DETERMINANTS OF PRICE

ENTR 20083 PRICING AND COSTING

BSAME IV

Prepared by:
BRADECINA, Abigael B
LANON, Allan C.
PAZ, Ladylyn R.
Objectives

At the end of this chapter, you are expected to:

 1. define pricing
 2. identify and describe the factors affecting pricing
decisions
 3. discuss the methods of determining price and
pricing strategies
INTRODUCTION
All profit and non- profit organizations must set prices on their
products and services.
Price is the amount of money charged for a product or service
or the sum of the values that consumers exchange for the
benefits of having or using the product or service.
Throughout most of history, prices were set by negotiation
between buyers and sellers.
Fixed price policies is setting one price for all buyers. It is a
relatively modern idea that arose with the development of
large-scale retailing at the end of the nineteenth century.
 The Internet promises to reverse the fixed pricing trend and
take us back to and era of dynamic pricing when charging
different prices depended on individual customers and
situations. Through the Internet, buyers and sellers
negotiate prices on thousands of items daily.

 Priceis also one of the most flexible of element of the

marketing mix it can be changed quickly.
 Many companies do not handle pricing well common mistakes
that they make are:

1. Pricing is too cost-oriented.

2. Prices are not revised often enough to reflect market changes.
3. Prices do not take into account the other elements of the
marketing mix.
4. Prices are not varied for different products, market segments,
and purchase occasions.
FACTORS TO CONSIDER WHEN SETTING PRICE
 Internal Factors affecting Pricing Decisions

1. Marketing Objectives

- The first decision to be made by the company is to set overall

strategy. if the company has selected its target market and
positioning carefully, then its marketing mix strategy, including
price, should be fairly straightforward. Setting objectives
(beyond marketing positioning) should be carefully monitored.
Clear objectives aid in a successful marketing venture.
 Some common objectives:

 (a)Survival - the main objective if they are troubled by too much

capacity, heavy competition, or changing consumer wants.
 (b) Current profit maximization - they estimate what demand and
costs will be at different prices and choose the price that will
produce the maximum current profit, cash flow, or return on
investment.
 c) Market share leadership- they believe that the company
with the largest market share will enjoy the lowest costs and
highest long-run profit. Prices are usually set as low as
possible.
 (d) Product quality leadership - This usually calls for
charging a high price to cover higher performance quality
and the high cost of R&D.
 2. Marketing mix strategy

-Price is only one of the marketing mix tools that a company

uses to achieve its marketing objectives.
 (a). Price decisions must be coordinated with product
design, distribution, and promotion decisions to form a
consistent and effective marketing program.
 (b).Companies Often make their pricing decisions first and
then base other marketing-mix decisions on the prices that
they want to charge.
(c).Other companies de-emphasize price and use
other marketing mix tools to create nonprice
positions.
(d). Remember that consumers rarely buy on price
alone. Instead, they seek products that give them the
best value in terms of benefits received for the price
paid
3. Cost
 -cost are another internal factor that sets the floor for the
price that company can charge.
 (a). Companies want to charge a price that covers all their
costs for producing, distributing, and selling the product and
provides a fair rate of return for their effort and risk.
 (b). Many companies work to become the "low-cost
producers" in their industry. Costs can take two forms:
 1.) Fixed cost, or overhead, are cost that do not vary with production
or sales levels.
 2.)Variable costs are cost that vary directly with the level of
production.
 c).Total costs are the sum of the fixed and variable cost at any given
level of production.
 (d).The company must carefully watch their costs. If it spends more
than competitors to produce and sell its product, the company will
have to charge a higher price or make less profit, putting it at a
competitive disadvantage.
4. Organizational Consideration
 Management must decide within the organization who should
set prices.
 In small companies, top management usually makes all the
pricing decisions.
 In large companies, divisional or product line managers make
the decisions.
 In industrial markets, salespeople often enter into the process
by negotiating certain aspects of the control and price.
 Some companies even have a pricing department.
External Factors Affecting Pricing Decisions
Market and demand -set the upper limit.

 Pricing freedom varies with different types of

markets:
(a). Pure competition -is a market where many buyers
and sellers trade in a uniform commodity
 Pure Competition

Many buyers and sellers who have little

effect on the price
 (b). Monopolistic competition -is a market where many
buyers and sellers trade over a range of prices rather than a
single market price.

Monopolistic Competition
Many buyers and sellers
who trade a range of prices
 c).Oligopolistic competition -is a market where there are a
few sellers who are highly sensitive to each others pricing
and market strategies.

Oligopolistic Competition
Few sellers who are sensitive to
each other's pricing/marketing
strategies
 (d).A pure monopoly is a market where there is a single seller-it
may be government monopoly, a private regulated monopoly, or
private non regulated monopoly. Monopolist do not always
charge a full price because:
 (1). they dot not want to attract competition.

 (2). they want to penetrate the market faster.

 (3). they fear government regulation

Pure Monopoly

Single user
 Competition is another external factor affecting the company's pricing decision
competitors costs and prices and possible competitor reactions to the company-
owned pricing moves

 Other environmental factors (economy resellers, government, social concerns)

 (a). Economic conditions such as boom or recession inflation or interest rate.

 (b). Resellers policies must be considered especially if they do not match the
suppliers

 (c). Because of its regulatory power the government must be considered.

 (d). Social concerns may affect the appearance short-term sales market share
and profit goals
GENERAL PRICING APPROACHES

 The price a company charges needs to be somewhere

between being too low to produce a profit and too high to
produce any demand. Product costs set the floor to a price
while consumer perceptions of the product's value set the
ceiling. Also, the company must consider competitor s prices
and other external and internal factors to find the best price.
COST-BASED RICING
 Cost-based pricing approaches include the following:
Cost-plus pricing is an approach that adds a standard
mark-up to the cost of the product. Considerations in
using this approach are:
a. Markups vary greatly among different goods and
services.
b. b. Lawyers and accountants are examples of
professionals that use this approach.
c. The standard markup approach may not make much sense
because it ignores current demandand competition.

d. It remains popular because:

 Sellers are more certain about costs than about demand.
 Pricing is simplified since it is tied to cost.
 Prices tend to be similar when all firms in an industry use
this approach and thus, price competition is minimized.
 Many people feel that this approach is much fairer to both
buyers and sellers.
 To
illustrate markup pricing, suppose a karaoke microphone
manufacturer had the following costs andexpected sales:
 Variable cost P 10
 Fixed cost P 300,000
 Expected unit sales P 50, 000
 Then the manufacturer's cost per microphone is given by:

 Nowsuppose the manufacturer wants to earn a 20 percent

markup on sales. The manufacturer's markupprice is given by:
2. Break-even pricing

 Break-even pricing, or target profit pricing, is an approach to

setting price to break-even on the cost of making and
marketing products or to make the target (desired) profit.
VALUE-BASED PRICING

 An increasing number of companies are basing their pricing

on the product's perceived value. Value based pricing is
setting prices based on buyers' perceptions of value rather
than on the seller's cost. This means that the company
cannot design the product and then set the price. Instead,
price is considered along with the other marketing mix
variables before the marketing program is set.
 COMPETITION-BASED PRICING
The final approach is competition-based pricing.
Variations include:
1. Going-rate pricing. Here prices are set based largely on
following competitors' prices rather than on company cost or
demand. This approach is popular. Firms feel that going rate
represents the collective wisdom of the industry concerning the
price that yields a fair return. They also feel that holding to the
going-rate price will prevent harmful price wars. A. Used when
demand elasticity is hard to measure.
 2. In sealed-bid pricing, the firm sets prices based on how
the firm thinks competitors will price rather than on its own
costs or demand estimates.
NEW-PRODUCT PRICING STRATEGIES
Pricing involves complex dynamics. Pricing decisions are subject to an
incredibly complex array or environmental and competitive forces. A
company sets not a single price, but rather a pricing structure that covers
different items in its line.
Pricing strategies usually change as a product passes through its life cycle.
The introductory stage of the PLC is particularly challenging.
Companies bringing out a new product face the challenge of setting prices
for the first time. They can choose between two broad strategies: market-
skimming pricing and market-penetration pricing
 MARKET-SKIMMING PRICING
 Market skimming pricing involves setting a high price for a new product to
skim maximum revenue from the segments willing to pay the high price. The
company makes fewer but more profitable sales. This approach makes sense
under certain conditions:
 1. The product's
quality and image must support its higher price and enough
buyers must want u product at that price.
 2. The costs of producing a small volume cannot be so high that they cancel
the advantage of charging more.
 3. Competitors should not be able to enter the market easily and undercut
the high price.
MARKET-PENETRATION PRICING

Market-penetration pricing means setting a low price for a new

product in order to attract a large number of buyers and a large
market share. This approach makes sense under certain
conditions:
1. The market must be highly price-sensitive.
2. Production and distribution costs must fall as sales volume
increases.
3. The low price must help keep out competition.
PRODUCT-MIX PRICING STRATEGIES

When the product is part of a product-mix, product mix

pricing strategies often need to be evaluate Pricing is
difficult because the variations of products have related
demand and costs, and face differ degrees of
competition.

There are five product mix pricing situations:

PRODUCT LINE PRICING
The first of situation is product line pricing. It involves setting the
price steps between various products in a product line based on
cost differences between the products, customer evaluations of
different features, and competitors' prices.
1. In many industries, sellers use well-established price points for
products in their line.
2. The seller's task is to establish perceived quality differences
that support the price differences
OPTIONAL PRODUCT PRICING

 The second situation is optional product pricing. It involves the

pricing of optional or accessory products along with a main
product. For example, a car buyer may to choose to order
power windows, a stereo with CD player. Car dealers have to
decide which items to include in the base price and which to
offers options.
CAPTIVE-PRODUCT PRICING

 The third situation is captive product pricing. It involves setting

a price for products that must be used along with a main
product. Examples of captive products are razor blades, camera
film, video games, and computer software.
 1. Producers of the main product offer them at low prices and
set high markups on the supplies.
 2.If
the producer does not make the supplies, they price their
products higher.
3. In the case of services, this strategy is called two-
part where the price of the service is broken into a
fixed fee plus a variable usage rate (telephone
company charging a monthly rate plus a usage rate.
For example, Kodak camera unit price is low and
makes money on its accessories like film, film
developing, flash bulb, and battery.
BY-PRODUCT PRICING

The fourth situation is called by-product pricing. It

involves setting a price for by-products in order make
the main product's price more competitive. An example
of this is a lumber mill selling turn wood out chips.
Sometimes companies do not realize how valuable
their by-products are. By-products can turn out to
printable. For example, fish dealers produces unsold
fish, which they could sell as fish balls.
PRODUCT-BUNDLE PRICING
It involves combining several products and offering the
bundle at a reduced price. Price bundling can promote
the sales of products that consumers might not
otherwise buy, but the combined price must be low
enough to get them to buy the bundle.
 PRICE ADJUSTMENT STRATEGIES

 SIX PRICE ADJUSTMENT STRATEGIES

1. DISCOUNT AND ALLOWANCE PRICING
 Discount is a straight reduction in price on purchase during a
stated period of time.

1. Cash discount is a price reduction to buyers who pays their bills

promptly.

2. Quantity discount a price reduction buyers who buy large

volumes.
3. A functional discount also called a trade discount is a price
reduction offered by the seller to trade channel members who
perform certain functions such as selling storing and
recordkeeping.

4. A seasonal discount is a price reduction to buyers who buy

merchandise or services out of season. 
2. SEGMENTED PRICING
In segmented pricing, the company sells a product at
two or more prices, even though the differences in
prices is not based on differences in costs.
 1. Customer segment pricing is when different customers
they different prices for the same product or service.
 2. Product- form pricing is when different versions of the
product are priced differently but not according to
differences in their cost.
 3. Location pricing is when different locations are priced
differently even though the cost of offering each location is
the same.
 4. Time pricing is when prices vary by the season , the
month, the day or even the hour.

 
 3. PSYCHOLOGICAL PRICING

 It considers the psychology of prices and not simply the

economics.
 Customers use price less when they can judge quality of the
product.
 Another aspect of psychological pricing is reference prices which
are prices that the buyers carry in their mind and refer to when
they look at a given product.
 Pricebecomes an important quality signal when customers can’t
judge quality, price is used to say something about the product.
4. PROMOTIONAL PRICING

 istemporarily pricing products below the list price and

sometimes even below the cost to increase short-term sales.
 1. Loss leaders- may be used by supermarkets and
department stores to attract customers to the store in the
hope that they will buy other items at normal markups.
 2.Special-event pricing- is used in certain seasons, such as
January white sales, to draw more customers.
 3. Cash rebates might be offered to customers who've
consumers who buy the product from dealers within a
specific specified time.
 4. Some manufacturers offer low -interest financing, longer
warranties, free merchandise to reduce the customers
price.
 5. A seller may simply offer discounts from normal prices to
increase sales and reduce inventories
5. GEOGRAPICHAL PRICING
 must be decided how to price products to customers located
in different parts of the country.
 1. FOB- origin pricing- is a geographical pricing strategy in
which goods are placed free on board a carrier and the
customer pays the freight from the factory to the destination.
 2. Uniform-delivery pricing is a geographical pricing strategy
in which the company charges the same price plus freight to
all customers, regardless of their location.
 3. Zone Pricing- a geographical pricing strategy in which the company
sets up two or more zones- all customers with a zone pay the same
total price in this is higher in the more distant zones.
 4. Basing-point pricing occurs when the seller designates some city as a
basing point and charges all the customers the freight from the city to
the customer location , regardless of the city from which the goods are
actually shipped.
 5.Freight- absorption pricing- occurs when the company absorbs all or
part of the actual freight charges in order to get the business.
6. INTERNATIONAL PRICING

 companies that market products internationally must decide

what prices to charge in the different international countries in
which they market. Factors that affect this decision includes:
 1. economic conditions

 2. competitive situations

 3. laws and regulations

 4. development of the retailing and wholesaling system

 PRICE CHANGES
 INITIATING PRICE CHANGES

- initiating price changes means either cutting or raising prices. Initiating

price cuts may be necessary because of several situations.
 1.When there is excess capacity , the company needs more business and
cannot get it through increase sales effort , product improvement or other
means.
 2. There is falling market share in the face of strong competition.

 3. The company may also cut prices in a drive to dominate the market
through lower costs.
 Initiating price increases may also be necessary because:

 1. Some major factors like normal cost inflation affect price.

 2. There is an overdemand or when a company cannot

supply all its customer needs.
 Raising prices can be done by dropping discounts or openly
raising them. The company must carefully avoid the image
of being a “price gouger”
 Buyer reactions to price changes are numerous: Price cuts are
seen as:

1. Current models being replaced by newer models

2. Current models having some fault and are not selling well

3. The company being in financial trouble and may not be in

business much longer.

4. Quality having been reduced.

5. Price coming down even further.

 Price increases also draw mixed reactions. Customers
perceive that:

1. Theitem is in demand and will be unobtainable unless

bought soon.

2. The product is unusually good value.

3. The company is greedy and charging what the traffic will

bear.
 RESPONDING TO PRICE CHANGES:

 Reactions to competition might be to:

1. Reduce the product’s price to match the competitor’s price

2. Maintain the company’s price but raise the perceived

quality of its offer.

3. Improve quality and increase price.

4. Launch a new low-price “fighting brand”

 PRICING WITHIN CHANNEL LEVELS

 Price fixing policy states that sellers must set prices

without talking to competitors. Price fixing is illegal per
se.
 Sellers are also prohibited from using predatory pricing.
 Price discrimination is the policy that attempts to ensure that sellers
offer the same price terms to a given level of trade
1. In addition, resale price maintenance is prohibited, which means
that a manufacturer cannot require dealers to charge a specified
retail price for it product; however, they can suggest a price.

2. Deceptive pricing occurs when a seller states prices or price savings

that are not actually available to consumers.

3. Other deceptive pricing issues:

a. Scanner fraud

b. Price confusion
REFERENCE

 Ac-ac, Maria Victoria M, (year).Principles of Marketing “Pricing: Understanding Customer Value and
Strategies.location. Pg.176-200
THANK
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