BAM 201/MKT 002/004/010: Marketing Management

Module #9

Name: ______________________________________________________ Class number: _________

Section: ____________ Schedule: _______________________________ Date: ________________

Lesson title: Marketing Mix: Price References:

Principles of Marketing ; Cynthia A. Zarate; C&E Lesson Objectives: Publishing, Inc. 2014
Ed.
At the end of this module, I should be
able to: Kotler, P., Wong, V., Saunders, J., Armstrong, G. (n.d.)
1. Define price and enumerate its Principles of Marketing. Fourth European Edition, factor in
setting prices, Pearson Prentice Hall. approaches and strategies
2. Describe the different pricing Additional student support at techniques/strategies and
know www.pearsoned.co.uk/kotler (Pages. 661-712) Accessed how to use it on
March 15, 2021.
3. Appreciate the importance of https://www.google.com/url?sa=t&source=web&rct=j&url pricing
strategy to a http://library.wbi.ac.id/repository/212.pdf&ved=2ahUKEwi product/service
z_5O37sLvAhVKE6YKHRs0CDYQFjAIegQIGBAC&u=A
OvVaw1cSrGxiKCWcWE4JiXfLE3W

A. LESSON PREVIEW/REVIEW
1) Introduction
Welcome back! How was your exploration activity from our previous session? Did it shed
some light to the path that you would like to take in the future? Hoping that it did because that
knowledge is very useful in your forthcoming endeavor.
Last time, we introduced to you the first aspect of the Marketing Mix, which is the Product
and today, you will learn about the next aspect, which is the Pricing. Before, we will continue
learning the new topic; illustrate in an informative and detailed diagram the levels of product to
reminisce the lessons we had previously.

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CORE PRODUCT GENERIC PRODUCT EXPECTED

The basic product with Refers to the tangible PRODUCT
its intended purpose qualities of the product
The qualities of
the product plus
what the
consumers want
from the product
POTENTIAL PRODUCT AUGMENTED PRODUCT
Refers to both tangible Refers to the additional
factors of a product which
and intangible features of
sets it apart from
a product that may competitors. This is its brand
potentially become in the identity and image.
future

2) Activity 1: What I Know Chart

Write in the first column your answer for the second column. Answer the third column
after the discussion. You may use the back page to create a bigger chart.

What I Know Questions: What I Learned

The required payment to What is Price? Price is the equivalent
purchase a product or amount of money charged
service. in exchange for a product or
service.
The amount needed to What is Cost? Cost is the equivalent
produce a product or amount of money spent in
service. producing product/service.
By adding cost and profit How to set a Price? Setting a price requires the
a business want to achieve cost and achievable/allowed
or allows. profit, simply, cost plus mark
up.
B. MAIN LESSON
1) Activity 2: Read and understand the Content Notes

What is Price?

In the narrowest sense, price is the amount of money charged for a product or service. More broadly,
price is the sum of all the values that consumers exchange for the benefits of having or using the product
or service. Previously, pricing was the most important consideration for buyers. This is still true in poorer

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countries, among the least affluent, and with minorities. However, in recent decades, non-price elements
have become increasingly relevant in customer decision-making.

Historically, prices were established through negotiations between buyers and sellers. They would reach
an acceptable price through negotiation. Depending on their wants and bargaining skills, different
purchasers paid varying rates for the same things. Fixed price plans, on the other hand, are a relatively
new concept that emerged with the emergence of large-scale retailing at the end of the nineteenth
century.

The only aspect of the marketing mix that generates income is price; all other elements are costs. One of
the most adaptable aspects of the marketing mix is price. Price, unlike product characteristics and channel
obligations, is easily adjusted. At the same time, many marketers' primary concern is pricing and price
competition. Yet, many companies do not handle pricing well. One frequent problem is that companies are
too quick to cut prices to gain a sale rather than convincing buyers that their products or services are
worth a higher price. Other common mistakes are pricing that is too cost oriented rather than customer-
value oriented; prices that are not revised often enough to reflect market changes; pricing that does not
take the rest of the marketing mix into account; and prices that are not varied enough for different
products, market segments and buying occasions.

Price is simply the cost plus mark up. Cost refers to the amount of money spent in producing
goods/services or the amount charge to a product. Revenue is the average price charged to a customer
times the total number of units sold (i.e. price x units sold). Profit is revenue minus total costs.

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Types of Cost
1. Fixed costs are costs that do not change even if quantity or volume of production changes.
These costs are also called overhead costs. Example: Rent Expense
2. Variable costs are costs that change directly with changes in quantity or volume of production.
Example: Raw aterials
3. Total cost refers to the sum of a company’s fixed costs and variable costs under a given level
of production.

Pricing Objectives
1. Profit-oriented objectives call for profit generation. This may either be:
a. The target return objective refers to the pricing objective requiring certain level of profit.
b. The profit maximization objective refers to the pricing objective of seeking as much
profit as possible.
2. Sales-oriented objectives refer to those that will provide higher sales volumes which may be
achieved through any of the following:
a. Increasing sales volume requires an increase in sales volume for a given period.
b. Maintaining or increasing market share requires maintaining or increasing the
company’s market share.
3. A status quo-oriented objective requires maintaining the same prices for the company’s
products. This may be due to any of the following:
a. To stabilize prices;
b. To meet competition
c. To avoid competition

Internal Factors Affecting Pricing Decisions

1. Marketing Objectives
Before deciding on a pricing, the company must choose its product strategy. If the corporation
has carefully selected its target market and positioning, its marketing-mix plan, which includes price,
will be simple. For example, if Company A wanted to compete with European luxury cars in the higher-
income market, it would have to charge a premium. Lodging House-A and Lodging House-B market
themselves as motels that offer affordable accommodations for budget-conscious guests, a position
that necessitates a low pricing. As a result, historical market positioning decisions heavily influence
pricing strategy.
At the same time, the company may pursue other goals. Setting price is easier for a company
that has clearly established its goals. Survival, present profit maximization, market-share
maximization, and product-quality leadership are examples of shared objectives. When faced with
excess capacity, fierce competition, or shifting market demands, businesses make survival their
primary goal. To keep a plant running during periods of low demand, a corporation may set a low price

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in the hopes of raising prices when demand increases.

2. Marketing-mix Strategy
Price is only one of the marketing-mix tools that a company uses to achieve its marketing
objectives. To create a consistent and effective marketing program, price considerations must be linked
with product design, distribution, and promotion decisions. Pricing considerations may be influenced by
decisions made for other marketing-mix variables. Producers who rely on a large number of resellers to
support and advertise their products, for example, may need to include higher reseller margins in their
prices. The decision to position the product on high performance quality will mean that the seller must
charge a higher price to cover higher costs.
Pricing decisions are frequently made first, followed by marketing mix considerations. Price is a
critical product-positioning aspect that defines the market, competition, and design of the product. The
product characteristics that can be offered and the production costs that can be incurred are
determined by the targeted pricing. Target costing, a powerful strategic weapon, is used by many
businesses to support such price-positioning tactics. Target costing is the process of creating a new
product, calculating its cost, and then asking, "Can we sell it for that?" 'Rather, it begins with a target
cost and works backwards.'
3. Costs
The company wants to charge a price that covers all of its costs of manufacturing, distributing,
and selling the product while also providing a reasonable return on investment for its time and risk. The
expenses of a company's pricing strategy could be crucial. Many businesses strive to be among the
industry's top ten "low-cost producers." Lower-cost companies can set lower prices, resulting in higher
sales and profits.
4. Organizational Considerations
Management must decide who in the organization is in charge of pricing. Pricing is handled in
many ways by businesses. In tiny businesses, top management sets prices rather than marketing or
sales teams. Pricing is usually handled by divisional or product line managers in major corporations.
Salespeople in industrial markets may be permitted to negotiate with customers within defined pricing
ranges. Nonetheless, top management establishes pricing goals and rules, and it frequently authorizes
rates recommended by lower-level management or salespeople. Companies in industries where pricing
is important (such as aerospace, steel, and oil) may often include a pricing department to set the
optimal prices or assist others in doing so. This department reports to high management or the
marketing department. Sales managers, production managers, finance managers, and accountants are
among those who have a say in pricing.

External Factors Affecting Pricing Decisions

1. The Market and Demand
The market and demand set the upper limit of pricing, whereas costs set the lower limit. Both
individual and business buyers weigh the cost of a product or service against the advantages of having
it. As a result, before deciding on prices, the marketer must first comprehend the relationship between
price and demand for the product. Varied types of markets give sellers different levels of pricing
freedom. Economists distinguish four types of market, each with its own pricing issue:

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a. Pure Competition - is a marketing situation in which there are a large number of sellers of a
product which cannot be differentiated and, thus, no one firm has a significant influence on price.
Other prevailing conditions are ease of entry of new firms into the market and perfect market
information. Also referred to as Perfect Competition. Examples are agricultural products, such
as corn, wheat, and soybeans.

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b. Monopolistic Competition - is a type of imperfect competition such that there
are many producers competing against each other, but selling products that are differentiated
from one another and hence are not perfect substitutes. Examples are restaurants, clothing etc.
c. Oligopolistic Competition - a competitive situation in which there are only a few
sellers (of
products that can be differentiated but not to any great extent); each seller has a high percentage of the
market and cannot afford to ignore the actions of the others. Examples are airlines, Telecom, Mass
Media, etc.
d. Pure Monopoly - is a single supplier within a defined market or industry. The firm
effectively
is the industry in this situation. The nature of the market is that no close competitor or substitute exists.
A near pure monopoly occurs when one firm has a market share in excess of 90 percent. Examples are
the electric and water companies.

2. Competitors’ Costs, Prices, and Offers

Another external factor affecting the company’s pricing decisions is competitors’ costs and
prices, and possible competitor reactions to the company’s own pricing moves. A consumer who is
considering the purchase of a Brand A camera will evaluate Brand A’s price and value against the
prices and values of comparable products made by Brand B, C, D, and others. In addition, the
company’s pricing strategy may affect the nature of the competition it faces. If Brand A follows a
highprice, high-margin strategy, it may attract competition. A low price, low-margin strategy, however,
may stop competitors or drive them out of the market.
Brand A needs to benchmark its costs against its competitors’ costs to learn whether it is
operating at a cost advantage or disadvantage. It also needs to learn the price and quality of each
competitor’s offer. Once Brand is aware of competitors’ prices and offers, it can use them as a starting
point for its own pricing. If Brand A’s cameras are like B’s camera which is high end, it will have to price
close to Brand B or lose sales. If Brand A’s cameras are not as good as Brand B’s, the firm will not be
able to charge as much. If Brand A’s products are better than Brand B’s, it can charge more. Basically,
Brand A will use price to position its offer relative to the competition.

3. Other External Factors

When setting prices, the company must also consider other factors in its external environment.
Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors such
as boom or recession, inflation and interest rates affect pricing decisions because they affect both the
costs of producing a product and consumer perception of the product’s price and value. The company
must also consider what impact its prices will have on other parties in its environment. How will
resellers react to various prices? The company should set prices that give resellers a fair profit,
encourage their support and help them to sell the product effectively. The government is another
important external influence on pricing decisions. Finally, social concerns may have to be considered.
In setting prices, a 13 company’s short-term sales, market share and profit goals may have to be
tempered by broader societal considerations.

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General Pricing Approaches/Strategies

Pricing Strategies refer to the processes and methodologies businesses use to set prices for their
products and services. If pricing is how much you charge for your products, then product pricing strategy
is how you determine what that amount should be.
The benefits of pricing approaches/strategies are: (1) ability to compare different prices (2)
meet customer expectations (3) portrays value (4) convinces customers to buy and (5) transform the
perceived value of your products or services in the long run. There are different pricing strategies to
choose from but some of the more common ones include:

1. Value-Based Pricing - setting your prices according to what consumers think your product is worth.
2. Competitive Pricing - setting your prices based on what the competition is charging
3. Price Skimming - setting your prices as high as the market will possibly tolerate and then lower them
over time, you will be using the price skimming strategy. The goal is to skim the top off the market and
the lower prices to reach everyone else. With the right product it can work, but you should be very
cautious using it.
4. Cost-Plus Pricing - This is one of the simplest pricing strategies. You just take the product production
cost and add a certain percentage to it. While simple, it is less than ideal for anything but physical
products.
5. Penetration Pricing - is a marketing strategy used by businesses to attract customers to a new product
or service by offering a lower price during its initial offering. The lower price helps a new product or
service penetrate the market and attract customers away from competitors.
6. Psychological Pricing - is the practice of setting prices slightly lower than a whole number. This
practice is based on the belief that customers do not round up these prices, and so will treat them as
lower prices than they really are.

2) Activity 3: Skill-building Activities

The following case study application is also found in Burnett, pp. 259-260. Read it and discuss with
your classmates the questions at the end of the case.

Case Application:United Techtronics

United Techtronics faced a major pricing decision with respect to its new video screen
television."We're really excited here at United Techtronics," exclaimed Roy Cowing, founder and
president of United Techtronics. "We've made a most significant technological breakthrough in large
screen, video television systems." He went on to explain that the marketing plan for this product
was now his major area of concern and that what price to charge was the marketing question that
was giving him the most difficulty. Cowing founded United Techtronics (UT) in Boston in 1959. Prior
to that time, Cowing had been an associate professor of electrical engineering at MIT. Cowing

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founded UT to manufacture and market products making use of some of the electronic inventions
he had developed while at MIT. Sales were made mostly to the space program and the military.
For a number of years, Cowing had been trying to reduce the company's dependency on
government sales. One of the diversification projects that he had committed research and
development monies to was the so-called video screen project. The objective of this project was to
develop a system whereby a television picture could be displayed on a screen as big as eight to ten
feet diagonally. One of UT's engineers made the necessary breakthrough and developed working
prototypes. Up to that point, UT had invested USD 600,000 in the project. Extra-large television
systems were not new. There were a number of companies who sold such systems both to the
consumer and commercial (tavern restaurants, and so on) markets. Most current systems made
use of a special magnifying screen. The result of this process is that the final picture lacked much of
the brightness of the original small screen. As a result, the picture had to be viewed in a darkened
room. There were some other video systems that did not use the magnifying process.
These systems used special tubes, but they also suffered from a lack of brightness.
UT had developed a system that was bright enough to be viewed in regular daylight on a screen up
to 10 feet diagonally. Cowing was unwilling to discuss how this was accomplished. He would only
say that a patent protected the process and that he thought it would take at least two to three years
for any competitor to duplicate the results of the system.
A number of large and small companies were active in this area. Admiral, General Electric,
RCA, Zenith, and Sony were all thought to be working on developing large-screen systems directed
at the consumer market. Sony was rumored to be ready to introduce a 60 inch or 152.4 centimeter
diagonal screen system that would retail for about USD 2,500. A number of small companies were
already producing systems. Advent Corporation, a small New England company, claimed to have
sold 4,000 84 inch or 203.2 centimeter diagonal units at prices from USD 1,500 to USD 2,500.
Cowing was adamant that none of these systems gave as bright a picture as UT's, He estimated
that about 10,000 large screen systems were sold in 1996. Cowing expected about 50 per cent of
the suggested retail-selling price to go for wholesaler and retailer margins. He expected that UT's
direct manufacturing costs would vary depending on the volume produced. He expected direct labor
costs to fall at higher production volumes due to the increased automation of the process and
improved worker skills.
Material costs were expected to fall due to less waste due to automation. The equipment costs
necessary to automate the product process were USD 70,000 to produce in the 0-5,000 unit range;
an additional USD 50,000 to produce in the 5,001-10,000 unit range; and an additional USD 40,000
to produce in the 10,001-20,000 unit range. The useful life of this equipment was put at five years.
Cowing was sure that production costs were substantially below those of current competitors
including Sony. Such was the magnitude of UT's technological breakthrough. Cowing was unwilling
to produce over 20,000 units a year in the first few years due to the limited cash resources of the
company to support inventories and so on. Cowing wanted to establish a position in the consumer
market for his product. He felt that the long-run potential was greater there than in the commercial
market. With this end in mind, he hired a small economic research-consulting firm to undertake a
consumer study to determine the likely reaction to alternative retail prices for the system. These
consultants took extensive pricing histories of competitive products. They concluded that: "UT's
video screen system would be highly price-elastic across a range of prices from USD 500 to USD

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5,000 both in a primary and secondary demand sense." They went on to estimate the price
elasticity of demand in this range to be between 4.0 and 6.5.
Mr. Cowing was considering a number or alternative suggested retail prices. He said: "I can see
arguments for pricing anywhere from above Advent to substantially below Muntz's lowest price” A
decision on pricing was needed soon.

Guided Questions:
➢ Should penetration pricing be used or would skimming be better? Support your answer.
Since Cowing concluded that production would have a lower cost, and considering that other
companies have already started selling similar products, penetration pricing will be more useful in this
situation. Using the skimming will be a bit disadvantageous since consumers have already experienced
the other company’s products and selling a more expensive of similar product will only take the
customers away from the UT. However, using penetration pricing, UT can establish a firmer ground on
the market since they have lower price range with a product of similar features and effectivity.

➢ What should be the base price for the new product?

Considering the other companies’ prices, and using the penetration pricing, the price range can
play within USD 1500 to USD 2000. This is similar with the small New England company, however, UT
has a better branding and will attract customers faster and easily.

3) Activity 3: Assessment
Direction: Encircle the correct answer.

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1. Which pricing strategy is where you add a percentage onto what you originally pay for the product?
A) Loss Leader Pricing B) Price Skimming C) Cost Plus Pricing D) Penetration Pricing 2.
2. Which pricing strategies would be appropriate for an established business trying to win customers
from competitors?
A) Price Skimming B) Cost Plus Pricing C) Value Based Pricing D) Market Penetration
3. When demand for your product is high and supply is low, you can command a high price. Do you
agree or not? Choose among the choices below:
A) No, I do not agree since this would result to a loss.
B) No, since it does not give any advantage to the sellers.
C) Yes, I totally agree since this would create massive profits
D) Yes, because since it is an advantage particularly to the buyers.
4. When setting the price for a good, a service, or an idea, which of the following is not a factor to
consider?
A) Costs B) Competition C) Market Demand D) Location
5. It sets a low initial price to infiltrate the market quickly and deeply to attract many buyers quickly
and win a large market share.
A) Market and demand
B) Market-skimming pricing
C) Market-penetration pricing
D) Competition-based pricing

TRUE or FALSE: Write True if the statement is correct and write False if it is incorrect.
__True_ 1. Before setting price, the company must decide on its strategy for the product.
__True _ 2. Price is the only element in the marketing mix that produces revenue; all other elements
represent costs.
__True_ 3. Internal factors affecting pricing include the company’s marketing objectives, marketing-mix
strategy, costs, and organization.
_False_ 4. Price the only marketing-mix tools that a company uses to achieve its marketing objectives.
__True_ 5. Pricing decisions are affected by external factors such as the nature of the organization and
its costs.

C. Reflection

1. I have learned that there are several factors to consider when it comes to placing a price on a product or
service, not only cost and the profit that you want to get.

2. I have realized that in creating a price for a product or service, there should be several steps to consider
and strategies to use depending on the situation and the kind/nature of business that you have.

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3. I will apply what I have learned not only when I become a businessman but also as a buyer. Knowing
these will help me distinguish the best product to buy while comparing it with other similar products with
different prices.

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