2. “Pricing is a critical ingredient in the
marketing mix that diffirentiates the
brand. In some cases, it is the
major factor that determines brand
image.”
ALEX FERNANDEZ
Head of Consumer Health, United Laboratories, Inc.
4. Price - Definition
the amount of money asked or given for
“something”
the sum of all the values that consumers
exchange for the benefits of having or
using the product or service
Lessor – rent; schools – tuition; employees –
wages; banks – interest; lawyers and doctors
– professional fee; fixers – consultancy fee
5. Pricing Strategy
It can be defined as “a reasoned
choice from set of a alternative prices (or
price schedules) that aim at profit
maximization within a planning period in
response to a given scenario” (Gerard
Tellis, 1986)
6. Function of Price
It makes the product affordable to its
target market
Firms offer installment plan
It reflects the value of the product
A major tool for business model
innovation
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Factors to Consider in Pricing
Internal Factor:
Product Cost
Company Objectives
8. Factors to Consider in Pricing
Internal Factor 1: Product Cost
Product cost must be broken down to fixed
and variable cost as most companies sell
more than one item and the fixed cost must
be allocated to different products in a
sensible way
Under the cost-based pricing strategy, two
common types of setting prices:
Mark-up
Target Profit
9. Internal Factor 1: Product Cost
Mark-up – a retail price of P1000 with
10% mark-up on sales = P900
Target Profit Pricing =
= unit cost + target ROI x investment
Unit sales
= P20 + 35% x P2,000,000
P100,000
= P27
11. Cost vs Expense Structure
Your main competitor has just lowered
their price. Should you also lower your
price or will it risk an expensive price
war?
12. Internal Factor 2: Company’s
Objectives
Pricing Objectives of the firm:
Differential Pricing Strategy
Competitive Pricing Strategy
Product Line Pricing Strategy
Characteristics of the consumers:
Some consumers have high search costs
Some consumers have a low reservation for
the price
All consumers have certain special
transaction costs other than search costs
13. Pricing Strategies based on Company’s
Objectives and Consumer Characteristics
Characteristics of
Consumer
Differential Pricing
Competitive
Pricing
Product line
Pricing
Some consumers
have high search
costs
Random
Discounting
Price Signalling
Image Pricing
Some consumers
have a low
reservation for the
price
All consumers
have certain
special transaction
costs other than
search costs
Periodic
Discounting
Penetration /
Experience Curve
Price Bundling /
Premium
Second Market
Discounting
Georgraphic
Pricing
Complementary
Pricing
14. Differential Pricing
Random Discounting - Common examples are
“sale” prices or special discounts provided by
companies.
Second Market Discounting – Only the second
market segment enjoys through lower price
Periodic Discounting – the manner of
discounting is predictable over time and
known to consumers and the discount can be
used by all consumers
15. Competitive Pricing
Price Signaling – Prices are set high
regardless of high or basic product quality
Penetration Pricing – Exploits economies
of scale having cheaper cost, superior
technology, and an efficient organization
Experience Curve – Exploits a firm’s
production experience as cost decreases
due to cumulative volume
Geographic Pricing – Can be adopted
when there are adjacent markets
separated by transport costs rather than
reservation or transaction costs
16. Product Line Pricing
Image Pricing – Makes use of high price
to signal high quality and uses the profit
it makes from higher priced versions to
subsidize the price of lower priced
version
Price Bundling – Buying the whole
bundle is cheaper than the buying the
parts separately
Premium Pricing – the firms set a high
price emphasizing on unique product
features
Complementary Pricing – Captive
pricing, two-part pricing, loss-leader
pricing
18. The Practice of Foolish
Penetration
Marketers may be tempted to price their
products low during the introductory period,
regardless of product quality and choices of
available distribution methods. The obvious
intention is to gain market shares quickly. The
temporary market shares gained, however,
may create a permanent price image for a
brand which may be difficult to change over
time.
19. External Factor 1: Market Demand
Different market create different market
demand.
Two of the most common ways in setting
prices under the market demand-based
pricing strategy are:
a. Perceived value
b. Demand Differential
21. External Factor 2: Competition
Two of the most common ways in setting
prices under the competition-based pricing
strategy are:
a. Going rate
b. Sealed bid
22. The Practice of “Foolish
Fellowship”
While external factors may be similar to
competing companies, internal factors are
not. Different companies have different
objectives, different cost structures, and
different strengths. Abusing and overusing
competitor’s price or “going rate” pricing is
common practice among lazy marketers.
Marketers remember that the more unique
their products are, the more flexible they
can be in formulating pricing.
23. INTERNATIONAL PRICING
F.O.B. – FREE ON BOARD. The supplier pays the freight
up to a certain point, usually the point of origin.
C&F – COST AND FREIGHT. It means that the Philippine
exporter is quoting a price inclusive of freight from the
Philippines.
C.I.F. – COST, INSURANCE and FREIGHT – has a
similar meaning with C&F except that it includes the
cargo insurance covering the shipment from the port
of origin
24. INTERNATIONAL PRICING
International marketers have to consider buyer’s
landed cost and not only the competitiveness
of their final quote price. Landed cost would
take into consideration additional expenses
that the buyer would incur such as freight,
insurance, brokerage and arrester charges,
and tariff (which may vary from country to
country).
25. PSYCHOLOGICAL PRICING
Also called “Noticeable Price Difference”, this
technique is used most specially in
supermarkets and department stores to
create an impression of “good value”.
26. PRICE ELASTICITY
The term Elasticity connects the relationship
between changes in price and quantity of
sales. Price elasticity means that demand will
change if change in pricing occurs. Price
elasticity means that demand will not change
even when changes in pricing occur.
Price elasticity measurement allows companies
to evaluate how price changes will affect total
revenue.
Price elasticity of demand for a product is the
ratio of the percentage change in quantity
sold to the percentage in price.
27. PRICE ELASTICITY OF DEMAND
Price Elasticity of Demand =
% Change in Quantity Sold
% Change in Price
1.
2.
If the price elasticity of demand is
more than one, we can say that
demand is elastic.
If the price elasticity of demand is
less than one, we can say that
demand in inelastic.
28. Significant Findings on Price
Elasticity
1.
2.
3.
“Consumers tend to be more price-elastic
towards an impending price increase than
what actually takes place when the price
increase happens.”
“Consumers appear to be more sensitive to
price decreases than to price increases. They
are more ‘downside elastic’ than being ‘upside
elastic’.”
“The consumer’s price elasticity is observed
to diminish when shopping with a friend or
when being persuaded by a salesman
perceived as an expert.”
29. PRICE EXPECTATIONS
Using pricing research, price expectation can be
identified. The objective is to know the fair
range of the upper and lower threshold limits
of pricing. Within the fair price range, there is
likely to be neither change in quantity
purchased nor any brand switching. Above
the upper threshold limit, consumers will feel
the product is too expensive. Below the lower
threshold limit, consumers will doubt the
quality of the product and may not buy it.
30. PRICE SENSITIVITY METER
Van Westendorp’s Price Sensitivity Meter is one
of a number of direct techniques to research
pricing. Direct techniques assume that people
have some understanding of what a product
or service is worth, and therefore that it
makes sense to ask explicitly about price. By
contrast, indirect techniques, typically using
conjoint or discrete choice analysis, combine
the price with other attributes, ask questions
about the total package, and then extract
feelings about price from the results.
31. BPTO MODEL
BPTO enables marketers to understand the
implications of any change of price as well as
the way in which price and brand relate for
each respondent type,
BPTO identifies price premiums customers are
willing to pay and the added advantage of
identifying which brands are directly
competing with each other. A consumer brand
loyalty specifying their favorite and second
choices can also be identified in the model.
32. PRICING CRITERIA
…BASED ON COMPANY’S OBJECTIVES:
Objectives
When to charge
Lower Price
When to charge
Higher Price
Sales Volume
Turnover
Fast
Slow
Market
Dominance
Low
High
Profit Objective
Long-term
Short-term
33. PRICING CRITERIA
…BASED ON PRODUCT SPECIFICATIONS:
Product
Specifications
When to Charge
Lower Price
When to charge
Higher Price
Product Type
Commodity
Patented
Product Usage
Single Use
Multiple Use
Product
Obsolescence
Product Appeal
Slow
Fast
Price Sensitive
Price Insensitive
Production Method
Mass Production
Custom Made
Production Quantity
Big
Small
Production Capacity
Excess
Limited
Types of Service
Regular
Extra
Perceived Value
Overpriced
Underpriced
