyers negotiate a price. Both parties tend
to underestimate the size of the bargaining zone and agree on a transaction price
that fails to maximize value/profit potential of the agreed price. To avoid small-pie
bias do the following:
 Formulate buyer’s reservation price. During a conversation with the buyer
uncover buyer’s reservation price (the price a buyers are willing to buy the
product given the set of benefits revealed to them.)
 Make the initial offer. Offer the product at a price higher than the buyers’
reservation price and allow the price to be negotiated down to the
transaction price.
 Price aggressively. Discount reluctantly. (Smith, 2012)
o Promotional Influences refer to the ability of marketing communications to reduce

price sensitivity by communicating aggressively the product attributes, benefits and
value.
 Prospect Theory of Tversky (1979)

The premise of prospect theory is that people’s choices are based on the perception of
losses and gains. The three value functions of losses and gains are reference dependency,
diminishing sensitivity and loss aversion.
o Reference dependency. It is customary for customers to compare choices using their

point of reference like the current satisfaction level, most recent prices seen in the
market or the need for replacement arises. The point of reference is the point when
customers will choose to remain with the current product (status quo) or replace
with replicas the last item purchased. The theory states that “Losses away from
point of references will be avoided. Gains above the point of references will be
discounted.” Example: Existing Product A is selling at P279. New Product B is
launched promising better product attributes and more benefits, priced at P389. The
promise of gain through better product attributes and additional benefits may be
discounted or may not be viewed as additional value because the current customers
are satisfied with Product A, while the P110 price difference will be considered
unnecessary loss by the customers. Most likely, customers will remain with Product
A and may find switching to Product B as risky (Smith, 2012; Micu & Micu, 2007;
Kuhberger, 2002).
o Diminishing Sensitivity occurs when the gains and losses increase away from the
point of reference, e.g. increasing number of choices or absolute magnitude of gains
and losses expressed in price differences. Example: When P5 is increased to P10
customers may resist the 50 percent increase of price as opposed to P490 to P495
customers may be forgiving even if both prices increased by P5.
o Loss Aversion. Customers are more conscious about the potential loss during
transaction than the potential gain. Paying for a product is always considered by
customers as a loss. To manage the perceived loss, promotion should consistently
communicate product attributes and benefits to create the value positioning in the
minds of our customers thereby reducing price sensitivity.
Addressing the psychological influences, Prospect Theory suggests that when promoting
products, marketing communications should unbundle the perceived gains (product
features, attributes and benefits) and bundle losses (avoiding surcharges instead give
discounts) or shift the pain from the direct price paid to indirect opportunity costs (e.g.,
From P279, now faster access, larger data capacity, real time activation for only P389).
 Effects of Prospect Theory

These psychological influences have been codified long before Prospect Theory but only
with the theory were these influences found its practical applications. These psychological
influences are also the reasons why setting prices are more than a quantitative exercise
(Smith, 2012).
o Reference Price Effect. Consumers experience reference price effect whenever their
price expectation is affected by their exposure to the current price or the last price
they saw. Moving away from the reference price increases the likelihood of price
sensitivity. If the consumers are coming from a recent sales promotion either the
product or its alternative, their reference price is the discounted price.
o Endowment Effect. Endowment effect takes place when we allow our consumers to
experience the products prior to actual buying like giving away sampling or trial
products. Endowment effect is the value people place on an object once they
possess it than they otherwise would.
o Anchoring. The premise of anchoring is that consumer expectations are created

with their exposure to early information becoming the reference points. Once
consumers are exposed to a particular information it is hard to change their
expectations in relation to the same information. In pricing, when a seller makes an
initial offer to a buyer, it becomes the reference price of the buyer. Previous
purchases are also strong price points to anchor on. Anchoring may be used for the
expected high or low price and benefits and product attributes of a product.
o Comparison Set Effect. The prices of the comparable alternatives are also reference
prices. When the products of competing alternatives are priced low, consumers
expect similar products within the same price range.
o Framing Effect. Consumers become increasingly sensitive to price when they

perceive price as a loss rather than gain. According to Kuhberger (2002)
“…framing effect does not exist with complete information… but expected in the
case of asymmetrical violation of complementarity, that is if the sure option is
described partially and the risky option is described completely.”
o Order Bias. Consumers’ price sensitivity is also affected by the order prices are
presented. This psychological effect takes on anchoring and loss aversion as such
that if consumers are presented prices from highest to lowest, consumers are less
price sensitive and perceive the succeeding lower prices as discounted prices
thereby increasing the gain and reducing loss. If we reverse the order, consumers’
reference point will come from the lower priced good. Moving up the price range
will cause the consumers to view the prices as increasing losses resulting to
heightened price sensitivity.
o End-Benefit Effect is the price sensitivity of the consumers in relation to the purpose
or end benefit derived from the purchased good. Example: The price sensitivity
over chocolates between a consumer who is on a weight loss program and someone
who just buys regularly. The consumer who is on a weight loss program might be
less price sensitive if the purchase of a chocolate is a reward for a disciplined eating
behavior for a week of treatment or otherwise if the consumer considers weight loss
as a significant investment of money and commitment to the program.
Concept Review

Relevant Costs, Exchange Value Model and Price-to-Benefit Map
2.1.Consumers are inherently price sensitive, how can we reduce consumers’ sensitivity to price?
2.2.How are prices ending in 9 able to generate economic value?
2.3.Why are consumers more price sensitive on premium prices than discounted prices? Which
psychological influence support your position?
Relevant Costs
Moving forward with pricing, let us be reminded that when setting the price include only the
relevant costs or costs with direct impact on the pricing decisions (Hou, 1997). From the previous
topics we learned that the price on the tag psychologically influences costumer preferences and
buying decisions. When setting the price, we do not limit the considerations to the demand-side.
In this section, we will emphasize the pricing considerations from the supply-side.
According to Hou (1997), we set a price based on our anticipated sales for the the future. This
future-orientated sales makes us rely on historical data as basis for pricing, such as previous sales
at a previous price or the use of naïve sales forecasting. Historical data, although readily available,
may only be used if the competitive environment is static. Hou (1997) reminds us that in a very
dynamic business environment, historical data is unreliable.
There are two aspects of relevant costs: 1.) incremental costs, and 2.) avoidable costs. Incremental
costs are “types of costs that may increase as a result of taking a particular course of action to
expand one’s business or increase sales, e.g. direct labor and sales commissions” (Hou, 1997).
Avoidable costs or “costs that may be avoided or need not be incurred are relevant” (Hou, 1997).
An example is our food vendor Aling Maria, selling arroz caldo for P15 per bowl.
During school days, Aling Maria is able to sell 150 bowls daily, variable cost is
P5.50 (rice grains, chicken parts, garlic, onion, ginger, disposable bowls and
spoons, LPG, utilities), fixed cost is P700 (monthly rent for the kiosk). Aling Maria
decided to make her kiosk more attractive to the teen consumers who are her
frequent customers during school days. She hired the local painter who also does
murals and Jeepney arts commissioned to re-paint her kiosk for P500 labor fee and
additional P500 for the materials. Positive about her newly designed kiosk, Aling
Maria hired a helper to assist her with the additional customers and agreed to pay
the helper P5 per bowl sold. Excited to show off her newly designed kiosk, Aling
Maria requested her daughter to design a colored flier and paid P1,500 for
printing.
Questions: If we are to consider the costs when pricing Aling Maria’s arroz caldo,
which are considered relevant costs?
When setting the price remember that we are asking the customers to pay an amount that will
recover the costs of producing the good that they buy plus the value they attached to the product.
 Variable cost is a relevant cost. Aling Maria’s arroz caldo has a variable cost of P5.50
consisting of the rice grains, chicken parts, garlic, onion, ginger, disposable bowls and
spoons, LPG, utilities. Technically, we are putting a price for each of the item
comprising the variable cost because work is done to convert each of the raw materials
into a final good, (i.e. each of the item is washed, cut, diced, boiled, seasoned, etc.) and
each of the item creates value to the final product (i.e. rice grain is a combined fine
malagkit and bigas, chicken parts are from the reputable poultry farm of the province,
etc.) Variable cost is relevant because without its composition, there is no product.
 Incremental cost is relevant. When Aling Maria anticipated an increase sales volume
or quantity sold as a result of the more attractive kiosk, she is adding labor cost with
additional helper assisting her and increasing the volume of her supplies to produce
more arroz caldo.
 Avoidable cost is relevant. The promotional fliers which is avoidable, meaning it is

added to generate more sales yet Aling Maria can also do away without it, will also
comprise the additional costs in generating increased sales volume.
 The incremental and avoidable costs will now be considered marginal cost or the cost
of producing the additional unit of sale or product.
 Fixed cost is not relevant. Fixed costs such as the monthly rent for the kiosk is not
relevant to pricing because whether Aling Maria sells her arroz caldo or not, she will
be paying the rent and so we take it out of the pricing equation. Also remember, fixed
costs are the responsibility of the business and not the customers, so we do not pass
fixed cost to the customers. If we do, we will end up using the total cost as a basis for
our pricing which will result to a high price that is no longer competitive in the market.
 Capital expenditure (CAPEX) is not relevant. Our simple example of CAPEX is the
cost associated to the repainting of the kiosk which are the labor cost of the local painter
and the painting supplies. These are not relevant because whether or not Aling Maria
sells her product, if the circumstances require that she re-paints her kiosk she will have
to do it.
Exchange Value Model
Recognizing that consumers’ willingness to pay or price preference is framed by the psychological
influences and the price of the competitor are crucial when setting the price. Exchange Value
Model is a simple tool used – most appropriate for new product or new product variant – when
there are two products being compared. This tool is used when computing for the acceptable price
range for the new product.
There are two ways of using the exchange value model: 1.) extreme boundaries, and 2.) narrow
boundaries.
Extreme Boundaries
Using the extreme boundaries, the price range for a product includes the customer utility and
marginal cost. As a general rule, the highest possible price we can sell a product should be equal
to customer utility and the lowest possible price is the marginal cost. Setting the price higher than
the customer utility will result to customers refusing to purchase the product; while setting the
price lower than the marginal cost will result to losses for the firm.
Let us get back to our alphabet book sold at $12 per copy, selling 500 copies a month. If we decide
to sell additional one unit making our monthly sales 501 the cost that will be incurred in producing
and selling additional one unit is called marginal cost. Supposed that there is a marginal cost of
$0.35 when we increase our sales by one unit, extreme boundaries is telling us that we cannot price
the book lower than $0.35.
Assume that we conducted a consumer response survey using conjoint analysis and found out that
customers are willing to pay $15 for our book, using extreme boundaries the price range of our
alphabet book is $15 highest price possible and $0.35 lowest price possible. This range indicates
that we can price the book anywhere between $15 and $0.35 and remain mutually beneficial for
the firm and the customers.
Notice the range is too wide. This is the challenge under extreme boundaries. We can end up
pricing the book at the point where customers are happy with the price yet the firm is unable to
capture the most of the value. Ensuring that we capture both value to customers and value to the
firm, we narrow the price range using narrow boundaries.
Narrow Boundaries
When narrowing the boundaries we can determine the exchange value of the new product by
calculating the expected cost and differential value.
Step 1: Calculate the Expected Cost
When calculating the expected cost the following are needed:

1. Selling price for the comparable alternative, in this case the alphabet book selling at $12
per copy.
2. Frequency of sales for the comparable alternative, hypothetically let us peg the re-order
rate of the alphabet book at 78%.
We can use a decision tree when calculating the expected cost.

a. Expected Cost
Repeat Buy
Alphabet Book
Expected Cost = $21.36 $12 x 78%
$12 x 1 + $12 x .78 + 0 Will not re-buy
$12 x 100%
$0 x 22%
Figure 1. Decision Tree for Expected Cost
Our decision tree shows that the alphabet book is sold at $12 for all 500 copies sold ($12 x 100%)
and that this book has a 78% repeat buy or 78% of the time this book will be re-purchased by its
existing customers, e.g. school endorsing the book for use the next school year ($12 x 78%), while
22% will choose another book ($0 x 22%).
The expected cost is used to compute for the price of the new book, and this is done using algebra.
It is important at this point that we understand that a selling price is not only the cost plus mark-
up. The selling price includes the value-adding features of a product. In the case of the alphabet
book we the price of the core product which is the contents of the book, is $8.50 referred to as the
Reference Price, the rest are prices for the value adding features, i.e. publisher, the book is
published by a reputable and leading publisher; author, written by an expert on the subject area;
international accreditations, packaging, etc. These value-adding features are also given a price and
they comprise 29% of the selling price. To get the reference price, we take-out the other parts of
the price, in our example the prices of the value adding features or the 29%.
Since the new book is comparable to the first edition, we assume that the new book contains the
value-added features of the first book. So we take out the 29% of the price or $3.50 as the same
value-added feature of the second book. Since we do not have the price of the core product, we
denote X for the price of the core product. Using algebra we know that the price of the new book
is $3.50 + X.
The new book will be the latest edition once it is distributed and promises a much higher repeat
buy at 95%. We now substitute the given numbers to our decision tree.
Step 2: Calculate the Exchange Value
b. Exchange Value
Repeat Buy
nd
Alphabet Book 2
Edition $3.50 + X (95%)
Expected Cost = $21.36
$3.50 + X (100%) + $3.50 + X (95%) + $0 (5%) Will not re-buy
$3.50 + X (100%)
$0 (5%)
Figure 2. Decision Tree for Exchange Value
Solution:
$21.36 = $3.50 + X (100%) + $3.50 + X (95%) + $0 (5%)
Simplify:
$21.36 = $3.50 + X (1) + $3.50 + X (0.95) + 0
Distribute:
$21.36 = $3.50 (1) + X (1) + $3.50 (0.95) + X (0.95)
$21.36 = $3.50 + 1X+ $3.33 + 0.95X
Combine Similar Terms

$21.36 = $3.50 + 1X+ $3.33 + 0.95X
$21.36 = $3.50 + $3.33 + 1X + 0.95X
$21.36 = $6.83 + 1.95X
Transpose
$21.36 = $6.83 + 1.95X
$21.36 - $6.83 = 1.95X
$14.53 = 1.95X
Cancel the Coefficient of X

$14.53 = 1.95X
$14.53 = 1.95X
1.95 1.95
Perform the Operation

$14.53 = X
1.95
$7.45 = Exchange Value
Finally, compute for the differential value using this formula:

Price of the Comparable Alternative + Differential Value = Exchange Value
Substitute our Values

$8.50 + DV = $7.45
Transpose
DV = $7.45 - $8.50
-1.04 = Differential Value
The differential value is the change in customer utility in comparison to the alternative. If the
product is superior, the differential value is positive, if inferior (less in product attribute) the
differential value is negative (Smith, 2012, p.13).
The economic exchange value is the price customer will pay for its nearest comparable offer plus
the value of the increased (or decreased) benefits of the improved (or degraded) new product,
meaning the exchange value is the upper narrow boundary or the highest possible price of the new
product (Smith, 2012, p.13).
Concept Review

2.1.Why is it important to learn and distinguish relevant costs?

2.2.Why are fixed costs and capex excluded from pricing?
2.3.Which of the following are relevant costs?
a. Advertising cost
b. Cost of raw materials
c. Cost of retail store renovation
d. Monthly retail store rent fees
e. Sales commission
f. Overtime pay for labor incurred during peak season
2.4. A grande size Frappuccino in Starbucks is priced roughly at P175. Determine the reference
price for each of the possible data combination:
a. 65% is branding, 35% is coffee. Reference price is _____?
b. 10% is packaging, 25% is ambiance and store service, 5% is coffee, 60% brand.
Reference price is ____?
2.5.Compute for the price range for a new XYZ shirt using the following data:
a. Customer utility is P325 and marginal cost is P75
b. Comparable alternative ABC shirt is selling at P289, 85% of ABC customers are
re-buying
c. 40% of the selling price of ABC shirt is purely distribution and promotion.
d. XYZ shirt has a promising 50% customers re-buying rate.
2.6.Compute for the price range for a new Happy Pets dog food variant using the following data:
a. Customer utility is P220 and marginal cost is P65
b. Comparable alternative Healthy Dog is selling at P160, 95% of their customers
are re-buying
c. 70% of the selling price of Healthy Dog is purely distribution and promotion.
d. Happy Pets has a promising 90% customers re-buying rate.
Price-to-Benefit Map
Price-to-Benefit map is a graph showing the relationship of price and perceived product value. The
graph indicates that perceived benefits delivered by the product increase in proportion to the price.
Another way of saying it is products of perceived greater benefits are priced higher. The graph
plots the perceived prices on the vertical axis (x) and the perceived benefit on the horizontal axis
(y). (See Graph 1.)
Graph 1. Price-to-Benefit Map (Smith, 2012)
The graph has four parts (Smith, 2012):
 Value equivalence line is the points where price is in proportion with the product benefits.
 Zone of indifference are the broken lines parallel the value equivalence line. They indicate
the differences in the perceived value or benefits that has negligible effect on the price
sensitivity of the consumers and maximizing the price points along this area can improve
profitability. The zone of indifference arises because products are unable to maximize the
price-benefit proportion on the value equivalence line and the challenges in customer
purchase decision.
Aside from the heterogeneity of the consumers, purchase decision is tiered according to
perceived benefit and perceived price. This somehow controls immediate product
switching when alternatives are far from each indicative of clear difference on benefits
offered and price charged. Benefit brackets consisting of: Benefit floor which arises from
the minimum requirement of a consumer from a product to merit a purchase, e.g. a mobile
phone benefit floor may include features for calling, texting, and camera and internet
access. Meanwhile, benefit ceiling are additional features that customers do not really take
advantage of but expect to be included just the same, e.g. viewing movies, may be synced
to other mobile communication devices. These variation on benefits and their prices if
unexplored remain as point in the zone of indifference.
 Value advantaged or the unharvested value is the space on the left side of the value
equivalence line. It is also called unharvested value because points lying on this side of the
value equivalence line indicate that there are more benefits than the price of the product.
This happens when the company decide to prices aggressively to capture market share by
adding additional features while selling at the same price. The problem with value
advantaged pricing is its tendency to launch a price war which inadvertently result to profit
loss for the industry.
 Value disadvantaged is the space on the right side of the value equivalence line. Price and
benefit points on this space indicate that a product is charged higher relative to the benefits
it offers. This occurs when companies packed a product with features and priced it at a
premium but consumers place little value on the product attributes. This may also happen
when the competitive landscape changed, very much like the high technology products,
misaligning the products in terms of price and benefits.
Graph 2. Value Advantage and Value Disadvantage

(Smith, 2012)
The natural tendency of consumers to differ in expectations and preferences results to varying
perceived benefits and prices. Differences in the perceived price of the product result to dispersion
in perceived price, shown in Graph 3. This is due to the failure to promote the price accurately.
Extensive distribution can also cause dispersion in the perceived price because different
distribution channels offer different prices for the same product, e.g. a bottle of cola may be priced
P12 in a Sari-Sari store and P75 in a restaurant. Price discounts also results to dispersion of the
perceived price.
Graph 3. Dispersion on the Perceived Price (Smith, 2012)
Although dispersion in prices can enhance profits, too much price variations can result to
positioning challenges.
Dispersion in perceived benefits occurs when promotions fail to communicate the benefits of a
product.
Graph 4. Dispersion on the Perceived Benefits (Smith, 2012)
Dispersion in both perceived price and perceived benefits indicates that consumers are
confused about the benefits and price of the product and large dispersion denotes overlapping
perceptions.
Graph 5. Dispersion of Perceived Benefits and Price (Smith, 2012)
Tactical approaches to the marketing mix cause differences in perception. There are customer who
are expecting high benefits and willing to pay a high price but end up paying a low price resulting
to lost profit opportunity. There are instances where products are willingly purchased at the actual
price but fail to deliver the expected benefits, causing the customers to shy away favoring the
alternative products resulting to lost sales and profits. The key is sustaining a marketing mix
strategy that consistently communicates and delivers the value expected by the customers.
Appendix 1: Creating a Price-Benefit Map Using MS Excel and Word
Using the consumer response survey we can represent the price and benefit relationship using our
MS Excel and MS Word.
Step 1: After computing the mean for the perceived benefits, encode the scores on column A of
your MS Excel worksheet. Place the scores for the perceived benefits on column A and perceived
price on column B. This way your entries on perceived benefit will appear on the horizontal axis
of the graph and those on column B will appear on the vertical axis of the graph (see below). Each
row shows the scores given by each of the respondent of the consumer response survey.
Picture 5. Encoding the Values for Perceived Benefit and Perceived Price in Excel Worksheet-
Product A
Continue encoding all the entries in the same columns for the comparable alternative (see below).
For both products, indicate product A and product B so you can easily recognize the scores of each
product.
Picture 6. Encoding the Values for Perceived Benefit and Perceived Price in Excel Worksheet-
Product B
Step 2: Highlight all the scores in columns A and B. Click Insert tab, go to Graph and click Scatter
(see below).
Picture 7. Creating a Scatter Graph for Products A and B in Excel Worksheet
MS Excel will generate the scatter graph for you. You will notice that the scores represented in
dots on the graph are clustered according to the product. In the case of our sample data, you will
notice a clear clustering (see below).
Picture 8. Generated Scatter Graph for Products A and B in Excel Worksheet
Step 3: Now that you have your scatter graph, edit the graph and place the correct labels by clicking
on this icon and choosing Axis Titles. On the vertical axis type Price and on the horizontal
axis type Benefit.
Picture 9. Editing the Axis Labels for the Horizontal and Vertical Axis in Excel Worksheet
Your scatter graph should look like the one below.
Picture 10. Sample Scatter Graph with Axis Labels for the Horizontal and Vertical Axis in Excel
Worksheet
Do the same with the chart title and type Price-Benefit Map for the two brands you are comparing.
Picture 11. Editing the Scatter Graph Title in Excel Worksheet
Your scatter graph should look like the one below.
Picture 12. Sample Scatter Graph with Title in Excel Worksheet
Step 4: Transfer the scatter graph to MS Word, the document that you are required to submit. This
is done by clicking on the graph, then right click on your mouse and choose copy.
Picture 13. Copying the Scatter Graph in Excel Worksheet
Step 5: Go to MS Word and open a new document. On the blank page, click Paste. Your first page
should look like the one below.
Picture 14. Transferring the Scatter Graph to MSWord document
Step 6: Completing your price-benefit map requires you to draw a value equivalence line. This is
done by clicking Insert, choose Shapes, and then choose Line.
Picture 15. Completing the Scatter Graph with Value Equivalence Line in MSWord
Place the cursor on the lower left corner of the scatter graph then drag to the upper right corner of
the same graph. Your scatter graph should look like the one below.
Picture 16. Sample Scatter Graph with Value Equivalence Line in MSWord
Step 7: Showing the scores for each product requires that you draw a circle showing the two
clusters of scores. You can do this by clicking on Insert, choosing Shapes and then clicking Oval
(see below).
Picture 17. Clustering the Values of Perceived Benefits and Price of the Scatter Graph Line in
MSWord
Proceed to drawing your first circle making sure that the scores for one product are all inside the
circle. Then click on the circle, edit the shape by removing the color filling-up the shape (see
below).
MSWord – Product A
Click on the shape again, on your mouse do a right click, choose Copy then Paste (see below).
MSWord – Product B
Now you have two identical shapes. Click on the second circle and drag to the next cluster of
scores. Your scatter graph should look like the one below.
Picture 20. Price-Benefit Map in MSWord
Step 8: The final step is to write your data interpretation. You are only expected to indicate the
type of price-benefit relationship that you generated for the products you surveyed.
Picture 21. Completing the Price-Benefit Map with Verbal Interpretation in MSWord
Possible deviations like overlapping dots may be due to dispersed perceived price and benefit.
Should that be the case, you should be able to show the dispersal by adjusting your circles or ovals
in such a way that you are able to capture the data deviations.
Concept Review

2.1.Using the consumer response survey you completed, create a price-to-benefit map. Include
your interpretation by indicating which brand is priced at value advantage and/or value
disadvantage.
PRICE POSITIONING AND PRICE STRUCTURE
Learning Objective 3: Explain Price Positioning.
Learning Output 3a: Identify the appropriate price positioning technique for each of the stage in
the Product Life Cycle Model and for each quadrant of the Ansoff Product and Market Growth
Matrix
Learning Objective 4: Discuss the price structures and Explain Profit Sensitivity Analysis and
Price Elasticity.
Learning Output 4a: Compute for the acceptable price adjustments.

Learning Output 4b: Compute for the price elasticity.
Types of Pricing Positioning
The price-to-benefit map enables the marketers to identify opportunities referred to as the customer
addressable horizon. It can be used to identify new products, estimate market size and sales
volume and even anticipate competitor reactions and visually capture the three pricing positioning,
namely: price neutral positioning, price penetration positioning and price skimming positioning.
 Price Neutral Positioning is when products are priced within the zone of indifference
denoting that price is not used to capture market share, instead pressure is placed on the
distribution and promotion strategies. In this case, existing competitors will most likely
drop the price for the premium product and increase the benefit for the low priced product.
Shown in Graph 6 are existing competitors responding to the new product.
Graph 6. Neutral Pricing Positioning (Smith, 2012)
 Price Penetration Positioning is when price is used to capture market share by offering a
low price in comparison to the benefits the product is offering. This is commonly used by
high-technology industry which has gained cost advantages brought about by the benefit
of improvements from new technologies. Penetration pricing enables the product to capture
market interest while trading-off contribution margin and initiate competitive reactions that
may be unfavorable to the industry. Notice that existing competitors will most likely reduce
their prices in response to the low priced new product.
Graph 7. Price Penetration Positioning (Smith, 2012)
 Price Skimming Positioning is when a new product sets a high reference price in
comparison to the benefits it delivers. This pricing positioning is expected to gradually
reduce its price in the future time. This type of pricing positioning does not result to
competitor responses and will fail to motivate early purchase given that existing
alternatives are priced lower.
Graph 8. Price Skimming Positioning (Smith, 2012)
Appendix 2: Revisiting the Product Life Cycle and the Ansoff Product and Market Growth
Matrix
Product Life Cycle
The most recognized model used when formulating product strategies is Everett Roger’s Product
Life Cycle or PLC. It is a model that describes the stages in the product life cycle from its
development and launch in the market to its withdrawal or decline. The tool enables us to have a
guided decision pertaining to allocating resources and targeting the suitable market segments at
each product life cycle stage. For instance, you found out in your market research that there is a
significant market size who are still resistant to the product that you are about to launch. With our
knowledge on STP (segmenting-targeting-positioning) we know that it is important to consider
market size when targeting a segment. Validating the decision to target the resistant segment using
the PLC model will reveal that innovators or opinion leaders are the more suitable segment to
introduce a new product to stir promotion, while early adopters are the most suitable segment that
guarantees sales and profit growth potential. Both segments are characterized as “very much
willing to try new things”. Given that there is a substancial market size for the resistant segment,
we instead focus on those who are willing to try new things.
Just as in any life cycle, products have the following stages: birth, growth, maturity and decline.
 Introduction is the stage of product research and development until it is launched or made
available in the market. At this stage, the product generates very small sales and negative
profits.
 Growth is the phase of fast sales increase and the most profitable.
 Maturity is the point when the product reaches stability. Growth and profit starts to
decline.
 Decline is the final stage, sales starts to decline, and withdrawal from the market may be
the suitable strategy otherwise reinvent, reposition and relaunch and start all over again.
Depending on the product and marketing mix strategy, products may not follow the stages
sequentially. We gathered some brand failures and turnarounds from Market Watch (2015) and
got the following:
 Hewlett-Packard’s Touchpad is a story of a sweeping product decline. Touchpad was

introduced in July 2011 promising a powerful video capacity and impressive processing
speeds. The market anticipated it to be the strongest competitor of Apple’s IPad. Despite
aggressive promotional efforts, Hewlett-Packard had to cut-short Touchpad’s product life
due to the failed operating system. Attempts to correct the operating systems were put on
hold and the product was withdrawn from the market.
 Emirates is successful revival story. Emirates Airline has been flying our skies since 1985
but only recently has it become an iconic brand and recognized as “the world’s best airline”.
Emirates Airline is a product story that is able to recover from the decline stage and
resurface as today’s finest airline. The reinvention success of Emirates is attributed to the
reinvigorated superior customer service, investment in technology and US$58 billion

investment on 170 new aircrafts.
Graph 9. Product Life Cycle
At each stage in the product life cycle are types of consumers whose buying behavior cause the
shift from one stage to the next which teaches us that companies need not target the entire market
during the initial stages but focus on the early adopters and opinion leaders to drive sales growth
and a market-wide acceptance of the new product. Below are the different segments:
 Innovators are consumers during the introduction stage of a product. They are individuals
of higher net worth than average which enables them to take risks. They are most likely
the first to be exposed to new products and give valuable feedback. They are considered
opinion leaders of the society and provide valuable promotion to a product during the
introduction stage.
 Early Adopters are characterized as independent-minded and highly educated individuals.

Similar to innovators, early adopters are the first to try a new product and serve as opinion
leaders. They give a market credibility and lead the product to the next stages of product
life cycle.
 Early Majority are characterized as well educated and financially stable individuals who
follow early adopters after a varying degree of time and sustain the growth of the market.
 Late Majority comes at the time when sales and profit growth slows down. They are
characterized as individuals of lower social status and lesser financial means and tend to
be highly price sensitive. Due to their social and economic status they are usually skeptical
about innovation and change.
 Laggards are the last to adopt to a new product. They are usually the senior segment of
the society who have become resistant to change and prefer the traditional values and
products.
The Ansoff Product and Market Growth Matrix
After identifying the target market, product positioning and launching the product, marketers think
of ways to grow the market because the growth in sales volume is dependent on the market size.
If the market cease to grow, so do products.
Another tool used when formulating marketing strategy aiming for market growth is the Ansoff
Product and Market Growth Matrix that was published in the Harvard Business Review in 1957.
This tool is useful for new and existing products and markets comprising of four stages.
Figure 3. Ansoff Product and Market Growth Matrix
 Market Penetration is a growth strategy focused selling existing products in existing

markets. Growth in market share is achieved by repelling competitors and gaining brand
loyalty from existing market.
 Market Development is a growth strategy using existing products and new markets. This
can be done by distributing the existing products to new geographic segments,
demographic segments or new channel of distribution.
 Product Development is a growth strategy that involves developing new products or

modifying the existing products to address the changing needs of an existing market.
 Diversification is considered when all other growth strategies fail. This is a growth
strategy involving new products in new markets. Unlike the other three strategies that
makes use of the company’s existing resources and experiences, diversification is
venturing into new grounds requiring new competencies thus presents the highest degree
of risk.
Graph 10. Product Life Cycle and Ansoff Strategies
At each stage in the product life cycle is a product and market growth strategy. On the launch stage
where the product is very young the suitable strategy is to penetrate the market categorized as the
innovators/opinion leaders and early adopters. Growth is the highest from introduction stage to
growth stage as the product reaches its early majority segment. As the product reaches maturity
stage characterized by slowing of growth because the product has saturated the market, it is about
time to develop new markets for existing products or the riskier product development to address
the needs of the new segment, the late majority. When market and product development fail and
the product continuously loses its growth potential and starts to decline, diversification is
considered.
Learning Objective 3: Discuss the different price structure techniques.
Price Variances and Price Structures
Enabling price to deliver value to both the firm and consumers require that we manage price
variances and utilize price structures.
 Price variance is when we offer products in different price points to address the
heterogeneity of consumers, those who are willing to pay high and those who demand
lower price. Managing price variance requires that we do the price segmentation, price
promotions, and discount management.
o Price segmentation is setting prices based on customers’ willingness to pay.
Different prices is set for different consumer segments. Price segmentation enables
the firm to maximize profits by charging high prices to consumers who are willing
to pay more and generate sales volume from consumers who are willing to pay less.
Price segments are identified using segmentation hedges that are correlated with
the perceived value and culturally accepted by the consumer segment. These
segmentation hedges can be constructed using consumer demographics, time of
purchase, purchase location and promotional sales e.g. coupons, rebates, and trial
offers.
o Price promotions involves the lowering of prices to capture the consumer segments
who are willing to pay less. Price promotions generates a temporary increase in
sales volume by encouraging product trials and brand switches permitting improved
market share. Price promotion is not without a drawback, the economic inefficiency
is primarily caused by customers who are willing to pay high opt to avail the price
discount, missing the economic opportunity from the particular segment. There are
three commonly used price promotions: coupons, rebates and trial offers.
 Coupons come in different forms. They can be distributed directly to
customers, included in the packaging, or sent along with direct mails.
Regardless of the form, coupons is a mechanism for the customers to signal
their willingness to pay low.
 Rebates are discounts offered to encourage repeat purchase or brand loyalty,

e.g. loyalty cards used by customers to earn points from purchases made
with a retailer, points earned have equivalent monetary value and may be
used to purchase items from the same retailer.
 Trial offers like product sampling or products are offered at a discounted

price to induce trial.
o Discount management are transactions involving reduction of selling prices for

various reasons like, volume discount (purchases in large amounts), or special
client-supplier relationship, etc. Aside from economic efficiency of price
discounting, customers may experience the fairness effect knowing that they are
paying different prices from other customers. Difficulty may also arise from
customers who may experience the anchoring effect, expecting a price based on the
most recent price paid.
 Price structure is another way of addressing customer heterogeneity. Price is set according
to customer’s consumption volume or paying only the amount of products or services
consumed.
o Multipart Price Structures has two types of pricing mechanism, Two-Part Tariffs
and Tying Arrangements.
 Two-Part Tariffs is when customers are asked to pay an “entrance fee” and
a “metered fee”. “Entrance Fee” is a fixed sum charged to all customers
regardless of their level of consumption. An example of an entrance fee is
the connection fee paid to water services like Maynilad or Manila Waters.
“Metered Fee” is the price paid on a per use level of consumption. An
example of a metered fee is the amount billed to us monthly based on our
water consumption.
 Tying Arrangements is a price structure generating profits with the sale of

consumable portion of tied-in products and not the sale of the durable
portion. An example of a product using tying arrangement is a razor, the
consumable portion is the blade and the durable part is the handle.
o Add-Ons, Accessories, and Complementary Products are pair or group of products

sold together. These products are distinct from one another and may be priced and
sold individually providing separate benefits but the sale of one may increase the
likelihood of purchase of another product. An example is a purchase of a laptop
includes Windows and productivity tool MS Office Starter Pack (complementary
products), plus flash drive, mouse or headset (add-on), USB cable and charger
(accessories).
o Versioning is offering different variations of the same product and sold

simultaneously. Each version offers a specific benefit, lower versions have fewer
product features. Following the price-to-benefit map, as features add up, so does
the price. An example of product versioning is Windows 8, Windows 8.1 and
Windows 10.
Graph 11. Versioning (Smith, 2012)
o Bundling is selling a set of distinct products in one basket or package at a single

price. There are two types of bundling: Pure bundling, products in a bundle are not
sold individually, and Mixed bundling, both the bundle and the individual products
are sold in the same retail space. Bundle is popular because the single price is less
than the sum of prices when the products in a bundle are purchased individually.
An example of a bundle is a Christmas basket sold in supermarkets as suggested
gifts.
o Subscription and Customer Lifetime Value is a pricing structure commonly used in

magazines, fitness centers, etc., where customers pay a single payment for what
could have been a series of individual purchases or paying in advance a period’s
consumption. An example is a one-year subscription of Reader’s Digest, regardless
of uncertainty in the editorial content, subscribers purchase copies ahead of time.
o Yield Management or revenue management is the selling of a product or service

with changing prices over a period of time like airline tickets, the closer the date of
departure the higher the price, and failure to appear on the departure date forfeits
the airline ticket and the seat is sold to the next customer at a higher price. This type
of price structure requires the following (Smith, 2012):
 Operational Requirements
 Capacity is limited and perishable.
 Customers will reserve units of capacity ahead of time.
 The firm can sell that resource at a variety of prices, also known as
fare classes, each of which has a fixed price.
 The firm can change the availability of the predefined fare classes
over time.
 Market Requirements
 Large number of potential customers
 Willingness to pay will change over time depending on the specific
drivers of customer demand
 Demand may be derived and contingent on specific factors external
to the product being offered
Challenge Yourself.
Learning Objective 3: Discuss the different price structure techniques.
3.1. Think of a tie-in arrangement for your product, identify the durable and consumable products.
3.2. If you are to use bundling, what product will you bundle and how much will you price your
bundle?
Learning Objective 4: Use the Product Life Cycle model in identifying appropriate pricing
positioning.
PLC and Pricing Strategy
Using the PLC model we can predetermine the pricing directions to take.
 Introduction. During this stage we can expect very minimal restrictions on pricing because
price competition is still low. Pricing success is dependent on how much promotion is carried
out to educate the market of the product attributes and benefits.
o Pricing strategies
 Reference price effect argues against price penetration but since it is important
for new products to be experienced by the consumers and it imperative that they
understand the product’s full value. We use price neutral or price skimming and
offer free-trials for a period of time.
 Best if the price of the new product is derived using the Exchange Value Model.
 Growth. During the growth stage the product experiences rapid growth both in terms of market
segments and competitor size. Consumers have knowledge about the product benefits and
firms have better pricing idea. At this point, we limit the latitude on setting prices and have an
accurate idea of an acceptable price.
o Pricing strategies
 Armed with price accuracy and increasing competition driving the prices down,
you may consider exploring the price structures that offer add-ons (Laptop +
Windows) or versioning (Windows 8.0, Windows 8.1, Windows 10).
 Maturity. Pricing becomes very rigid and the focus is shifted to price structures and managing
price variances. This is also the stage where companies can explore new sources of profitability
and maximize economies-of-scale, scope and learning.
 Decline. During this stage the prices are volatile and companies may choose any of the
strategies:
o Exit Strategies
 Harvest Strategy is slowly exiting the market while generating the remaining profit
from the customers. Companies will refrain from any capital investments like, new
production plant or process improvement.
 Consolidate Strategy is seeking to become the last product of its kind serving the
industry. Companies will sustain a low-cost position through economies of scale
and technology improvements.
 Focus Strategy is focusing on the key strength and core competencies letting go of
the weaknesses and allowing other companies to serve the needs of a niche market.
Challenge Yourself.
Learning Objective 4: Use the Product Life Cycle model in identifying appropriate pricing
positioning.
4.1. Using the product lifecycle model, discuss the appropriate pricing positioning technique for
your product.
4.2. Using the consumer survey you conducted, set the price for your product. Note: Always be
guided by the psychological influences of price on consumers.
Learning Objective 4: Discuss the price structures and explain Profit Sensitivity Analysis and
Price Elasticity.

Profit Sensitivity Analysis: Computing the Impact of Price Discounting on Profit
The other situation when we have to compute for the price is when we are considering price
adjustments. There are instances when we want to offer a discounted price or sometimes we set
the price wrongly and we have to correct it. In cases like these, we change the price but we do it
with caution. Any price adjustment will have an immediate impact on profit and an equivalent
reaction on quantity sold.
Pricing Myth: Lower prices generate higher sales leading to higher profits. (WRONG!)
General Rule: Price and Quantity have an inverse relationship. Increase price leads to decrease
in quantity. Decrease price expect increase in quantity.
Calculating the profit sensitivity to price changes requires that we know our volume hurdle.
Volume hurdle acts as a safety net or the allowable percent change in quantity in relation to price
change. The decision to adjust a price is dependent on whether or not the computed volume hurdle
satisfies the condition %∆Q ≥ Volume Hurdle. Volume hurdle is computed using several formula
depending on the given data and nature of price adjustment:
Case #1: Using the -%∆P and %CM when asked to compute for the volume hurdle
When the case problem gives you a negative percent change in price (-%∆P) which means that
you are asked to do price discounting or price off, and variable cost, use this formula:
%∆Q ≥ -%∆P÷ %CM + %∆P
Case #2: Using Pf, Pi and variable cost when asked to compute for the volume hurdle
When the case problem gives you the following variables:
Pf referring to new price or price final

Pi referring to the original price or price initial
V referring to variable cost
Use this formula:
Pi – Pf
Pf – V
Sample Case:
We are launching the 2nd Edition of the alphabet book at a lower price, we consider offering a 50%
off on the 1st Edition, selling it at $6 per copy. The price seem acceptable considering that we
cannot price the 2nd Edition above its exchange value $7.45. To justify the new price, the general
rule is that the %∆Q ≥ volume hurdle. This brings us to predicting our %∆Q.
When calculating the %∆Q, we need to have our %∆P. The %∆P is the variance between the new
or final price and the initial price.
Pf – Pi
Pi
Substituting the values:

$6 – $12
$12
%∆P = -0.50
General Rule #3: Price decrease will generate a negative %∆P. Price increase will generate a
positive %∆P.
Now that we have our %∆P we can now calculate for the predicted %∆Q. To get a %∆Q close to
the volume hurdle Smith (2012) suggests that we multiply -1.67, (the elasticity of many products
in many industries) to the %∆P. Let us multiply the %∆P to -1.67:
-.50 x -1.67 = 0.84

%∆Q = 0.84 ≈ 84%
Let us check if the price discount that will result to 84% change in quantity is acceptable, we
calculate the volume hurdle:
P i – Pf
Pf – V
Substitute the values:

$12 - $6
$6 - $0.75
= 6 ÷ 5.25
Volume hurdle = 1.14 ≈ 114%, this means that if price is discounted from $12 to $6 (50%
Price Off), the quantity adjustment (also known as the sales volume adjustment) must not
be lower than 114% of the current sales volume.
Check the values against the general rule %∆Q ≥ Volume Hurdle:
0.84 < 1.14

Price discount is unacceptable. This means that the proposed 50% price off is unacceptable.
This is validated further using the standard profit equation. The general rule that applies is that
the πf ≥ πi; where πf is the new profit computed using the new price and quantity, πi is the orginal
profit computed using the original price and quantity. Decisions pertaining to pricing is always in
relation to potential profit that may be generated. Anything we do in Marketing should leave the
firm and the customer better off. Marketing’s success is measured according to our contribution to
profits.
πi = Qi (Pi - V) - F
πf = Qf (Pf - V) - F
Appendix 3: Computing for percent change in price ∆P, percent change in quantity ∆Q, and
percent contribution margin, %CM
Percent change in price
∆P = Pf – Pi ÷ Pi
Where: Pf refers to the new price or price final, Pi refers to the original price or price initial.
Percent change in quantity
∆Q = Qf – Qi ÷ Qi
Where: Qf refers to the new quantity or quantity final, Qi refers to the original quantity or quantity
initial.
Percent contribution margin
%CM = Pi – Vi ÷ Pi
Where: Pi refers to the original price or price initial, Vi refer to the original price or price initial.
Price Elasticity
Another tool used when considering price adjustment is price elasticity or the market reaction
(demand) when prices change. Price elasticity is computed using this formula:
│ε│ ≡ %∆Q ÷ %∆P
Where:
│ε│ symbolizes elasticity
│ │, if a number is inside these two bars, it means “absolute value” or we disregard the +
and - sign.
≡, means “identical to”
%∆Q, percent change in quantity
%∆P, percent change in price
To compute for the elasticity, simply divide the %∆Q to %∆P. Get the absolute value.
Let us now compute the elasticity of our price discounting for the 1 st edition alphabet book.
│ε│ ≡ %∆Q ÷ %∆P
│ε│≡ .84
-.50
│ε│≡ -1.68, get the absolute value│-1.68│ or 1.68
To interpret our elasticity, be guided by this general rule:

│ε│≥ 1, demand is elastic, meaning consumers are price sensitive and will react when price
changes. Consumer reaction is expressed in change of demand which may be reducing the usual
quantity purchased, change to another brands, or change to the substitute product.
│ε│< 1, demand is inelastic, meaning consumers are less price sensitive and may not react when
price changes.
Interpretation: │ε│≥ 1, elastic
1.68 >1, elastic, consumers of the alphabet book are price sensitive.
Note: This tool is also used in Promotion, particularly in advertising, when deciding to increase or
decrease advertising expenses. Advertising expense value is substituted to price. Details is
discussed in IMC course.
Challenge Yourself.
Learning Objective 4: Discuss the price structures and Explain Profit Sensitivity Analysis and
Price Elasticity.

4.1. We want to improve our profit from product A that is currently selling at P185 with a variable
cost of P12.50. Consider the following conditions and recommend which price adjustment
option is feasible and determine the price sensitivity of the consumers:
a. Increase the price by 2%
b. Discount the price by 25%
c. Price elasticity
4.2. We want to improve our profit from product B that is currently selling at P75 with a variable
cost of P1.50. Consider the following conditions and recommend which price adjustment
option is feasible and determine the price sensitivity of the consumers:
a. Increase the price by 0.75%
b. Discount P5 from the price
c. Price elasticity
4.3. Consider the fixed cost P 1,250 and quantity sold/sales volume of 650 pieces, which price
adjustment option is viable for product B.
References:
Goepel, K. (2011, May 4). Conjoint Analysis. Business Performance Management Singapore. (K.
D. Goepel, Ed.) Singapore: Business Performance Management Singapore. Retrieved June
19, 2015, from http://bpmsg.com/conjoint-analysis-example-in-excel/
Micu, A., & Micu, A. (2007). How should they affect pricing decisions? Difficult Comparison
Effect. The Annals of "Dunarea de Jos" University of Galati Economics and Applied
Informatics, I, 107-112. Retrieved March 9, 2016, from
http://www.ann.ugal.ro/eco/Doc%202007/Angela%20Micu,%20Adrian%20Micu.pdf
Smith, T. (2012). Pricing Strategy: Setting Price Levels, Managing Price Discounts, &
Establishing Price Structures (International ed.). South-Western Cengage Learning USA.

Pricing Strategy Module SY16-17

Uploaded by

Copyright:

Available Formats

You might also like

Pricing Strategy Module SY16-17

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pricing Strategy Module SY16-17

Uploaded by

Copyright:

Available Formats

Pricing Strategy

I. Course Title: PRICING STRATEGY

III. Learning Objectives:

LO2: Discuss the psychological influences on consumer price perception, Relevant

Note: May need to review economic concepts: profit, sales volume or

Note: May need to review the economic concept of demand elasticity.

INTRODUCTION TO PRICE AND PRICING

Standard Profit Equation

Concept to Learn: Revenue

Concept to Learn: Income

Concept to Learn: Profit

π = 500 (12.00 – 0.75) – 5,000

500 x 1.05 = 525 units

π = 525 (12.00 – 0.75) – 5,000

Step 4, compute for the ∆π or change in profit using this formula:

$12.00 x 1.05 = $12.60 Why use 1.05 when increasing by 5%?

π = 500 (12.60 – 0.75) – 5,000 100% (1.00) + 5% (.05) = 1.05

Step 4, compute for the ∆π or change in profit using this formula:

$0.75 x 0.95 = $71 Why use 0.95 when decreasing by 5%?

Step 4, compute for the ∆π or change in profit using this formula:

$5,000 x 0.95 = $4,750

π = 500 (12.60 – 0.75) – 4,750

Step 4, compute for the ∆π or change in profit using this formula:

Exercise #1: Standard Profit Equation

Name: _______________________________________________________ Score: __________

Compute for the following:

1. Generated weekly profit with the present weekly sales

Exercise #1: Standard Profit Equation

Name: ________________________________________________________ Score: __________

Compute for the following:

1. Generated weekly profit with the present weekly sales

Conjoint Analysis: Customer Utility and Part-Worth Utility

1. Setting-Up the Table for Product Features and Attributes

Table 2. Product Features and Attributes

2. Preparing the questionnaire

The questionnaire may appear like our example below:

1. I prefer fresh milk over other creamer for my fruit blends. 5 4 3 2 1

Questions 1 to 3, Fresh Milk

3. Computing the Part-Worth Utilities and Customer Utility

Table 3. Tallied Responses and Computed Scores (hypothetical)

Step 1: Get the given:

P43.75/util = P95 - P60

Interpretation: Premium brand adds value to the product.

Interpretation: Fresh milk adds value to the product.

Table 5. Fresh Fruit Blends Part-Worth Utility

Completing the Conjoint Analysis with Statistics

Picture 1. Goepel Conjoint Analysis Calculator

Picture 3. Goepel Conjoint Analysis Calculator with Linear Regression Correlation

Picture 4. Goepel Conjoint Analysis Calculator Table of Results

Util is the unit of measure to part-worth utility

1.1.What are the risks in wrong pricing?

Exercise #3 Part-Worth Utility and Customer Utility

Name: ________________________________________________________ Score: __________

Research Report Format:

A Consumer Response Survey on Online Shopping Preferences using Four-Factor

1. I am buying online if the price of the products is less than the

PSYCHOLOGICAL INFLUENCES ON PRICING

Learning Objective 2: Discuss the psychological influences on consumer price perception,

Name: _____________________________________________ Score:

Name: ______________________________________________ Score:

Name: ______________________________________________ Score: