Cavite State University – CCAT Campus

Department of Business Administration

Chapter 3: Product Pricing

Prepared by:

Mr. Richard P. Perez

 PRODUCT PRICING
Price is the “p” in the marketing mix that provides
revenues to a firm. The rest- product, place, and
promotion generate expenses. The firm's decision to
produce new products or enhance the existing products
entails expenditures. Choosing the right distribution
channel for the product and transporting the products to
reach the distribution outlet, like supermarkets and
department stores, incur expenses. In terms of promotion,
the choice of broadcast programs or print media, whether
to utilize sales promotions or public relations as mediums
to reach the target market adds to the budget
consideration of the company.
Product Pricing
 The pricing strategy that a company uses depends on
whether its operation is in domestic market or
international market. Pricing schemes also vary
depending on the type of products and the type of
market the company is catering to.

Price
• Price refers to the amount of money charged by product
or service providers to the market in exchange for their
product or service. Pricing scheme also vary depending
on the type of products and the type of market the
company is catering to.
PRICING OBJECTIVES
1. Meet their profit objective. Every company sets a specific
profit target for a particular product at a particular time .
This profit objective or target becomes the motivating
force for companies' marketing efforts.
2. Maintain or improve market share. Right pricing scheme
can enormously build customer traffic and an important
factor for brand shift decision of market.
3. Control entry of new players in the market offering
competing brands. Companies do this by offering lower
prices and sometime much lower than industry standard.
Importance of Price
 Pricedictates product demand. Market patronizes
products because of their prices. Some factors must
be considered, like product quality and type of
services given to cutomers by the company's staff.

 Price
determines the level of expenditures of the
market. Price influences buyers decision whether to
buy the product or not.
PRICING STRATEGIES
 Pricing in relation to product quality
a. Premium pricing strategy involves setting a high
price for products produced with high quality.
b. Economy pricing strategy involves setting the price
low because the product is of low quality.
c. Companies that offer the same high-quality
products but offer the customers with more value for their
money use the value pricing strategy.
d. In overcharging pricing strategy, products are
priced high but the quality of the products is low.
PRICING STRATEGIES
Pricing Strategy Price Quality
Premium High High
Economy Low Low
Value Low High
Overcharging High Low
PRICING STRATEGIES
 Other Pricing Strategies
a. Penetration Pricing Strategy involves setting a low initial
price for new products offered in the market. The objective of
penetration pricing is to be able to enter the market
immediately.
b. Market skimming pricing strategy involves setting a high
initial price for a product or service offered, and after a definite
period of time, companies either lower the price of the offering
or maintain its price.
c. Bundle pricing strategy involves setting one price for a set of
complementary products. For example, spaghetti sauce is
bundled and given a price of P100. Some companies bundle
fast-moving products with slow-moving products. Services can
also use a bundle pricing strategy, like when resorts offer
PRICING STRATEGIES
 Other pricing Strategies
d. Geographical pricing involves setting the price differently in
different locations. Producers of goods or channels of distribution,
like wholesalers, set geographical pricing schemes due to shipping
costs or transport costs. Under geographical pricing, the seller offers
varied schemes in different situations.
Zoning Pricing - This is type of geographical pricing
where the seller sets up zones where markets within the zone pay
the same price for the products. The farther the distance of the
market from the seller's zone, the higher will be the products price.
Some examples of zoning pricing are done by logistics providers,
remittance, and courier firms. Telephone companies also charge
different long distance call rates depending on location or distance.
 Freight Absorption Pricing - In order to
penetrate the market and to maintain existing
customers, some sellers shoulder part, if not,
the entire cost of the freight. Freight absorption
strategy is practiced by some companies in the
belief that distribution cost will be
compensated by business done in volume.
Reasons For Price Change
Companies cut price when:
 There is excess capacity
 There is a continuous decrease in market share
 Competitors lower their price offering, and other companies believe
that it is advantageous for their companies to follow the price
decrease.
 Company desires to regain lost market share and gain more
customers.
 Company is anticipating a new product model or design.
Companies increase price when:
 There is a desire to increase profit
 There is high demand for the product
 There is an increase in the cost of raw materials or labor costs.
Pricing Strategies for Products Mix /
Product Line
 Product Line Pricing
 Determining the price levels between product
varieties ia line based on cost differences, product
features, and competitor's prices. For example, a
product has several varieties - regular and premium
categories, the marketer may set a higher price for
the premium category and lower price for the regular
category because they differ in costs, features and
performance.
Pricing Strategies for Products
Mix / Product Line
 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 offe accessory
products at optional prices. Market may decide to take
optional items at optional prices, or leave it and decide
just for the main product at the base price. This is used
by car dealers wherein options like CD player, power
windows, remote control/power are offered at optional
product pricing strategy.
Pricing Strategies for Products
Mix / Product Line
Captive Product Pricing
The strategy of pricing accessory products required
to be used along with a main product. These captive
products are razor blades, films, computer software, CD
tapes and the like. Marketers commonly set a low price
for main products like a camera or razor; a high price for
the accessory product like the film or blade or service of
processing and development.
Pricing Strategies for Products
Mix / Product Line
Two Part Pricing
For services, a fixed fee and a variable fee are
charges to customers. 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 thse variable fees which is based
on customer's degree of usage.
Pricing Strategies for Products
Mix / Product Line
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 alow 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.
Pricing Strategies for Products
Mix / Product Line
Product Bundle Pricing
This combines several products and offers the
bundle or total package at reduced price. This strategy
can promote sales of products which consumermay 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 items
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 customers at the same
price. This gives advantages such as building customer
confidence in the store, saving time, and can be used for
self-service stores.
2. Variable price policy – Price paid by the 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 power. This gives the seller flexibility in dealing with
customers, like as lowering prices for some buyers. This
may help increase store traffic.
Psychological Pricing Policies
3. Odd-price policy - Prices are set at odd
amounts, such as P19.95; P99.95; P39.95. This
pricing is based on the belief that buyers feel for
example, that P19.95 is much lower than P20 or
P99.95 lower than P100, because they give more
attention to the peso figure than the centavos.
ELEMENTS TO CONSIDER IN SETTING
PRICES
 Internal Elements Affecting Pricing Decision

Marketing Objectives
Profit Maximization - is estimating demand and costs at
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
Competitive survival - a marketing organization faced with
heavy competition considers survival as a goal and sets a low price,
hoping to increase demand. They consider profits to be less important,
provided that it cover variable costs and a few fixed costs. This purpose
is only a short-term goal.
ELEMENTS TO CONSIDER IN
SETTING PRICES
 Internal Elements Affecting Pricing Decision
Marketing Mix Strategy
Pricing decisions vary with product features,
distributions, 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 the ideal selling price, then targets costs that
will ensure that price is met.
ELEMENTS TO CONSIDER IN SETTING
PRICES
 Internal Elements Affecting Pricing Decision
Cost
Types of costs are fixed and variable costs. Fixed costs
are overhead expenses that do not vary with quantity
produced or sold. These may be the rentals, executive
salaries, interests, and the like. Variable costs are directly
related to output level, such as the quantity of raw materials
needed to produce the quantity of output. The sum of the
fixed and variable costs is called total costs.
ELEMENTS TO CONSIDER IN SETTING
PRICES
 External Elements Affecting Pricing Decision
Market and Demand
Before setting the price, the marketer must understand the
relationship between price and demand under different types of
market.
1.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 that the on-going price
because they can sell all they want, at the regular price. If sellers
increase prices and profits, new sellers can easily enter the markets.
ELEMENTS TO CONSIDER IN
SETTING PRICES
 External Elements Affecting Pricing Decision
Market and Demand
2. Monopolistic Competition - buyers and sellers can trade
over range of prices, because sellers can differentiate offers to
buyers in terms of variations in features, quality, style or services.
3. Oligopolistic Competition - sellers are alert to competitors'
startegies and moves. if one seller lowers its price, buyers will
immediately shift to this seller. If a seller slashes her price, other
sellers will follow, but if one increase a price others may not follow.
ELEMENTS TO CONSIDER IN
SETTING PRICES
 External Elements Affecting Pricing Decision
Market and Demand
4. Pure Monopoly - there is only seller. 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.
ELEMENTS TO CONSIDER IN
SETTING PRICES
 External Elements Affecting Pricing Decision
Competitors' Cost, Prices and Offers
A consumer planning to purchase a product will
evaluate prices of comparative competitors' brands. A
marketer with high price, high margin startegy may
attact competition. A marter with low price, low margin
strategy may drive-out competition.
ELEMENTS TO CONSIDER IN
SETTING PRICES
 External Elements Affecting Pricing
Decision
Economic Factors
 Interest rates
 Inflation
 Government restrictions
 Social Concern
THANK YOU