IMEMARK

Week 7 Handout

Overview
After learning about how to create customer value and the fundamentals of product development from the
previous modules, we are now ready to take a closer look at the second major marketing mix tool- i.e. pricing.
Effective pricing is the result of effective product development, promotion and distribution. As companies
successfully carry out the marketing objective to engage customers and build profitable customer relationships
by creating customer value, we must not forget that this entails capturing some of this value from its customers
in return in order to sustain the business. This is why it is essential to recognize the importance of pricing,
examine pricing strategies, and understand pricing decision considerations and approaches, which we will all
tackle in this module.

Learning Objectives
Below are the learning objectives for Module 7:
1. Define the meaning and importance of pricing, and identify the three major pricing strategies (01 Major
Pricing Strategies)
2. Understand the important internal and external considerations affecting pricing decisions (02 Other
Internal and External Considerations Affecting Price Decisions)
3. Identify other pricing strategies and considerations for new products, total product mixes, and price
adjustments (03 Pricing Approaches for Different Pricing Situations)
4. Discuss why and how companies initiate and respond to price changes (04 Price Changes)
IMEMARK
Week 7 Handout

01 Major Pricing Strategies

Introduction
We all know as consumers that price defines the amount of money charged for a particular product or service.
In a more elaborated definition, price is the sum of the values that customers exchange for the benefits of having
or using a product or service. Price is one of the most important elements that establish a company’s market
share and profitability, as it is the only element in the marketing mix that actually generates revenue. As such,
pricing is actually a key strategic tool for creating and capturing customer value and building profitable
customer relationships.
With the recent dramatic fluctuations of the economy across the globe, today’s consumers resort to more frugal
spending habits and seek more value in their purchases. Although companies feel this increasing pricing
pressure and persistently find ways to cut prices, reducing prices is not always the best solution because it can
also lead to profit losses and damaging price wars. In any case, regardless of economic conditions, companies
should sell value, not price.
Nowadays, it is extremely important that companies make their customers realize that the price they will spend
is justifiable by the level of perceived value they will gain in return. Then again, in setting a price that will fall
within the range illustrated in the diagram below, numerous internal and external factors must be considered.
With that in mind, let’s take a look at the major pricing strategies that can help companies set prices that will
deliver the expected customer value to build strong customer relationships.

Customer Value-Based Pricing

As the diagram above suggests as the ceiling price, the consumers’ perceptions of value are used in customer
value-based pricing. With this, pricing involves understanding how much value consumers place on the benefits
they can gain from the product and capturing that value in the price to be set. Marketers cannot simply design a
product and marketing program, and then set the price (i.e. cost-based pricing). Price is considered along with
all other marketing mix variables after assessing customer needs and value perceptions to set the price to match
perceived value, before determining costs that can be incurred and developing the marketing program, as shown
in the diagram below.
IMEMARK
Week 7 Handout

Because perceived value is used to evaluate a product’s price, it is important for companies to have a means to
gauge such value customers attach to a product. Some companies may resort to directly asking consumers how
much they are willing to pay for certain products and other added benefits; some companies may conduct
experiments to test the perceived value of different product offers. Let’s examine two types of value-based
pricing, as described in the diagram below.

Cost-Based Pricing
While consumer perceptions of value define the ceiling for setting prices, as shown in the first diagram, product
costs set the floor price. Cost-based pricing sets prices based on the total costs of producing, distributing, and
selling the product plus a fair rate of return for the company’s effort and risk.
IMEMARK
Week 7 Handout

A lot companies strive to become low-cost producers in order to set lower prices that bring about smaller
margins but greater sales and profits. Companies monitor costs cautiously because higher costs incurred
compared to their competitors may put them at a competitive disadvantage when competitors can afford to price
similar products at a lower charge due to lower costs incurred. On the contrary, there are also some companies
that opt to pay higher costs for added value and higher quality, thus higher prices and margins. With cost-based
pricing, companies manage the spread between costs and prices in order to gain profits from the customer value
being delivered.

Types of Costs
Before we move further to cost-based pricing techniques, let’s review the types of costs you’ve learned from
cost accounting, as shown in the diagram below.

Companies set prices that will at least cover the total production costs at a certain level of production. Given
that the level of production volume or output is imperative in evaluating costs, let’s take a look at the different
cost behaviors and cost-based pricing techniques at different levels of production output and as a function of
production experience.

Costs at Different Level of Production

Since total costs have both fixed and variable components in it, companies must evaluate how their costs behave
and vary with different levels of output. For a fixed-size plant, cost behavior shows a short-run average cost
curve (SRAC), as illustrated in the first graph (A) below. This sample graph shows the optimal cost per unit at
an output of 1,000 units per day. Producing less than this level will incur higher costs for the company given
that fixed costs will be spread over fewer units, hence a larger share of fixed cost per unit. On the other hand,
producing more than 1,000 units, exceeding usual capacity, can make the plant less efficient, thus incurring
higher costs in manpower, machine usage and maintenance, etc.
IMEMARK
Week 7 Handout

Alternatively, for different-size plants, the same concept applies, but for a long-run average cost curve
(LRAC), as shown in the second graph (B) above. If the same company needs to build additional plants with
higher capacities, supported by a stronger demand higher than 1,000 units, they can design different-size plants
using more efficient machinery and work arrangements. Each plant shows different SRAC curves, and in the
sample graph above, the optimal cost per unit will be at an output of 3,000 units per day with the most efficient
level of operations. Above this level, however, production would again be less efficient because of increasing
diseconomies of scale, having increasing organizational size and workload given too much output that may not
be effectively supported by demand.

Costs as a Function of Production Experience

As companies gain production experience, work becomes better organized and operations become more
efficient over time, hence achieving economies of scale with increasing production output. With this, average
costs decrease with accumulated production experience and will drop faster with increasing output and demand,
as illustrated in the sample graph below; this is called the experience curve or the learning curve.

The pricing strategy using the experience curve suggests setting prices lower than competitors to gain higher
sales, and as costs decrease with more experience, prices can gain more competitive advantage. However, it is
important to note that focusing solely on reducing costs can also bring about risks of showing off cheaper
product image. Moreover, if a company focuses too much on its own experience curve, they may not notice
competitors finding lower-cost alternatives that enable setting even lower prices. As such, this pricing strategy
entails religious monitoring of competitor activities in order to maintain market share and even attract more
demand.
IMEMARK
Week 7 Handout

Cost-Plus Pricing
After learning cost behaviors relative to production output and experience, we can now look into the “fair rate
of return” aspect of the cost-based pricing strategies. The simplest pricing method is cost-plus pricing or
markup pricing. This involves adding a standard markup to the cost of the product for profit or a desired
percentage return on sales.
In markup pricing, below formulas must be kept in mind: (Recall the concept of cost-volume-profit analysis to
make deeper sense of these formulas)
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 +
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆
𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 = (𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 % 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)(𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) = (𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) − (𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)
𝑤𝑤ℎ𝑒𝑒𝑒𝑒𝑒𝑒 (𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) = 𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺

Derived from the profit formula above is the markup price formula below:
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 =
(1 − 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 % 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆)
To illustrate further, let’s have a simple example, considering a baker with the following costs and expected
sales on brownies:
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = Php 15/𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = Php 500
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 100 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 % 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 (% 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀) = 20%
Php 500
𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 = Php 15 + = Php 20
100
Php 20
𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴𝑴 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 = = 𝐏𝐏𝐏𝐏𝐏𝐏 𝟐𝟐𝟐𝟐
(1 − 0.20)
Given that the baker wants a 20% markup on sales (or in other words, 20% margins), the computed selling price using the incurred
costs above will be at Php 25 per piece (i.e. 20% of the price at Php 25 = Php 5 is the return on sales or the margins/profit gained by
the baker).

Using the same markup price formula, if the baker sells brownies to a neighbourhood cafe, the cafe can impose its own markup price.
Hence, if the cafe wants to earn a 50% markup on sales / margins, the selling price of the brownies at the cafe will be at Php 50 (i.e.
50% of its cafe price at Php 50 = Php 25 is the cafe’s profit per piece). Given its cost of buying the brownies from the baker at Php 25,
the cafe price is equivalent to a markup on cost of 100% (Php 25 profit / Php 25 cost = profit is 100% of cost and 50% of sales). The
same concept and formula will apply if another reseller buys from the cafe and imposes its own markup or desired margins on the Php
50-cost of buying the brownies from the cafe. (In comparison with a large-scale company, the baker is like the manufacturer, the cafe
can be likened to a wholesaler, while the other reseller buying from the cafe can be likened to a retailer.)

Even though markup pricing ignores demand and competitor prices, a lot of sellers resort to this method to
simplify pricing by tying the price to cost. Moreover, similar sellers using the cost-plus pricing method
minimize price competition and make pricing fairer to both buyers and sellers, having a fair share of return on
investment without taking advantage of buyers when demand increases significantly.
IMEMARK
Week 7 Handout

Break-Even Analysis and Target Profit Pricing

Another cost-based pricing method is break-even pricing, with a variation called target return pricing. Using
this method, prices are set to break even or make a target return on the costs of making and marketing a product.
Using the same concept of break-even point in cost-volume-profit analysis, target return pricing can be
illustrated using the break-even chart, as shown below (i.e. total cost and revenues at different sales volume
level). Given the fixed costs as a constant, the total costs increasing with volume (summing up both fixed and
variable costs), and the sales revenue starting from zero and rising with volume sold, there will be an
intersecting point between the total sales revenue and total costs graphs, which is the break-even point, wherein
profit equates to zero (i.e. total sales revenue = total costs). To make a profit, the sales volume level must
exceed the break-even point; otherwise, losses will be incurred.

Let’s recall the break-even point concepts by reviewing the formulas below:
𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 = (𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) − (𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶)(𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆) − 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
Knowing that profit at break-even is zero, we derive the break-even point/volume formula below:
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩𝑩 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 (𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉) =
𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 − 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
Using these formulas, companies can evaluate different prices and estimate break-even volumes, probable
demand, and profits for each. At increasing prices, break-even volume decreases, yet demand may also
decrease, especially for price-elastic products. At the other extreme, if price is too low, the demand might not be
able to meet the high break-even point, still resulting to negative profits. As such, it’s important to set a price
that will not only meet target returns, but will also be competitive enough to attract the necessary demand to
actually achieve sustainable profits.

Competition-Based Pricing
Although it is important to use consumer perceptions of value and take into account total costs when setting
prices, it is also as important to assess the competitors’ pricing strategies for similar products because
consumers tend to compare prices and base their judgments of a product’s value on the competitors’ prices.
IMEMARK
Week 7 Handout

Competition-based pricing uses competitors’ strategies, costs, prices and market offerings in setting prices. The
diagram below shows the questions that need to be considered when assessing the competitors’ pricing
strategies.

In a nutshell, pricing strategies do not necessarily entail just following one method. Learning about the major
pricing strategies lays down the basic techniques and main considerations when deciding the optimal price for
products and services – i.e. customer value perceptions, costs, and competitor strategies. Keeping in mind all
three strategies will enable companies to succeed in their marketing efforts to create superior customer value
versus competitors and, in turn, build profitable customer relationships.

02 Other Internal and External

Considerations Affecting Price Decisions
Introduction
Aside from the major pricing strategies, companies
must also consider several additional internal and
external factors, which are enumerated in the
diagram.
IMEMARK
Week 7 Handout

Internal Considerations Affecting Price Decisions

Internal Factors Description

Overall Marketing Strategy, Given that price is only one element of the company’s broader marketing
Objectives and Mix strategy, the total marketing strategy and mix must be determined first
before setting prices.
• If overall marketing strategy is built around finding the right price-value
trade-off, pricing strategies require regular realignment to meet changes
in the pricing environment
• If target market and positioning are clearly defined, the marketing mix
strategy, including price, will be fairly straightforward
• Pricing can help accomplish various company objectives (e.g. attract
new customers, retain existing customers, prevent new entrants, stabilize
market, create brand excitement, help boost sales of other internal
products, etc.)
• To develop an effective integrated marketing mix program, align
price decisions with product design, distribution and promotion
decisions
• Target costing – start with an ideal selling price based on customer
value considerations, then target costs that will ensure that the price is
met (similar process as value-based pricing)
• Create non-price positions – deemphasize price, and differentiate the
marketing offer to make it worth a higher price

Organizational It is important to decide who should set prices, depending on the size and
Considerations type of company/organization.
• Top management - usually for small companies
• Divisional/product managers – usually for large companies
• Salespeople – usually for industrial markets
• Pricing departments – usually for industries where pricing is a key factor
(e.g. airlines, steel, railroads, oil companies)
• Other key people with influence on pricing: sales managers, production
managers, finance managers, accountants

External Considerations Affecting Price Decisions

External Factors Description

The Market and Demand Both consumer and business customers balance the price of a
product/service against the benefits of owning it; hence, it is important to
understand the price-demand relationship, esp. in different types of
markets.
• Pricing varies for different types of markets:
 Pure competition (uniform commodity with a single market
IMEMARK
Week 7 Handout

price) – no single buyer or seller has much effect on the market

price
 Monopolistic competition (range of prices) – sellers can
differentiate their offers for different customer segments
 Oligopolistic competition (few large sellers) – each seller is alert
and responsive to competitors’ pricing strategies, as price
becomes a major competitive tool
 Pure monopoly (one seller) – the seller may be a government
monopoly, a private regulated monopoly, or a private
unregulated monopoly
• Price changes lead to a different level of demand (price-demand
relationship) – price and demand are inversely related, i.e. the higher the
price, the lower the demand (as shown in the demand curve below)

• Price elasticity of demand – measures how responsive/sensitive demand

will be to price changes
 Elastic demand – demand changes greatly with a small change
in price; hence, sellers consider lowering prices
 Inelastic demand – demand is not so much affected by any price
change

The Economy Economic conditions and factors (e.g. boom/recession, inflation, interest
rates, etc.) greatly affect pricing strategies because of the considerations
below. Nowadays, consumers are more frugal and more value conscious;
thus, marketers are giving more emphasis on value-for-money pricing
strategies.
• Consumer spending
• Consumer perceptions of price and value
• Company costs of producing and selling a product

Other External Factors A company should also consider other factors in its external environment
when setting prices and know the impact of its prices on these parties.
• Resellers – set prices that will give resellers a fair profit, encourage their
support, and help them to sell effectively
• Government
• Social concerns/public policy
IMEMARK
Week 7 Handout

03 Pricing Approaches for Different

Pricing Situations
Introduction
Pricing decisions are affected by several complex factors within the company, in its environment, and even with
its competitors. As such, prices change over time, depending on product life cycles, changes in costs and
demand, competitive environment changes, and many more. Given such changing situations, companies must
decide when to initiate price changes and when to respond to them. Thus, we examine new product pricing,
product mix pricing, and price adjustment tactics in this section.

New Product Pricing Strategies

Pricing strategies change over time as products move through their life cycles. The introductory stage is the
most challenging, as companies launch a new product and set its price for the first time. With this task, two
broad strategies can be used, as presented in the diagram below.

Product Mix Pricing Strategies

Pricing strategies also change for related products in a particular product mix, as companies look for a set of
prices or a pricing structure that maximizes profits on the total product mix. This is another challenging feat
IMEMARK
Week 7 Handout

given different pricing situations, wherein various products have related demand and costs as well as different
degrees of competition. The diagram below shows five product mix pricing situations and the suitable
approaches for each.

Price Adjustment Strategies

Because of changing situations and various customer differences, it is inevitable for companies to adjust their
basic prices. On that note, the table below enumerates price adjustment tactics.

Pricing Strategy Description

Discount and Reduce prices to reward customer responses.

IMEMARK
Week 7 Handout

Allowance Pricing • Cash discount – for paying bills promptly

• Quantity discount – for buying large/bulk volumes
• Functional/trade discount – for trade-channel members performing selling,
storing, record keeping and other functions
• Seasonal discount – for buying merchandise/services out of season
• Trade-in allowances – for turning in an old item when buying a new one
• Promotional allowances – for dealers who participate in advertising and sales-
support programs

Segmented Pricing Set two or more prices to allow for differences in customers, products, and
location even though the difference in prices is not based on differences in costs.
The market must be segmentable, and segments must show different degrees of
demand, reflecting real differences in customers’ perceived value.
• Customer-segment pricing – different prices for the same product/service for
different customers (e.g. student & senior discounted rates)
• Product form pricing – different prices for different versions of the product (e.g.
economy vs. Business-class Airline tickets)
• Location-based pricing – different prices for different locations (e.g.
theatre/concert tickets for different seat locations)
• Time-based pricing – different prices by the season, month, day and even hour
(e.g. resort peak vs. off-peak rates)

Psychological Consider the psychology of prices, not simply the economics, because price says
Pricing something about the product.
• Price as a quality signal – when consumers lack the information or skill to
assess whether they are paying a good price, they use price to judge quality
• Reference price – prices that buyers carry in their minds and refer to when
looking at a product from current or past prices or based on the buying situation
• Pricing cues – when consumers don’t have the time, ability or inclination to
explore different alternatives, they rely on certain cues that signal whether a
price is high or low (e.g. sales signs, price-matching guarantees, loss-leader
pricing, etc.)

Promotional Pricing Temporarily price products below list price or cost to create buying excitement
and urgency, increasing short-run sales. Although this can help persuade
customer buying decisions, frequent use of this strategy can create pricing
confusions, tainted perceived brand value, or even “deal-prone” customers who
only buy when there is a sale/promo.
• Discounts – to increase sales and reduce inventories
• Special-event pricing – to draw more customers in certain seasons
• Limited-time offers – to create buying urgency, making buyers feel lucky to get a
deal (e.g. online flash sales)
• Cash rebates
• Low-interest financing
• Longer warranties
• Free maintenance
• Trade-ins
IMEMARK
Week 7 Handout

Geographical Pricing Set prices for customers located in different parts of the country or world,
deciding on how to charge shipping/delivery costs
• FOB-origin pricing (free on board) – customers are asked to pay for the actual
shipping costs
• Uniform-delivered pricing – the company charges the same price plus average
freight cost to all customers, regardless of location
• Zone pricing – the company sets up zones, wherein customers within a given
zone pay a single total price
• Basing-point pricing – the company designates a given city as a basing point,
wherein all customers are charged the freight cost from that city to the customer
location
• Freight-absorption pricing – the company absorbs all or part of the actual freight
charges to get the desired business and hold on to competitive markets

Dynamic and Online Adjust prices continually to meet the characteristics and needs of individual
Pricing customers and situations.
• Use online databases to gauge a specific shopper’s desires and compare
competitor prices in order to tailor offers to fit that shopper’s situation and
behavior
• Change prices according to changes in demand, costs or competitor pricing
• Customize offers and prices based on the specific characteristics and behaviors
of individual customers
• Adjust prices instantly based on supply, demand and store traffic factors- known
as surge pricing (e.g. Grab)
• Adjust prices according to market forces and consumer preferences, keeping in
mind the easy access of consumers to price comparisons and product reviews
because of the internet
• Devise strategies to deal with consumer practice of showrooming, where
consumers only use actual stores as showrooms, but resort to buying from online
resellers due to dynamic prices

International Pricing Decide what prices to set in different countries:

• Set a uniform world-wide price
• Adjust prices to reflect local market conditions and cost considerations (e.g.
economic & market conditions, competitive situations, laws & regulations, the
nature of the wholesaling & retailing system, consumer perceptions &
preferences, different marketing objectives, & selling strategies)
• Innovate products to sell at low prices to bottom-of-the-pyramid consumers in
untapped markets, giving them functional and aspirational products

Additional Source:

• Watch how Walmart, one of the biggest retailers in the US, successfully implements their loss leader
pricing strategy. Do you think this is a sustainable strategy?
https://www.youtube.com/watch?v=XduHK6XRxSo
IMEMARK
Week 7 Handout

04 Price Changes
Introduction
Even after developing their pricing structures and strategies, companies may still be faced with situations where
they need to initiate price changes or respond to their competitors’ price changes. Let’s look at the reasons
behind such price changes and others factors affecting and resulting to such decisions.

Initiating Price Changes

When companies initiate price changes, they must anticipate possible buyer and competitor reactions. The
diagram below shows and explains the reasons for initiating price changes as well as buyer and competitor
reactions to such.
IMEMARK
Week 7 Handout

Responding to Price Changes

Reversing the situation, if the company’s competitor had a price change, how should the company now
respond? In responding to competitor price changes, the company needs to consider first the following issues, as
enumerated in the diagram below.

There are several ways for a company to assess and respond to a competitor’s price change, depending on its
size, market share, resources, strategies, policies, etc. As an example, the diagram below shows alternative
strategies for a company in responding to a competitor’s price cut.

The first consideration is usually in terms of the effect on market share, sales and profits. If the competitor’s
price change will not hurt the company’s market share and profits badly, holding its current price and profits
may be the best move.
However, if there will be a significant negative impact, the company may opt to respond in any of the
enumerated ways in the diagram above. For a highly price sensitive market, reducing prices or launching a low-
price “fighter brand” may be effective in matching the competitor’s price cut. Then again, it is still important to
assess the impact on profit margins in the long run and to ensure upholding product quality even as it cuts
prices.
On the other hand, to preserve high margins and appease more value conscious customers, the company may
also resort to either raising the perceived value of its offer or improving product quality with an increased price
to move its product into a higher price-value position. Regardless of the action to be taken and the price to be
IMEMARK
Week 7 Handout

set, the ultimate goal of companies still remains at building strong and profitable customer relationships by
providing their expected value and satisfying their needs.

Additional Source:
• With the new tax law implemented in the Philippines, we see how external factors influence price
changes across different industries. This news clip will give us a glimpse of how companies and
consumers respond to and are affected by major price increases:
https://www.youtube.com/watch?v=0e-SE2AY-SQ

Week 7: Wrap-up and Looking Ahead

Wrap-up
As enumerated in this module, there are several strategies, considerations and factors that can be accounted for
when setting prices. In reality, there is no one pricing strategy that fits all or even a single company or product.
Pricing decisions are a combination of numerous strategies and factors that must be assessed in order to set a
price that will not only provide the expected customer value but also allow companies to gain value in return in
order to sustain its business through profitable customer relationships.
Pricing is indeed a key element given that this is the only element in the marketing mix bringing revenue to the
company. Then again, the main objective is still to create customer value; hence, setting prices, despite the
many considerations and possible issues, should never compromise the overall value that customers will
perceive- and this is why creating value for customers and building customer relationships still come first in the
Marketing Process before capturing value from customers through effective pricing strategies.

The Marketing Process

Looking Ahead
After learning one of the most technical concepts, we can again add a big chunk of puzzle piece to the
marketing plan we’re developing. Digging into the concept of pricing will enable a deeper understanding and a
more practical application of all the other marketing mix elements. This module will be very helpful not just for
your next progress report, but also for your Case Study 2.