MKT 047: Pricing Strategy (with Business Analytics)

Module #2 Student Activity Sheet

Name: _________________________________________________________________
Section: ____________ Schedule: ________________________________________Class number: _______
Date: ________________

Lesson title: Pricing Strategy and its Principles: Materials:

Learning Targets: SAS,
At the end of the module, students will be able to:
1. Explain Pricing Strategy References:
2. Discuss the different principles of Pricing and its compo- MKT 047 Syllabus
nents
3. List the different strategic pricing choices the managers
must make to maximize growth profitability.

A. LESSON PREVIEW/REVIEW

Introduction
As an individual, we see a lot of things, need different things, and want many things. There are instances
however that no matter how we like a product or a certain service, we hesitate to purchase or avail one. It
could be because of several factors like: hesitancy, unclear value, lack of urgency for the product/service, and
such. The easiest factor to consider is the price.

Before we get started, I want you to think of a product or service you've always wanted to purchase or use
but are hesitant to do so because of the price. After that, try answering the following questions:

1. What is this product or service?

________________________________________________________________________________________
________________________________________________________________________

2. List down the difficulties that you experienced before you chose to at long last purchase the item or avail the
service.

________________________________________________________________________________________
________________________________________________________________________

3. Write down your experience in purchasing and availing this pricey product or service, what lessons you
learned after the purchase of that valuable product or service?

________________________________________________________________________________________
________________________________________________________________________

B.MAIN LESSON

Content and Skill-Building l

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 MKT 047: Pricing Strategy (with Business Analytics)
Module #2 Student Activity Sheet

Name: _________________________________________________________________
Section: ____________ Schedule: ________________________________________Class number: _______
Date: ________________
Below are the notes about pricing strategy. You may underline or highlight words or phrases that you
think is key to the lesson.

Hello, Students! It's another day and we will be starting a new topic for you to learn which is pricing
strategy. In markets with increasing volume and price pressure, the right pricing approach is essential to re-
main competitive. It brings you the value you de- serve for your products and services offered and secures the
profits you need to invest in change and growth.

Topic # 1: Pricing Strategy

Pricing strategy refers to methods companies use to price their products or services. It is a plan for setting
the best price for your products or services. The goal is to set a price that will entice customers to buy, but that
isn't so low that you're not making a profit. Practically all organizations, huge or little, base the cost of their
items and administrations on creation, work and promoting costs and afterward add on a specific rate so they
can create a gain. If pricing is how much you charge for your products, then product pricing strategy is how you
determine what that amount should be.

Topic # 2: Principles of Pricing and its Components

Pricing strategy is the policy the firm adopts to determine what it will charge for its products and ser-
vices. Strategic approaches fall broadly into three categories: cost-based(cost-plus) pricing, customer-driven
pricing, and share-driven pricing.

Cost-Plus Pricing:

This type of pricing is, historically, the most common pricing procedure because it promotes financial cau-
tion. This is achieved by pricing the product or service to yield a return over all costs, fully and fairly allocated.
In theory, it is a simple guide to profitability; in practice, it is a blueprint for mediocre financial performance.

The problem with cost-driven pricing is fundamental: In most industries, it is impossible to determine a
product’s unit cost before determining its price. Why? Because unit costs change with volume. This cost
change occurs because a significant portion of costs are “fixed” and must somehow be “allocated” to determine
the full unit cost. Unfortunately, because these allocations depend on volume, and volume changes as prices
change, unit cost is a moving target.

Cost-based pricers often assume a level of sales volume and assume that setting price without affect-
ing that volume can lead to pricing decisions that undermine profits. This can result in a death spiral, where
higher prices reduce sales and raise average unit costs further. Conversely, if sales are higher than expected,
fixed costs are spread over more units, leading to lower prices. This can result in overpricing in weak markets
and underpricing in strong ones, which is the opposite of a prudent strategy.

Customer-Driven Pricing:

Many companies now recognize the fallacy of cost-based pricing and its adverse effect on profit. They
realize the need for pricing to reflect market conditions. As a result, some firms have taken pricing authority
away from financial managers and given it to sales or product managers. In theory, this trend is consistent with
value-based pricing, since marketing and sales are that part of the organization best positioned to understand

This document is the property of PHINMA EDUCATION

 MKT 047: Pricing Strategy (with Business Analytics)
Module #2 Student Activity Sheet

Name: _________________________________________________________________
Section: ____________ Schedule: ________________________________________Class number: _______
Date: ________________
value to the customer. In practice, however, their misuse of pricing to achieve short-term sales objectives often
undermines perceived value and depresses future profitability.

Two problems arise when prices reflect the amount buyers seem willing to pay.:

1. First, sophisticated buyers are rarely honest about how much they are actually willing to pay for a product.
Professional purchasing agents can manipulate product values, leading to buyers' financial incentives to
mislead sellers. This undermines salespersons' ability to build customer relationships and understand their
needs, as sellers' prices are reactively flexible.

2. Second, there is an even more fundamental problem with pricing to reflect customers’ willingness-to-pay.
Sales and marketing should focus on raising customers' willingness-to-pay to reflect the product's true value.
Many companies underprice innovative products by asking potential customers for their willingness to pay.
However, studies show that price doesn't significantly impact customer acceptance. Instead, focus on un-
derstanding the product's value for satisfied customers, communicating that value to the uninformed, and
setting prices accordingly. Low pricing isn't a substitute for effective marketing and sales efforts.Share-Dri-
ven Pricing:

Pricing is often viewed as a strategic tool to gain market share, as seen in eBay's example. However,
it's not a reason for an organization to pursue market share as an end in itself.

Cutting price is a quick and effective sales strategy, but it's often a poor financial decision due to its
short-term market advantage and lower margins. Product differentiation, advertising, and improved distribution
are more sustainable and cost-effective in the long run. Effective pricing managers balance profitability and
market share, making hard decisions when necessary.

Topic # 3: Pricing Strategy Principles

Pricing, given the assumptions of economics, is simply about optimizing the price level given that de-
mand. In reality, however, demand for most products and services is not given. It is created, sometimes
thoughtfully and sometimes haphazardly, by decisions that sellers make about what to offer their customers,
how to communicate their offers, how to price differently across customers or applications and how to manage
customer price expectations and incentives. Making these decisions thoughtfully and implementing them effec-
tively to maximize profit- ability is what we call “strategic pricing.”

Although different strategies can achieve profitable results even within the same industry, nearly all
successful pricing strategies embody three principles. They are value-based, proactive, and profit-driven:

• Value-based means that differences in pricing across customers or applications reflect differences in the
value to customers.

• Proactive means that companies anticipate disruptive events (for example, a new competitive threat or a
customer’s decision to award business via a reverse auction) and develop strategies in advance to deal with
them.

• Profit-driven means that the company evaluates its success at price management by what it earns relative
to alternative investments rather than by its market share and growth relative to its competitors.

This document is the property of PHINMA EDUCATION

 MKT 047: Pricing Strategy (with Business Analytics)
Module #2 Student Activity Sheet

Name: _________________________________________________________________
Section: ____________ Schedule: ________________________________________Class number: _______
Date: ________________
Skill Building Activity:

List down the Principles of Pricing Strategy and describe each element.

Check for Understanding

MULTIPLE CHOICE: Determine What kind of Pricing Strategy is might be used for these scenarios:
1. Company A sets a selling price of $36 after adding a 20% profit margin to the $30 production and distri-
bution cost.
a. Customer-Driven Pricing
b. Cost-Driven Pricing
2. If the purchase price is based on a promised effect instead of the product, for example in systems and
consulting transactions, the supplier himself assumes the customer’s usage risks and thus increases
their willingness and confidence to pay.
a. Customer-Driven Pricing
b. Cost-Driven Pricing
3. Construction company XZ, before submitting bids for a project they might be undertaking, they estimate
the total cost of production. After they estimate and come up with the costs, they add a markup for prof-
it.
a. Customer-Driven Pricing
b. Cost-Driven Pricing
4. If a retailer sells several heterogeneous goods in one package at a total price, one speaks of price
bundling. If the total price is usually lower than the sum of the individual prices, the bundling of prices
also leads to increased price satisfaction and thus to higher customer loyalty.
a. Customer-Driven Pricing
b. Cost-Driven Pricing
5. Beverage manufacturers offer a service for private and business customers, delivering defined bottle
selections for a fee. This reduces procurement costs, boosting customer loyalty and reducing costs.
a. Customer-Driven Pricing
b. Cost-Driven Pricing

This document is the property of PHINMA EDUCATION

 MKT 047: Pricing Strategy (with Business Analytics)
Module #2 Student Activity Sheet

Name: _________________________________________________________________
Section: ____________ Schedule: ________________________________________Class number: _______
Date: ________________
C. LESSON WRAP-UP

“Pricing strategy is an important marketing tool that plays a key role in determining the success or fail-
ure of a product or service. It influences consumer perception, takes into account competitor analysis, and
helps maximize revenue and profitability.” Schryers, 2023
The significance of setting the right price cannot be downplayed because it directly affects the profits of
the organization. The purpose of strategic pricing is not simply to create satisfied customers. Customer satis-
faction can usually be bought by a combination of over delivering on value and underpricing products. But
marketers delude themselves if they believe that the resulting increases in sales represent marketing success-
es. The purpose of strategic pricing is to price more profitably by capturing more value, not necessarily by mak-
ing more sales. When marketers confuse the first objective with the second, they fall into the trap of pricing at
whatever buyers are willing to pay, rather than at what the product is really worth. Although that decision may
enable marketing and sales managers to meet their sales objectives, it invariably undermines long-term prof-
itability.
The goal of pricing should be to find the combination of margin and market share that maximizes prof-
itability over the long term. Sometimes, the most profitable price is one that substantially restricts market share
relative to the competition.

Answer Key:
Check to Understanding
1. Cost-Driven Pricing (b)
2. Customer-Driven Pricing (a)
3. Cost-Driven Pricing (b)
4. Customer-Driven Pricing (a)
5. Customer-Driven Pricing (a)

Rationale: When the pricing policy can specifically influence the price satisfaction of their customers and thus
increase customer loyalty without selling below the margin, it is Customer-Driven Pricing and when the pricing
policy where you decide how much extra you will charge for an item over the cost, it is Cost-Driven Pricing.

This document is the property of PHINMA EDUCATION