The Second P: PRICE

PRICE
Price is defined as an amount charged by a company to
a buyer in exchange for good or services.
Internal Factors
1. Marketing Objectives – It must be note that pricing is
ONLY one component of the marketing mix
designed to aid attainment of company objectives.
Therefore, Before price are set, a company defines the
objectives it wishes to achieve such as:
-Survival
-Current profit maximization
-Market share leadership
-Product-Quality Leadership
Internal Factors
2. Marketing Mix Strategy – Price decision must be
highly consistent with product design, distribution
and promotion decision.

Target Costing or Design to Price – a company initially

come up with a target cost that would serve as a basis
for designing and manufacturing the product it would
offer its market
Internal Factors
3. Cost – Cost and Price are two different terms. Cost
refers to amount of money spent in producing goods
or services. Price is simply cost plus mark up.

For example: If company Spend 200.00 in producing 1

unit of product X and sell the same product for 250.00.
Internal Factors
2 Types of Cost
Fixed cost are cost that do not change even if quantity or
volume of production changes. These cost are also called
overhead costs.2500
Variable cost change directly with changes in quantity or
volume of production 10,000= 100 * 100

Total cost refers to sum of company’s fixed and variable

cost under a given level of production.
Internal Factors
4. Organizational Consideration – these refer to the
organizational characteristic that make up a company
and which include :
 personality of executives
 pricing practices being implemented by the firm
 policies, philosophy, vision and mission
 tradition of the company
 personal limitation of the people or department
tasked to set up company prices
 previous experience of the organization.
External Factor
1. The Market – different market structure trigger different pricing strategy
4 Types of Market
Pure Monopoly – This market structure occurs when there is only one
dominant seller of a specific good or services. monopsony
Oligopolistic competition – This market structure is characterized by the
presence of few sellers who are sensitive to each other’s pricing and
marketing strategies. Oligopoly oligopsony
Monopolistic Competition- These structure consist of many buyers and
many seller who trade over a range of prices rather than a single market
price.
Pure competition – under this structure, the market consist of many
buyers and many seller who deal with a uniform commodity and do not
have any opportunity to differentiate.
External Factor
2. The Demand
 Marketing starts and end with the customer.

Price Elasticity of Demand

 Elasticity – refers to the degree or responsiveness of
demand to price changes.
 If the percentage change in demand is greater than the
percentage change in price, demand is said to be elastic.
Example: The Price of brand 1 detergent is expected to
increase by 10% by next month If this happens, 15% of its
buyer are expected to shift to brand 2, a much cheaper brand.
External Factor
 If the percentage change in demand is less than the
percentage in price, demand is said to be inelastic.
For example: The Holy Redeemer School is planning to
lower its tuition and other fees by 12%. If it does, its
expected enrollment go up by 7%.
 If the change in demand and price is equal, demand is
said to be unitary.
For example: Agua Berna is planning to increase the price
of one gallon of purified water from 10.00 to 12.00. If this
happens, the company estimates that demand will fall from
100 gallons a day to 80 gallons a day.
External Factor
To compute:
x 100%
= x100%
=0.20x100%
=+20%
x 100%
=-.20x100%
=-20%
External Factor

3. The Competition - the price of a company’s product

can be effectively set when prices of other companies
offering the same product are considered.

4. The General Condition – External environment

creates a tremendous impact not only on a specific
company or industry but also on all companies and
industries operating within the country.
Cost-Based Pricing Strategies
3 Pricing Approach

1. Cost-plus Pricing- This is the simplest pricing method that requires

a standard mark up in the cost of a product.
Example: if EMT Company spend 40.00 to produce units of its product
and the company standard mark up is 25%. What is the selling price?
Mark up: 40*.25 =10
SP=C+M
=40+10
=50
SP=40*1.25
=50
Cost-Based Pricing Strategies
2. Break-even Pricing – Break even refers to a condition where the
company either earn profit nor incur loss.
Where:
Formula: Q* = break-even quantity
TFC = total fixed cost
Example: SP/u =Selling price per unit
VC/u= Variable cost per unit
JOMARICO Enterprises would like to determine how many units of
its product should it sell in order to break even. Total fixed cost
amounts to1,000,000 a year. Selling price is 300.00 per unit. Variable
cost covering direct materials and direct labor is 200.00 per unit.
Cost-Based Pricing Strategies
To check

SALE(300X 10,000)

Less:
VARIABLE COST
(200*10,000)
GROSS INCOME
Less:
FIXED COST
NET INCOME -0-
Cost-Based Pricing Strategies
Example:
If JOMARICO Enterprises estimates that it will be able
to sell only 8,000 units the whole year due to declining
demand, what price must the company sell its product to
break even? Where:
P* = break-even price
Formula: TFC = total fixed cost
Q =Estimated quantity to be
sold
= VC/u= Variable cost per unit
Cost-Based Pricing Strategies
To check

SALE(325X 8,000)
Less:
VARIABLE COST
(200*8,000)
GROSS INCOME
Less:
FIXED COST
NET INCOME -0-
Cost-Based Pricing Strategies
3. Target Profit Pricing – Under this scheme, the
company set a target profit to be earned and uses
break-even analysis to meet the said target.
• Example:
JOMARICO Enterprises can sell 8,000 units at 325.00
each with a variable cost of 200.00 per unit and total
fixed cost of 1,000,000 per year. In this case it will have
no profit. What if the company wants to earn a target
profit of 400,000 for the year. At what price must
JOMARICO Enterprises sell its product so that it can
achieve this target profit?
Cost-Based Pricing Strategies
Formula: TPP Where:
TPP= break-even price
= To check: TP = Target Profit
Q =Estimated quantity to be
sold
CSP= current selling Price

SALE(SP/u X Q)
Less:
VARIABLE COST (VC/u X
Q)
GROSS INCOME
Less:
FIXED COST
NET INCOME
Product-Mix Pricing Strategies
Product Line – This pricing approach is applicable
to firms that develop product lines rather than
single product.
Optional-Product Pricing- This approach offer to
sell optional or accessory product along with main
product.
By-Product Pricing –A by-product is a surplus
product or item coming from main product itself.
Product-bundle Pricing – In this pricing
techniques, a company combines several of its
products into a bundle and offer the bundle for sale
at a reduced price.
Price-Adjustment Strategies
1. Discount Pricing
Forms of Discount Pricing
Cash Discount – It is a price reduction given to buyer
who pay their bills on time. (2/10 n/30)
Quantity discount – These are price reductions given
to buyer who purchase a product in large volumes.
Seasonal Discount – These are price reductions given
to buyer who purchase a merchandise or services that
are out of season.
Price-Adjustment Strategies
2. Segment Pricing
Forms of Segment Pricing
Customer-segment pricing – is a strategy in which different
customer pay different rates or prices for the same product or
services.
Product-form pricing – is another strategy in which different
version of product or services are priced differently. But not
according to differences in their cost.
With location pricing – different locations are priced differently,
even tough the cost of offering each location is the same.
Time pricing – varies the price of a certain product according to
the time or season of the year.