Republic of the Philippines

TARLAC STATE UNVERSITY

College of Business and Accountancy
Tarlac City, Tarlac

PRICE ANALYSIS

Submitted to: Mrs. Arlene Gabriel

Submitted by: Kailyn Cris B. Ruaboro
Pricing

Pricing is often treated as being the core of managerial economics since pricing brings
together the theories of demand and costs that traditionally represent the main topics within the
overall subject area. It is also the process of determining what a company will receive in
exchange for its product or service. A business can use a variety of pricing strategies when
selling a product or service. The price can be set to maximize profitability for each unit sold or
from the market overall.

Pricing Objectives

Pricing objectives are fundamental to business success because these are the goals that
guide your business in setting the cost of a product or service to your existing or potential
consumers. Some examples of pricing objectives include maximizing profits, increasing sales
volume, matching competitors’ prices, deterring competitors- or just pure survival. Each pricing
objective requires a different price-setting strategy in order to successfully achieve your business
goals. It requires the firm to have understanding of both product attributes and the market.

Price Strategy

Pricing strategy is a method used to establish the best price for a product or service. It
helps the business choose to maximize profits and shareholder value while considering consumer
and market demand. Almost all companies, large or small, base the price of their products and
services on production, labor, and advertising expenses and then add on a certain percentage so
they can make a profit.

The following are some of the common used pricing strategies that businesses often employ in
order to determine the prices on their products and/or services.

1. Premium Pricing

Premium pricing strategy allows businesses to set their prices higher than the
competition. It is great for a small business whose niche is selling unique goods, as well
as for the times when you are first in placing a product on the market that has a specific
competitive advantage. Premium pricing strategy can be good choice for businesses
entering a new market and trying to cash in the early days of a product life cycle.
However, a business must create a perceived value of its product or service in order for
the customers to perceive the product as worth its price.

2. Penetration Pricing

In penetration pricing strategy, a company is looking to establish its presence by

entering the market and offering lower prices than their competitors. The reason why is to
attract customer away from the competition, which often results as an initial, much as
calculated income loss. The point of penetration pricing is to raise brand awareness and
 brand loyalty in the crowded market and stand out so that in the long run, a business can
effectively raise its prices that actually reflect their true market positioning.

3. Price skimming

Price skimming strategy acts as a way for a business to leverage their competitive
advantage and maximize their sales on new products and services. Contrary to
penetration pricing, a company initially sets a higher price and then gradually lowers it as
competition begins to catch on and offer similar products or alternatives. The primary
benefit of price skimming is to gain maximum revenue advantage on early adopters until
it lower prices to cater to more price-sensitive groups.

4. Psychological Pricing

Psychological pricing strategy is more of a technique that plays on the customers’

emotional perception of the price, down to the small details that can make a difference. It
is a widely used strategy that is one of the favorites by many marketers. As an
illustration, a product with a P99 price is cheaper than a product of P100. In the mind of
the buyer, P99 is psychologically “less” than P100, possibly due to the fact it has one less
digit as in our example. In essence, you are creating an illusion of enhanced value
(cheaper price) for the customer.

5. Economy Pricing

Economy pricing strategy is often used by large companies, especially in the food
market as it aims to attract a particular segment of the market- the price-sensitive buyers.
In this case, companies reduce their marketing and production costs to a bare minimum in
order to maintain low prices. This strategy is not suitable for businesses that lack the
large sales volume which are needed to stay profitable with low prices.

6. Bundle Pricing

Bundle pricing is a great way for small businesses to sell multiple products for a
slightly lower rate, convincing buyers that they are getting a bargain as compared to
purchasing each item individually. The main point of bundle pricing strategy is that it
increases the customer perceived value while also providing an effective way of selling
unsold items that are stored for far too long. It is most effective for businesses that sell
complementary products that actually have something to bundle. It makes the entire
shopping process a bit easier by bundling similar items together. However, it is very
important to remember that the profits earned on the higher-value items must cover the
losses you take on the lower-value product.
HOW TO PRICE PRODUCTS?

Calculate the Cost

COST= MATERIALS+LABOR; where labor is equal to hourly rate multiplied by time.

Markup the Cost

First Markup: WHOLESALE PRICE= COST X MARKUP

Second Markup: RETAIL PRICE= WHOLESALE PRICE X MARKUP

*markup is usually 2-2.5 or more.

Example: A single product incurred a cost of 100 pesos; P60 and P40 of materials and
labor, respectively and a markup of 2.

First Markup: Wholesale Price= 100x2

Wholesale Price= 200
Second Markup: Retail Price= 200x2
Retail Price= 400

Markup vs. Margin

Markup is equal to the profit as a percentage of costs.

To compute markup: Markup= Profit/Cost

Illustration: A product with a retail price of 100 pesos with a cost of 80 pesos.
Solution: So we have a retail price of 100 pesos less the cost of 80 pesos which gives you
a profit of 20 pesos.
Markup= 20/80
Markup= .25 or simply 25%

Margin is equal to the profit as a percentage of sale prices.

To compute margin: Margin= Profit/Sale Price

Illustration: A product with a retail price of 100 pesos with a cost of 80 pesos.
Solution: So we have a retail price of 100 pesos less the cost of 80 pesos which gives you
a profit of 20 pesos.
Margin= 20/100
Margin=.20 or simply 20%

The difference between margin and markup is that margin is sales less the costs; while,
markup is the amount by which the cost is increased on a product to arrive at the selling
price.