PRICING

STRATEGIES
CHAPTER SIX:

PRICING STRATEGIES
LESSON ONE:

ORIGINS OF PRICING
 LEARNING OUTCOMES
At the end of the lesson, the learners will be
able to:
1. Understand the evolution of pricing
practices;
2. Gain insights into the subjective nature
of pricing;
3. Be introduced to the complex dynamics
between suppliers and sellers,
particularly with regard to pricing; and,
4. Understand that pieces can be flexible
and, therefore, can be negotiated.
 It denotes the price that a consumer
product is expected to be sold at over
the counter and in stores.
Intended to be a pricing tools for
suppliers so that they can somehow control
the list price of their products.

WHAT IS
SUGGESTED RETAIL PRICE?
 DANCE
A socio-cultural phenomenon
that both parties are expected
to respect and abide by

It occurs between the

buyer and seller.
How can you tell if
something is cheap
or expensive?

-BY COMPARING
Emergence of the Suggested Retail Price

EVOLUTION IN
MECHANDISING

ELEMENTS
 MASS PRODUCTION
Led to wider access to
cheap goods that are sold
in bulk, as made possible
by factory-based
processes.
 Transportation
The emergence of long-range
mechanical transportation
systems provides merchants with
access to a far wider variety of
goods than was ever before
possible.
 The power of pricing is still in
the hands of the shopkeepers
and the manufacturers or
suppliers want to control the
end-user price of their products.
Therefore, the concept of
suggested retail price emerged.
CHAPTER SIX:

PRICING STRATEGIES
LESSON TWO:
PRICE ELASTICITY AND
INELASTICITY
 LEARNING OUTCOMES
At the end of the lesson, the learners will
be able to:
1. Understand the nature of price
Elasticity and Inelasticity;
2. Gather insights into the effect of the
marketing mix on the market's
reactivity to price.
WHAT IS
ELASTICITY?
It is refers to the degree
of sensitivity of a market to
change in a product's
price.
 It is refers to a market's
reluctance to let go of a product
even if it's price goes up or,
contrariwise, inertia against buying
more of a product just because its
price goes down.

WHAT IS
INELASTICITY?
 Price Elasticity of
Demand
It is typically explained
as the market's sensitivity
to changes in price.
Formula-wise, it is reflected by the
following equation:

Ep = Elasticity coefficient
aQ= Change in quantity
Q= Total Quantity
aP= Change in price
P= Total Price
 General rule of demand that are inversely
reacting to price. (and henceforth having
negative coefficient) These are:

1. Veblen Goods - goods that become

more sought after the higher their prices
become, often in the case of high-end
luxury goods (Veblen, 1934).

2.Giffen Goods - goods that end up being

preferred despite its price increase because
substitute goods prices are also rising as well, to
the point that the former becomes more
attractive than the substitutes (Marshall, 2006).
CHAPTER SIX:

PRICING STRATEGIES
LESSON THREE:

PRICING METHODS
 LEARNING OUTCOMES
At the end of the lesson, the learners will
be able to:
1. Be familiar with the different price-
quality points;
2. Have alternative methods for setting a
product’s price; and
3. Have a greater understanding of
using price as a communication tool.
WHAT IS
PRICE?
It is a very sensitive element because
it can make or break your product’s
profitability.

Unique among the components of

the marketing mix.
PRICE HIGH OR PRICE LOW

If the price is too low, you could lose

money and at worst be driven out of
business.

If the price is too high, you could price

your product out of the market, and you
could lose buyers (and your business) too.
 COMMUNICATION
Plays a vital role in this
balancing act.

• A higher price helps to communicate

higher quality.
• A lower price (if done right) can
communicate good value.
 A matrix of the general
price-quality points that a firm
can position its products into
(Kotler, 2003).

WHAT IS
PRICE-QUALITY POSITIONS
 PRICE
P HIGH MEDIUM LOW
R Price High- Super-
O HIGH Strategy value value
strategy strategy
D Overcha Medium- Good-
U MEDIUM rging value value
T strategy strategy strategy
I Rip-off False Economy
O
LOW strategy economy strategy
strategy
N
WHAT IS
YOUR PRICING OBJECTIVE?

Price should be set in order to

enable profitable operations but this
is not the only objective that prices
can help achieve.
 PRICING OBJECTIVE
• Prices can be set low enough so as to
discourage potential competition from
entering the market.
• Prices can be discounted for a limited time
in order to encourage immediate
purchase.
• Prices can be set high in order to
communicate a premium feel for the
product.
 PRICING OBJECTIVE
If the objective is market share
leadership, then the price is set in such a
way as to appeal to the mass market.

However, if the objective is product

quality leadership, then a premium price
may be set in order to best communicate
this attribute to the market.
 SETTING THE PRICE
A typical approach in determining price is
by using MARKUP PRICING. Here, the cost of
producing the product is first estimated with
cost of often being primarily defined as the
variable costs of a product or the costs of its
direct components.

Having a standard markup simplifies the

determination of the selling price for each new
product that is developed.
 SETTING THE PRICE
On the other hand, it is not unusual for
service-based industries to also factor in
the cost of all the physical activities
involved (an accounting procedure known
as activity-based costing).
 SETTING THE PRICE
TARGET RETURN PRICING is similar to markup
pricing, except that it is based on Return on
Investment Requirements of the firm. The
formula for this is:
Target Price = Unit Cost + (Desired Return) x
(Invested Capital

Unit Sales
 SETTING THE PRICE
PERCEIVED VALUE PRICING is a
proactive and marketing-based (rather
than accounting-based) pricing method
whereby the value of the product to the
market becomes the basis for the price.
 SETTING THE PRICE
GOING-RATE PRICING is another
relatively simple price and technique, this
time basing price on industry rates rather
than on either costs or market perceptions.
Assume that the market leader K's prices is 20
pesos per bottle of a beverage.
If you are selling the challenger product L, you
may choose to:
• Price slightly lower than K at 19.95.
• Price much lower than K at, say 17 pesos.
• Price at a very low price point of, say, 14
pesos.
• Price slightly higher than K at 21 pesos.
• Price very much higher than K at 24 pesos.
• Price at very high price point of, say, 28. pesos.
CHAPTER SIX:

PRICING STRATEGIES
LESSON FOUR:
PRICING STRATEGIES
AND APPLICATIONS
 LEARNING OUTCOMES
At the end of the lesson, the learners will
be able to:
1. Know the essentials for adapting the
price;
2. Know the different price strategies for
handling product mixes; and
3. Understand the implications of
discounts, senior citizen discounts,
and VAT to the end price.
PRICING A NEW PRODUCT
MARKET SKIMMING involves setting the
price high and gradually being reduced
over time to milk the next tiers, and so on.

MARKET PENETRATION involves setting the

price even lower than planned, if only to
attract the market into trying and becoming
a loyal customer. Contrast to market
skimming, this method will increase the price
eventually.
 PSYCHOLOGICAL PRICING
ODD-NUMBER PRICING are prices
that end in non-rounded odd numbers,
such as 9.95 or 99.50. FREE PRICING, in
which customers pay the full price for
one product or service to get another for
free.
 DISCRIMINATORY PRICING
• CUSTOMER-SEGMENT PRICING, charging
different prices to different people for the
same or similar product or service.

• PRODUCT-FORM PRICING, different prices

charged for different variants of the same
product.

• IMAGE PRICING, charging different prices

for the same kind of a product on the
basis of an image.
 DISCRIMINATORY PRICING
• LOCATION PRICING, charging different
prices for the same product on the
basis of different locations where it is
offered.

• TIME PRICING, the price of a product

varies with time.
 PRODUCT MIX PRICING
• PRODUCT LINE PRICING is used when the
prices within the product line is kept variant
so that the customer purchases one or the
other product within the product line.

• OPTIONAL FEATURE PRICING, companies

offer to sell optional or accessory products
along with the main product.
• CAPTIVE PRODUCT PRICING, the prices on
the main products are set low while the
supplies are highly priced.

• BY-PRODUCT PRICING, pricing low-value

by-products to get rid of them or to earn
extra margin in profit.

• PRODUCT BUNDLE PRICING, it involves

combining several products and offering
the bundle at a reduced price than
individual product offerings.
 TRADE DISCOUNT
Incentives that you offer to resellers
in your selling process.

Amount by which a manufacturer

reduces the retail price of a product
when it sells to a reseller.
EXAMPLE:
XYZ Corporation offers a 30% trade
discount for its resellers. The retail price of
their product is Php2. One reseller order
500 pieces of your product, for which
you are granting 30% trade discount.
Thus, the total retail price of Php1000 will
be reduces to Php700. The trade
discount therefore is Php300.
 SUGGESTED RETAIL PRICE

The price that customers should pay

for goods according to the
manufacturer.
EXAMPLE:
XYZ Corporation is selling their product
for 10 pesos, they want their resellers to
get a 20% of the suggested retail price
as standard margin. But this will increase
to 24% if the resellers buy 10 pieces of
your product. In order to do that, XYZ
should come up with SFP that will
support up to 24% trade margin for the
resellers, along with sufficient margin for
their corporation.
CONTINUATION…
If XYZ want at least 20% for themselves,
SRP would be computed as:

SRP= 10.00+24%SRP+20%SRP
SRP- 24%SRP-20%SRP=10.00
0.56SRP=10.00
SRP=10.00/0,56
SRP= 17.86
 VALUE-ADDED TAX
A form of input tax where the tax is
designated onto the added value that a
firm produces.

Current VAT is 12%, this means that

an additional 12% of your SRP should be
designated for the payment of VAT.
EXAMPLE:
You want to sell your meal at an end
price of Php1,000, with cost of goods at
Php300. The customer pays you
Php1,000 pesos. How much of this goes
for the payment of VAT?
SOLUTION:
Price Before Tax= Price/1.12=
1,000/1.12=892.86
VAT Component= 1,000-892.86=107.14
COGS VAT= 300-300/1.12=300-
267.8=32.14
Total VAT bill for the product sold=
107.14-32.14=Php75
 SENIOR CITIZEN DISCOUNT
R.A 9994 or the Expanded Senior
Citizen Act, which includes restaurants
and medications.

Seniors are exempted from VAT and

20% of your net-of-VAT price is removed
as their discount.
EXAMPLE:
1. Remove VAT from meal price,
1,000/1.12= 892.86
2. Remove 20 percent from net-of-VAT
price, 892.86 x (1-.20) = 892.86 x .80=
714.29
Senior Citizen Bill will be Php714.29