PRICING OBJECTIVES AND PRICING STRATEGIES

PRICE –means the money value of a product or service expressed in terms of peso and or centavos.
It is also the amount of money needed in order to acquire a product or service and its
accompanying services.

PRICING OBJECTIVES:

1.Profit-oriented objectives- Target return objectives sets a specific level of profit as an objective.
This amount is often stated as percentage of sales or investment. Businessmen want satisfactory
return as an assurance of corporate survival or success.

Profit maximization objective seeks to get as much profit as possible. Some managers believe that
profit maximization objective can be achieved by changing higher prices.

2. Sales-oriented objectives-seek higher level of sales volume, peso sales or market share without
primary reference to profit. Some managers are more concerned about more sales than profit,
since more sales may lead to more profit. This concern can only be possible if costs of materials
are not increasing.

3.Status-quo objective-is adopted by managers who are satisfied with their present profits under
market share. These companies simply stabilize price by sticking to their own price line. This is a
non-price competition company.

PRICING STRATEGIES FOR NEW PRODUCT

As the product changes its stage in the life cycle, pricing strategies also change. When product is
in its introductory stage, either an innovative product or imitative product, it uses different pricing
strategies.

Premium pricing strategy- the use of a high price for high-quality product.

Economy pricing strategy- is charging a low price for lower quality product.

Good-value strategy- charging lower price for high-quality product.

Overcharging strategy- overpricing price of the product in relation to quality.

PRICING STRATEGIES USE IN AN INNOVATIVE AND PATENT-PROTECTED PRODUCT:

1. Skim-the-cream pricing-involves setting a higher price from what the market expects. Some
buyers associate higher prices with better quality goods. This strategy makes sense under
certain conditions. First, the quality of the product can be relative to its high price. Second,
cost of production for small volume must not be high to affect high price. And finally,
market entry for competitors must not be easy to undercut the high price.
2. Penetration pricing-involves setting a low initial price for the product or service. Product is
price at minimum that will generate profit. The aim of this strategy is to target the mass
market immediately and win a large market share. This strategy can be effective when
market is price sensitive, where low price result to market growth. Production and
contribution cost must decline as sale volume increases. Finally low price must keep out
competitive entry, on a longer period for price advantage.

PRICING STRATEGIES FOR PRODUCT MIX/PRODUCT LINE:

1. Product Line Pricing-determining the price level between product varieties in a line based on
cost differences, product features, and competitor’s prices. The marketer may set a higher price
for the premium category and lower price for the regular category because they differ in cause,
features and performance.

2.Optional Product Pricing- the strategy of pricing options or accessory products along with a
main product. The marketer quotes the base price for the product and offer accessory products
at optional prices. This is used by car dealers wherein options like CD player, power windows,
remote control/power are offered at optional product pricing strategy.

3. Captive Product Pricing-

the strategy of pricing accessory products required to be used along with a main product.
Marketers commonly set a low price for main products like a camera and razor; and a high
price for the accessory product like the film or blade or service of processing and developing.

4. Two-Part Pricing-

for services, a fixed fee and variable fee are charged to costumers. Fixed fee are the entrance
fee for parks or monthly rate for telephone services. This must be low enough to encourage
usage or attract customers. The variable fee is the rate charge for other services, like plus
charges for calls beyond minimum level; parks charges for rides, attractions and foods.
Reasonable profits can be made on these variable fees which are based on customer’s degree
of usage.

5. By-Product Pricing-

this decision requires manufacturer to seek a market for its by-products and should accept any
price that covers more than the cost of storing and delivering them. This will allow
manufacturers to lower expenses and reduce main product’s price. By products are those
sawdust from lumber mills; processed meats; bar soaps; chocolate bars; petroleum product
which can be sold to another industrial market who can re-processed these items into another
final products.

6.Product Bundle Pricing-

this combines several products and offers the bundle or total package at a reduced price. This
strategy can promote sales of products which consumer may need or are slow-moving items,
but the package price must be low enough to get them buy the bundle. These products are
computer sales companies one price for all item from the computer CPU, printer, scanner,
table, and chair and even cloth covers; hotel prices for service, room, meal and entertainment.

PSYCHOLOGICAL PRICING POLICIES:

1. Fixed-price policy-

in-store retailers adopt one-price system, where goods are sold to costumers at the same
price. This gives advantage such as building customer confidence in the store, it saves time,
and can be used for self-service stores.

2.Variable price policy-

price paid by customer at a given time for a certain item is determined by the buyer’s
bargaining power. This gives the seller flexibility in dealing with customers like by lowering
prices to some buyers. This may help increase store traffic.
3. Odd-price policy-

price are set at odd amounts. This pricing is based on the belief that buyers feel, for example,
that Php19.95 is much lower than Php20.00 or Php99.95 lower than Php100.00, because they
give more attention to the peso figure than the centavos.

GEOGRAPHICAL PRICING POLICIES

A seller, whether producer, manufacturer, wholesaler or retailer, must always consider the cost
of shipping his goods from his point of production to consumption. This freight cost should be
given importance since this will affect variable costs of the product. Its either the buyer or seller
shoulders the entire freight costs or they share the expenses.

1.F.O.B point of production pricing or factory point-

when seller quotes the price at FOB factory (free-on-board), the buyer is responsible for paying
the cost of transportation. Under FOB factory policy, the seller charges the same amount for
similar products of the same quantity irrespective of the distance or nearness of the buyer’s
business. At FOB factory, the farther the buyer from production point, the higher is the freight
cost has to pay.

2.Freight equalization or postage stamp pricing-

where the seller is pricing FOB at the buyer’s location. Seller quotes a price which includes
delivery cost regardless of the buyer’s location. Seller receives net profit on each sale
depending upon the amount of his shipping cost. This can be used if freight costs can be a
minor issue on the seller’s cost structure or this is given as additional service in the form of free
delivery.

3.Zone pricing-

this is synonymous with pricing of parcel post services, long-distance telephone service. Zone
lines for the total market must be carefully drawn to avoid discrimination among buyers.
Although delivered prices may vary from one zone to another, within a zone, all customers pay
the same delivered price. This means that each quotation for the same order is based on the
point of destination.
ELEMENTS TO CONSIDER IN SETTING PRICES:

INTERNAL ELEMENT AFFECTIVE PRICING DECISION:

1. Marketing Objectives- the company must first decide on its marketing objectives. Common
objectives are profit maximization, market share leadership, product quality leadership or
competitive survival. Current profit maximization is estimating demand and cost of different
prices and choosing the price that will provide maximum profit. Market share leadership is
setting the lowest price at the highest long-run profit. Product quality leadership charges a
high price to cover higher performance quality and service.

A marketing organization faced with heavy competition considers survival as a goal and set a
low price, hoping to increase demand. They consider profits to be less important, provided
that it covers variable costs and few fixed cost. This purpose is only a short-term goal.

2. Marketing Mix Strategy- pricing decisions vary with product features, distribution, and
promotion decisions. Companies often position their products on price, wherein it defines
the target market, competitors and product design. This technique is called target costing,
wherein it starts with identifying ideal selling price, then targets costs that will ensure that
the price is met.
3. Cost- types of cost are fixed and variable costs. Fixed costs are overhead expenses that do
not vary with quantity produced or sold. These maybe the rentals, executive salaries,
interest etc.. Variable costs are directly related to output level, such as the quantity of raw
materials needed to produce quantity of output. The sum of the fixed and variable costs is
called total costs.

EXTERNAL ELEMENTS AFFECTING PRICING DECISION:

1.Market and Demand- before setting the price, the marketer must understand the relationship
between price and demand under different types of market. Economist recognize four types
of market:

A. Pure competition- a seller cannot charge higher than the on-going price because buyers
can obtain as much as they need at the regular price. Nor sellers can charge lower than the
on-going price because they can sell all they want, at the regular price. If seller increase prices
and profits, new sellers can easily enter the markets.

B. Monopolistic completion- buyers and sellers can trade over range the prices, because seller
can differentiate offers to buyers in term of variations on features, quality, style or services.

C. Oligopolistic competition- there are few sellers offering uniform products (steel bars,
cement) or non-uniform products (cars, furniture), highly sensitive to each other’s pricing ad
marketing strategies. Sellers are alert to competitors’ strategies and moves. If one seller lowers
its price, buyers will immediately shift to this seller. If a seller slashes her price, other seller will
follow.

D. Pure monopoly- there is only one seller (like an electric company). The company can be
government-owned, private regulated or private non-regulated company. These companies
can set their own price level. However, they do not always charge the full price because they
do not want to attract competition. They desire to penetrate market quickly at a low price, or
they fear government regulations.

2. Competitors’ Cost, Prices, and Offers- a company’s pricing decision is affected by its
competitors ‘cost, prices and offers. A consumer planning to purchase a product to evaluate
prices of comparative competitors’ brands. A marketer with high price, high margin strategy
may attract competition. A marketer with low price, low margin strategy may drive-out
competitors.

PRICING APPROACHES:

1. Cost-Based Pricing

A. Cost-Plus Pricing- this is the simplest pricing method wherein a standard mark-up is added
to the cost of the product.

• Example:
• Variable cost -- Php10.00
• Fixed cost -- 30,000.00
• Expected unit sales -- 1,500.00
• Therefore, the manufacturer’s unit cost will be:
• Unit cost = Variable cost + Fixed cost/ Unit sales
 • Manufacturing Cost Per Unit= Php10.00+30,000/1,500
• = Php10.00+20
• = Php30.00
• Suppose the manufacturer wants to earn 20% mark-up on sales:
• Manufacturer’s selling price= Unit cost/(1-% Mark-up)
• =Php30/(1-0.20)
• =Php30/0.80
• =Php37.50
Cost-Plus pricing remains popular because sellers are more concern about costs than demand,
they do not have to make frequent adjustments as demand changes.

B. Break-even Pricing- this is also known as target profit pricing, where in the marketing
organization tries to determine the price at which it break-even or achieve the target profit it aims.
Target profit pricing uses the break-even chart, showing the total cost and total revenue expected
at different sales volume levels.

Example:

Fixed cost --- Php30,000.00

Variable cost -- Php10.00

Price -- Php37.50

Break-even Volume= Fixed cost/ (Price-Variable cost)

=Php30,000/ (37.50-10.00)

=Php30,000/27.50

=1091 units

2. Other approaches to Calculation of Selling Price:

A. Cost price- the costs of raw materials that the producer or manufacturer purchases to
process these into finished products. Costs, in general, may include production, packaging,
advertising, handling, storage and other expenses inherent to product manufacturing.
B. Cost of ordering- the prices of the merchandise for resale that the wholesaler or retailer pays
to manufacturer.

Whereas for a manufacturer, selling products to wholesalers or retailers formulas are:

For Manufacturer:

Retail Selling/Unit = Cost of manufacturing/Unit + Mark-up/Unit

Php95.00 = Php75.00 + Php20.00

For Wholesaler or Retailer:

Retail Selling Price/Unit = Cost of Ordering/Unit + Mark-up/Unit

Php125.00 = Php95.00 +Php30.00

3. Value-based Pricing- this cost-based pricing approach is also known as buyers-based

approach which considers consumers perceived value on the product. This means the price is
its marketing program. Value pricing is offering just the right combination of quality and good
service at a fair price. Pricing begins with analyzing consumers’ needs and value perceptions,
and price is set to match consumers’ perceived value.

4. Competition-based Pricing-

Going-rate Pricing- the company places less attention on its own costs or demand. This
approach charges the same price with that of major competitors. Some firms follow the leader’s
price, and feel that holding to the ongoing price will minimize price wars.

Sealed-bid Pricing- this sets price based on how the marketer thinks that other competitors
will price, irrespective of costs or demand, when the company bids for jobs. In short, the higher
the marketing organization sets its price above cost, the lesser is the chance of getting the
contract.
FINDING PERCENTAGE OF MARK-UP ON COST
Manufacturer:

Percentage of Mark-up on Manufacturing Cost = Mark-up in Peso/Selling price x 100%

=Php20.00/Php95.00 x 100%

=21%

Wholesaler/Retailer

Percentage of Mark-up on Selling Price =Mark-up in Peso/Selling Price x 100%

=Php30.00/Php125.00 x 100%

=24%

DISCOUNT POLICIES: REDUCTIONS FROM LIST PRICES

Some sellers may extend a buyer certain discounts or reductions from the list price. A seller
may use these discounts and still follow a pricing policy, as long as he gives similar discounts
to comparable buyers.

1. Quantity discount- price reduction offered to encourage customers to buy in large amounts

a. Non-cumulative discount - apply only to individual order. Such discounts encourage larger
orders but do not tie a buyer to the seller after that one purchase. These are used to discourage
small orders and encourage bigger orders. These can be based on peso value of the entire
order or on the number of units purchased.

Non-cumulative quantity discounts give seller lower costs because of large orders. Such cost
include: selling cost; packing, transporting and collecting costs.

b. Cumulative discount – based on the total volume purchased over a period of time. These
discounts are intended to encourage repeat buying by a single customer. Practical difficulties
of this discount policy are the tendency of buyers to place large orders at the end of discount
period to qualify for higher discounts. Another is the possibility for customers to argue if they
just fall short of the quantity needed to obtain the next higher discount. These discounts are
especially applicable to the sale of perishable products, based on total purchases over, say,
three months, rather than on each separate order.

2. Trade discount- also known as functional discounts. Reduction in price given to certain
classes of buyers, usually to compensate them for the performance of particular marketing
functions.

To illustrate:

Manufacturer’s Retail Selling Price = Php25.95

Manufacturer - Wholesaler --- Retailer --- Ultimate consumer

Trade discount = 40% 10%

=Php9.34 Php2.60

=Php14.01 Php23.35 Php25.95

3. Cash discounts – reduction in price allowed the buyer for prompt payment of his bill. When
trade or quantity discounts are made before the cash discount percentage is applied to the
balance.

Percentage reduction or discount

Grace period for payment with discount

Number of days after which bill is overdue.

To illustrate:

5/10; n/20

Where:

5 is the percentage reduction or discount

10 is the grace period for payment with discount

20 is the number of days after which bill is overdue.

4. Datings- these refer to the length of time for which sellers extend credit terms to buyers. These
are subject to negotiation because of the different viewpoints of the buyer and the seller. A buyer
is interested in datings that allows a longer period of time for taking discounts or for making
payment; while the seller wants prompt. The extended term depends on the following factors:

a. The length of marketing period, which is the time it takes the retailer to sell the article.

b. The length of the selling season.

c. The competitive conditions, where a long- established manufacturer may offer different terms
from those of a manufacturer who is trying to enter the market.

Types of Datings:

1. Season dating- the credit period is based on the selling season of the merchandise ordered. A
seller extending a season dating considers the buyers cash inflow, that is why buyer is given a
number of days to sell goods ordered for cash inflow to catch up with the discount period.

2. Indirect dating or Ordinary dating- credit period is based on date appearing on the invoice.
Usually, date of invoice is the date of shipment.

3. End of the month dating- the billing date stars after the end of the moth in which the invoice is
dated, instead of an exact date of the invoice.
4. Receipt of goods dating- credit terms apply from the date the goods are received by the buyer
under ROG dating. This form of dating is preferred by buyers located at a distance from their
suppliers because by the time they receive the goods under other datings, discount period had
lapsed if the merchandise are still in transit.

5. Receipt of goods, net term dating- same with the preceding ROG, but credit period is based on
invoice date.

So under other datings, there is but only one maturity dates or credit periods are based on the
following:

a. Season datings- selling season of the product

b. Indirect or ordinary dating – invoice date.

c. End of the moth dating- next month, first day after the date of invoice.

d. Receipt of goods dating- arrival of goods

e. Receipt of goods, net term dating- arrival of goods and invoice date.

THE PRICE TAG LAW

Republic act no. 71- requires price tags or labels to affixed on all articles of commerce offer for sale
at retail and penalizing violations of such requirement.

A price tag is a device attached to a commodity stating the price at which it is offered for
sale. All articles of commerce and trade offered for sale at retail to the general public should have
a price tag. There is need for a price tag law in order to provide buyers with adequate information
and guide to enable them to compare quality and prices of goods and patronize stores selling
quality products allow prices.

CHARACTERISTICS OF A PRICE TAG

A price tag should:

1. Be clearly written;

2. Be visible either at a distance of 3 meters or upon examination;

3. State the price of the commodity per unit (piece, package, pair, dozen, set, meter, liter, etc.) in
pesos and centavos, Philippine currency.

4. Bear no erasure or alterations of any sort.

VIOLATION OF THE PRICE TAG LAW

The following are considered violations of the law:

Failure to affix appropriate price tags or labels on articles offered and/or displayed for sale at retail;

Selling articles at prices other than those stated on the price tag, label or price list;

Giving discount discriminately;

Placing of price tags or labels which are not visible. Or, if price is stamped on the product, it is not
visible upon examination;

Erasing or altering any information on price tags or labels, except to show that a discount is being
offered

In the event a violation appear to have been committed, the consumer may do either of the
following steps:

1. Submit a written or verbal report on the apparent violation of the law to the nearest Department
of Trade and Industry Office with the following basic information:

The facts of the alleged violation;

The brand or name of the product;

The name and address of the establishment;

The name, address and telephone number of the consumer reporting.

2. File a letter of complaint containing the following information:

The names and addresses of the complainant and the firm/entity being complained about;

The acts or omissions constituting the offense including the approximate date, place and time of
its commission;
The remedy he is seeking from the Department, other than damages;

Any other relevant information the consumer may have regarding the matter.