Cherie Faye T.

Estacio
PRMSTRA (OTCDP1)

ACTIVITY 6: MODULE 6

1. What is the basket of goods approach?

Answer: A basket of goods refers to a fixed set of consumer products and services whose price
is evaluated on a regular basis, often monthly or annually. This basket is used to
track inflation in a specific market or country, so that if the price of the basket of goods
increases by 2% in a year, inflation can thus be said to be 2%. The goods in the basket are
meant to be representative of the broader economy and are adjusted periodically to account for
changes in consumer habits.

A basket of goods is used primarily to calculate the consumer price index (CPI).

2. Enumerate the price setting methods.

Answer: The system of pricing leads to a particular price. Similar approaches are used for
setting the commodity price. Some strategies, while some are market-oriented, are cost-
oriented. -- of the strategies has its points of plus and minus, and its applicability. The best
approach to set the price is applied by marketing managers. On the basis of the research and
review of internal and external factors, as well as the suitability of the process, the best
method may be determined. Following part describes some widely used pricing methods.

Mark-up Pricing Method:

This is the most commonly used method. The method is also known as cost-plus pricing. In this
method, a standard mark-up (or profit margin) is added to the product costs. This method is
used in construction business, professions, and even for consumer goods. The method can be
used only when company has necessary data about various costs and expected sales.
Company may prefer fixed per cent of costs or fixed per cent of selling price.

Perceived-value pricing Method:

Perceived-value pricing is a market-oriented method for setting the price. Here, price is based
on the consumers’ perceived value of the product. Consumers’ views on price are given priority.
Company takes consumers’ perception of value as a key to set the price, and not its own cost
and objectives.

Company tries to measure the views of buyers regarding price of the product. Manager explains
the consumers about total offers, including core product (key benefits and features), product-
related aspects (like brand image, reputation, novelty, etc.), and product- related services (such
as after-sales services like free installation, free home delivery, guarantee, etc.) and asks them
to estimate price for that product or for total benefits offered by the product.

Going-rate Pricing Method:

This is also said as competitive parity method. Even, sometimes, it is called as competition-
oriented pricing. The method is, normally, followed by small firms, said as ‘the followers’ In
going- rate pricing method, the company gives less attention to its own costs, objectives, or
product demand. But, pricing decision is largely based on competitors’ prices.
The company may charge the same, more, or less than major competitors. The notion is “follow
the leader,” or “leader is right.” One must note that company doesn’t select a price, which is far
below or much higher than the real. However, competitors’ pricing is taken as a base. And, final
price may be set slight high or low depending upon objectives, qualities of product, and services
offered.

Sealed-bid Pricing Method:

Sealed-bid pricing is followed in construction or contract business. It is also a competitive pricing

method. Here, price is selected on the basis of sealed bids (quotation or estimated price) for the
jobs.
The firm sets its price on expectations of how competitors will price the product. The firm wants
to win the contract requires submitting the lower price than competitors. However, costs and
profits are not totally ignored. The firm cannot set price below the costs.
It is called as tender pricing also. In response to the proposal of jobs or works, interested parties
(businessmen or marketers) have to fill the tender (send quotation or estimated costs) stating
price and conditions of work and send in forms of sealed-bids.

Target Return Pricing:

This is one of the cost-oriented methods for setting price of the product. Here, the firm
determines that level of price at which it can yield the target return on investment. Here, return
on investment is taken as a base for price determination.
Attempts are made to recover the cost of investment. Mostly, government Companies, public
utilities, cooperative societies, and the similar organizations fix pricing for their products on this
basis to ensure minimum return on investment.

Break-even Analysis Method:

Some companies set the price for their products by Break-Even Analysis (BEP method). It is a
managerial tool that establishes relationship among costs, volume of sales, and profits. It is also
known as cost-volume-profit analysis.

It involves developing tables and/or charts that help a company to determine at what level of
sales, the revenue will be equal to the total costs. Under this method, attempts are made to find
out volume of sales at which total costs are just equal to the sales revenue. This is such a level
of sales at which there is no profit, no loss.

Sales Revenue = Total Costs.

This level is called BEP (break-even point), at which the firm has neither profits nor losses. The
firm just covers its total costs. When sales revenue exceeds the total costs, the result is profit;
and when sales revenue is less than total costs, the result is loss. Thus, BEP is the position of
sales at which sales revenue is just equal to total costs. BEP can be calculated either by a
formula or by a chart.
3. What is the price window? What is it for?

Answer: The Price Window is set for each segment and is defined by the ceiling, the highest
allowable price point, and the floor, the lowest allowable price point. We begin the price
setting process by establishing the price window for each segment and then, in step two,
narrow that window based on strategic objectives for the segment and potential customer
responses to the new prices.

In both cases, the price ceiling is determined by the economic value created for customers. If
the price were set higher than the economic value, then customers would be better off buying
the competitor's product even though they might very much want (or need) some of the
differentiated value of your offering. Suppose you were pricing a product with a total economic
value of $140 comprised of a $100 reference price and $40 of net differential value as shown
below. A customer buying your product at a price of $150 would find themselves with a net
benefit loss of $10. The same customer would have a net gain of $10 if they purchased from
your competitor, even though they would have to forgo some of the differential value offered by
your product.

EXHIBIT 6-2 Defining Price Windows

The price floor for a positively differentiated product is determined by the competitor's reference price because it
represents an important tipping point for competitive response. Suppose that we chose to set our price for the product
in the previous example at $90, which is $10 below the reference value. We can see the implications for such a move
by calculating the economic value of the competitor's product, as illustrated below. By pricing below the competitive
reference price, we have placed the competitor in an untenable position in which their product creates negative
economic benefit for customers — a situation they can reverse in the short term only by cutting the price. Indeed, if
their price ceiling is their total economic value, then you could expect a cut in excess of 50 percent as your competitor
tries to stave off significant volume loss.

As this example illustrates, the price floor for a negatively differentiated product cannot be the competitive reference
value because that would place the floor above the price ceiling defined by the economic value (see graphic
illustration on right side of). The limiting factor for a negatively differentiated product is the relevant costs of the
offering that are defined as those that determine the profit impact of prices. We define these costs and discuss their
role in pricing in depth in and, thus, will not repeat that discussion here. Instead, it is sufficient to point out that the
price window for negatively differentiated products is lower than those that are positively differentiated, and it is
important to allow those offerings to maintain lower prices in order to maintain stable market prices.