Colegio de San Juan de Letran

GRADUATE SCHOOL

COURSE GS MARMAN
MARKETING MANAGEMENT

PRICING

Lesson 1. Pricing Concepts, Importance and Objectives

2. Bases for Setting Prices

3. Types of Pricing Strategies

Objectives: 1. Explain the importance of identifying the target market’s evaluation of price
in formulating pricing objectives.

2. Describe the basis used for setting prices.

3. Explain and give examples of the different types of pricing strategies

Introductio
n
Price is the amount of money charged for “something”. It comes in different
names. Schools call it tuition, employees call it salaries, banks call it interest,
doctors call it professional fees, lessor calls it rent. Price is the marketing mix
variable that generates profit. This is the challenge of a marketing manager is
to formulate a pricing strategy that will strike a balance the need for sales
growth and profit. In this regard, this module introduces the concepts,
importance and objectives of pricing. It addresses also the importance of
pricing, explores three major pricing strategies, and looks at internal and

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external considerations that affect pricing decisions.

Activating Having learned the topics on the process of targeting a specific market and
Prior creating a product that will align to the needs and wants of the of its target
Knowledge market. So, at this point in time, you are now ready to explore the pricing
variable in marketing mix. Recall your past pricing topics learned in your
senior high school and the pre uploaded materials in GC.

Based on synchronous modality, a discussion board has been posted in your

Google Classroom for group activity.
Analysis
As a sort of review, think and reflect “Price is a measure of the product’s
quality and performance.”

– Justify your answer and cite examples. This will be made part of your
assignment with specific instruction and format in the application box.

Acquiring Pricing provides the company a mechanism of obtaining value back from
New customers. It is also used as a segmentation tool. Marketers need to know how
Knowledge to set prices. They also have to understand how customers perceive prices and
price changes like promotions to know how prices will be received and affect
demand

Pricing Decisions: Pricing Objectives

The marketing function’s pricing objectives should be in line with the

organization’s overall corporate objectives to ensure internal consistency in
organizational practices. Pricing objectives are a precursor to pricing strategies.
As such, when determining a product’s pricing objectives, the marketing

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manager should be thinking ahead to an appropriate pricing strategy.

Five of the most common pricing objectives are:

1. Survival

2. Maximum current profit

3. Maximum market share

4. Maximum market skimming

5. Product-quality leadership

Pricing Decisions: Pricing Strategies

Pricing strategies are the means by which organizations meet their pricing
objectives. When selecting pricing strategies, the three considerations facing a
marketing manager are:

1. cost and profit objectives,

2. consumer demand and

3. competition

Checkpoint - Self-Assessment Question:

Why must marketing objectives and pricing objectives be considered when

making pricing decisions?

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Cost-Based Pricing Method

Cost-based pricing can be defined as a pricing method in which a certain

percentage of the total cost is added to the cost of the product to determine its
selling price. In other words, it refers to a pricing method in which the selling
price is determined by adding a profit percentage to the cost of making the
product.

Explanation

It is the approach to pricing which involves the costs for producing,

distributing, and selling the product by adding a fair rate of return to
compensate for the efforts and risks taken by the company. It is a simple way to
calculate the product’s price by calculating the total cost in which the desired
profit is added to determine the final selling price.

Cost-Based Pricing Classification & Formulas

#1 – Cost-Plus Pricing

It is the simplest method of determining the price of the product. In cost-plus

pricing method, an affixed percentage, also called markup percentage, of the
total cost (as a profit) is added to the total cost to set the price. Say, for
example, an ABC organization bears the total cost of $100 per unit for
producing a product. Therefore, it adds $50 per unit to the product as’ profit. In
such a case, the final price of the organization’s product would be $150. This
pricing method is also called average cost pricing and is commonly used in

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manufacturing organizations.
The formula to calculate the cost-based pricing in different types is as follows:

Price = Unit Cost + Expected Percentage of Return on Cost

#2 – Markup Pricing

It refers to a pricing method in which the fixed amount or percentage of the cost
of the product is added to the product’s price to get the selling price of the
product. Markup pricing is more common in retailing, in which a retailer sells
the product to earn a profit. For example, if a retailer has taken a product from
the wholesaler for $100, he might add up a markup of $50 to profit.
Price = Unit Cost + Markup Price
Where,

Markup Price = Unit Cost / (1-Desired Return on Sales)

#3 – Break-Even Cost Pricing

In the case of Break-even Pricing, the company aims to maximize contribution

towards the fixed cost. This is relevant, particularly in the industries that
involve high fixed costs like the transport industry. The sales level required to
cover relevant variables and fixed costs will be determined here.
Price = Variable cost + Fixed Costs / Unit Sales + Desired Profit

Selection of a Pricing Strategy

A. A pricing strategy is an approach or a course of action designed to achieve

pricing and marketing objectives. Pricing strategies help marketers solve the practical
problems of setting prices.

B. New-Product Pricing

1. The two primary types of new-product pricing strategies are

price skimming and penetration pricing. An organization can use one or both
over a period of time.

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a. Price Skimming

(1) Some consumers are willing to pay a high price for an

innovative product, either because of its novelty or because of the
prestige or status that ownership confers.

(2) Price skimming is the strategy of charging the highest possible

price for a product during the introduction stage of its life-cycle.

(3) One danger, however, is that this pricing strategy might make
the product appear more lucrative than it actually is to potential
competitors.

b. Penetration Pricing

(1) At the opposite extreme, penetration pricing is the strategy of

setting a low price for a new product.

(2) The main purpose of setting a low price is to build market share
quickly in order to encourage product trial by the target market and
discourage competitors from entering the market.

(3) A disadvantage of this pricing strategy is that it places the firm

in a less-flexible pricing position. It is more difficult to raise prices
significantly than it is to lower them.

C. Differential Pricing

1. An important issue in pricing is whether to use a single price or

different prices for the same product.

a. Using a single price has several benefits, including that it

is simple, easily understood by employees and customers, and it
reduces the chance of an adversarial relationship developing
between marketer and customer.

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2. Differential pricing means charging different prices to different

buyers for the same quality and quantity of product.

a. The market must consist of multiple segments with

different price sensitivities, and the pricing method should be
used in a way that avoids confusing or antagonizing customers.

b. Negotiated Pricing

(1) Negotiated pricing occurs when the final price is

established through bargaining between the seller and the
customer.

(2) Even when there is a predetermined stated price or a

price list, negotiated pricing may still be used to establish the
final sales price.

c. Secondary-Market Pricing

(1) Secondary-market pricing means setting one price for the

primary target market and a different price for another market.

(2) Often the price charged in the secondary market is lower.

(3) However, when the costs of serving a secondary market

are higher than normal, secondary-market customers may have
to pay a higher price.

d. Periodic Discounting

(1) Periodic discounting is the temporary reduction of prices

on a patterned or systematic basis.

(a) For example, many retailers have annual holiday sales,

and some apparel stores have regular seasonal sales.

(2) A major problem with periodic discounting is, if the

discounts follow a pattern, customers may wait to make
purchases until they can get the sale price.

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e. Random Discounting

(1) Random discounting is temporarily reducing prices on an

unsystematic basis.

(a) This is done to attract new customers and reduce

predictability of price reductions by current customers.

f. Psychological Pricing

(1) Psychological pricing strategies encourage purchases

based on consumers’ emotional responses, rather than on
economically rational ones.

(a) These strategies are used primarily for consumer

products, rather than business products, because most business
purchases follow a systematic and rational approach.

g. Odd-Number Pricing

(1) Odd-number pricing is the strategy of setting prices using

odd numbers that are slightly below whole-dollar amounts.

(2) Sellers who use this strategy believe that odd-number

prices increase sales because consumers register the dollar
amount, not the cents. The strategy is not limited to low-priced
items.

h. Multiple-Unit Pricing

(1) Many retailers (and especially supermarkets) practice

multiple-unit pricing, setting a single price for two or more units
of a product.

(2) Especially for frequently-purchased products, this

strategy can increase sales through encouraging consumers to
purchase multiple units when they might otherwise have only
purchased one at a time.

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i. Reference Pricing

(1) Reference pricing means pricing a product at a moderate

level and positioning it next to a more expensive model or brand
in the hope that the customer will use the higher price as a
reference point (i.e., a comparison price).

j. Bundle Pricing

(1) Bundle pricing is the packaging together of two or more

products, usually of a complementary nature, to be sold for a
single price.

(2) To be attractive to customers, the single price usually is

considerably less than the sum of the prices of the individual
products.

k. Everyday Low Prices (EDLPs)

(1) To reduce or eliminate the use of frequent short-term

price reductions, some organizations use an approach referred to
as everyday low prices (EDLPs).

(a) A major problem with this approach is that customers can

have mixed responses to it.

l. Customary Pricing

(1) In customary pricing, certain goods are priced on the

basis of tradition.

m. Product-Line Pricing

(1) Product-line pricing means establishing and adjusting the

prices of multiple products within a product line.

(2) Product-line pricing can provide marketers with

flexibility in setting prices.

(3) When marketers employ product-line pricing, they have

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several strategies from which to choose.

(a) These include captive pricing, premium pricing,

and price lining.

n. Captive Pricing

(1) When marketers use captive pricing, the basic product in

a product line is priced low, but the price on the items required
to operate or enhance it are higher.

o. Premium Pricing

(1) Premium pricing occurs when the highest-quality product

or the most versatile and most desirable version of a product in a
product line is assigned the highest price.

p. Price Lining

(1) Price lining is the strategy of selling goods only at certain

predetermined prices that reflect explicit price breaks. Price
Lining: Definition, Strategy, & Examples | Feedough

(a) It eliminates minor price differences from the buying

decision—both for customers and for managers who buy
merchandise to sell in these stores.

q. Promotional Pricing strategy

(1) Price, as an ingredient in the marketing mix, often is

coordinated with promotion.

Sales strategy in which a seller or a brand temporarily reduces

the price of a product or a service with the goal to attract more
customers. Promotional pricing works by increasing the
customer’s urgency to purchase with a limited-offer deal.

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(a) The two variables sometimes are so interrelated that the

pricing policy is promotion-oriented.

r. Price Leaders

(1) Sometimes a firm prices a few products below the usual

markup, near cost, or even below cost, which results in what is
known as price leaders.

(2) This type of pricing is used most often in supermarkets

and restaurants to attract customers by offering especially low
prices on a few items, with the expectation that they will
purchase other items as well.

s. Special-event pricing

(1) Special-event pricing involves advertised sales or price

cutting linked to a holiday, season, or event.

(2) If the pricing objective is survival, then special sales

events may be designed to generate necessary operating capital.

t. Comparison Discounting

(1) Comparison discounting sets the price of a product at a

specific level and simultaneously compares it with a higher
price.

(a) The higher price may be the product’s previous price, the
price of a competing brand, the product’s price at another retail
outlet, or a manufacturer’s suggested retail price.

(b) However, because this pricing strategy has led to

deceptive pricing practices, the Federal Trade Commission has
established guidelines for comparison discounting. For instance,
if the higher price against which the comparison is made is the
price formerly charged for the product, sellers must have made
the previous price available to customers for a reasonable period

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of time.

Checkpoint - Self-Assessment Question:

For what types of products would price skimming be most appropriate? For
what types of products would penetration pricing be more effective?

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________________________________________________________________
_____________________________.

Determination of a Specific Price

A. A pricing strategy will yield a certain price or range of prices,

which is the final stage in the price setting process.

1. However, this price may need refinement to make it consistent

with circumstances, such as a sluggish economy, and with pricing
practices in a particular market or industry.

B. Pricing strategies should help in setting a final price.

C. Marketers must establish pricing objectives; have considerable

knowledge about target market customers; and determine demand, price
elasticity, costs, and competitive factors.

Pricing for Business Markets

A. Setting prices for business products can be quite different from

setting prices for consumer products, owing to several factors such as size of

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purchases, transportation considerations, and geographic issues.

B. The three types of pricing associated with business products are

geographic pricing, transfer pricing, and discounting.

C. Geographic Pricing

1. Geographic pricing strategies deal with delivery costs.

2. F.O.B. origin pricing stands for “free on board at the point of

origin,” which means that the price does not include freight charges.

a. It requires the buyer to pay the delivery costs, which include

transportation from the seller’s warehouse to the buyer’s place of
business.

3. F.O.B. destination indicates that the product price does include

freight charges, and therefore the seller is responsible for these charges.

D. Transfer Pricing

1. When one unit in an organization sells a product to another unit,

transfer pricing occurs.

2. A transfer price is determined by calculating the cost of the

product, which can vary depending on the types of costs included in the
calculations.

3. The choice of the costs to include when calculating the transfer

price depends on the company’s management strategy and the nature of
the units’ interaction.

E. Discounting

1. A discount is a deduction off the price of an item.

2. Producers and sellers offer a wide variety of discounts to their

customers, including trade, quantity, cash, and seasonal discounts as
well as allowances.

a. Trade discounts are taken off the list prices and are

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offered to marketing intermediaries, or middlemen.

b. Quantity discounts are given to customers who buy in

large quantities.

c. Cash discounts are incentives offered for prompt

payment.

d. A seasonal discount is a price reduction to buyers who

purchase out of season.

e. An allowance is a reduction in price to achieve a desired

goal.

Checkpoint Assessment Question:

Application

Pricing strategy

Pricing is something you should consider while developing your

marketing plan. Developing the right pricing strategy can help you better
market your product.

 What will be your Pricing Strategies to achieve the

marketing objectives?

 What pricing policies to apply?

 What are reasonable margins to make a profit and cover the

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costs of production?

 Is there a market for products or services at your projected

price point?

 Are you willing to sacrifice profit margins in return for a

greater market share?

 What are your marketing and distribution costs?

 What are your Terms and Conditions of Sales Strategies

(like Discounts and Allowances and Promotional
Allowances)?

To assess your understanding of the is lesson, summative assessments of the

following will b ee scored based on the following rubric.

Rubric scoring

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Exemplary Proficient Intermediate Marginal Novice

DIMENSI TOT
ONS AL
(10-9 pts.) (8-7 pts.) (6-5 pt.) (4-3 pts.) (2-1 pts.)

Content Outstandi Well- Adequate Margin Poor 10

ng points develope points al points
Focus were d points were points were
and noted. were noted. were noted.
Directio noted. noted.
n

Details Contains Contains Contains Contain Contains 10

detailed detailed detailed s little or
analysis analysis analysis analysis no
with with good with analysis
with a high
level high level of average
of level of synthesis level of
synthesis. synthesis synthes
is.

Organiza Excellent Very Good Evident Lacks 10

tion and flow and good flow and flow flow and
Diagram structural flow and structural and structural
compositi structura compositi structur composit
on. l on. al ion.
Transitio composit Transition compos Poor
ns are ion. s are ition. transition
well Transitio evident Transiti s are
made and ns are and ons are evident.
follow well follow an evident.
appropria acceptable
made in an
te sequence.
sequences appropri
. ate
sequence
.

Mechani Correct Correct Acceptabl Accept Poor 10

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cs spelling spelling e spelling able spelling
and and and spelling and
Spelling grammar grammar grammar and grammar
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1.

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