ENTREPRENEURIAL MIND (MIDTERM)

BUSINESS ORGANIZATION- an entity formed for the purpose of carrying on commercial enterprise.
Such an organization is predicated on systems of law governing contract and exchange, property rights,
and incorporation.
Forms of Business Organization

One of the first decisions that you’ll have to make as a business owners is how your business should be
structured. You need to know the advantages and disadvantages of each of the different forms of
business organization to make sure you’re making the right decision for your new business.

All businesses must adopt some legal configuration that defines the rights and liabilities of participants in
the business’s ownership, control, personal liability, lifespan and financial structure. The form of business
determines which income tax return form to file and the company’s and owners legal liabilities.

This is a big decision that has long-term implications, so if you’re unsure of which form of business is best
for your company, you’ll want to consult a professional. Luckily, there are several business counselors
and centers across Missouri offering free assistance in forming a business that are knowledgeable and
ready to help.

When you’re forming your new business, you will want to take into account the following:

 Your (practical) vision regarding the size and nature of your business.
 The level of control you wish to have.
 The level of “structure” you are willing to deal with.
 The business’s vulnerability to lawsuits.
 Tax implications of the different organizational structures.
 Expected profit (or loss) of the business.

Sole proprietorship

The vast majority of small businesses start out as sole proprietorships. These businesses are owned by
one person, usually, the individual who has day-to-day responsibility for running the business. Sole
proprietors can be independent contractors, freelancers or home-based businesses.

SOLE PROPRIETORSHIP ADVANTAGES

 Owner receives all the profits

 Profits are taxed only once
 Owner makes all decisions and is in complete control of the company (could also be a
disadvantage)
 Easiest and least expensive form of ownership to organize

SOLE PROPRIETORSHIP DISADVANTAGES

 Unlimited liability if anything happens in the business. Your personal assets are at risk (including
your home in Missouri)
 Limited in raising funds and may have to acquire consumer loans
 No separate legal status

Tip: When looking at setting up a sole proprietorship, assess what type of liability you have. If you’re
selling advice or services, you may need an errors and omissions insurance policy to cover yourself
against claims for negligence. Determine what you have to lose. Do you own a home or savings account?
Your personal assets could be at risk in the case of a lawsuit.

Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law
does not distinguish between the business and its owners. The partners should have a legal agreement
that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future
partners will be admitted to the partnership, how partners can be bought out or what steps will be taken
to dissolve the partnership when needed

Disclaimer: If you’re establishing a partnership, it is extremely important to make sure everything is

outlined in case things go sour, especially in the case of starting a business with a loved one or friend.
Seek legal advice to create a partnership operating agreement to hash out all business decision
possibilities including succession or exit plans. There are several legal services in Missouri ready to assist
you every step of the way.
PARTNERSHIP ADVANTAGES 

 Easy to establish (with the exception of developing a partnership agreement)

 Separate legal status to give liability protection
 Profits taxed only once
 Partners may have complementary skills

PARTNERSHIP DISADVANTAGES

 Partners are jointly and individually liable for the actions of the other partners
 Profits must be shared with the partners
 Divided decision making
 Business can suffer if the detailed partnership agreement is not in place

Corporations

A corporation is considered by law to be a unique entity, separate from those who own it. A corporation
can be taxed, sued and enter into contractual agreements. The corporation has a life of its own and does
not dissolve when ownership changes.

There are three types of corporations: C-corporation, S-corporation and Limited Liability Company.

C-corporation

A C-corporation is a corporation that is taxed separately from its owners. It gives the owners limited
liability encouraging more risk-taking and potential investment.

C-CORPORATION ADVANTAGES

 Limited liability
 Transfer of ownership, shareholders can sell their shares
 Capital is easier to raise through the sale of stock
 Company paid fringe benefits
 Tax benefits

C-CORPORATION DISADVANTAGES

Double taxation (corporation and shareholder earnings taxed)

Can be costly to form

More administrative duties - required by law to have annual meetings, notify stockholders of the meeting,
must keep minutes of meetings and turn in

Pay corporate taxes at a different time than other forms of business

S-Corporation

An s corporation also known as subchapter S-corporation offers limited liability to the owners. S-
corporations do not pay income taxes rather the earnings and profits are treated as distributions. The
shareholders must report their income on their individual income tax returns.

S-CORPORATION ADVANTAGES

 Limited liability
 Avoids double taxation
 Profits taxed only once
 Capital is easier to raise through the sale of stock
 Transfer of ownership

S-CORPORATION DISADVANTAGES

 Can be costly to form

 Stockholders limited to individuals, estates or trustees
 Required administrative duties
 Cannot provide company paid fringe benefits
 Stockholders are limited to citizens or resident aliens of the United States
Registration with Local Government Units and other Agencies

Whether you’ve chosen to be a sole proprietorship, partnership or corporation, you will need
to sign your business up at many government agencies such as the local government unit
(“LGU”), the Social Security System (“SSS”), the BIR and others. What follows is a guide
through many of the typical licenses and permits needed to run a business.

A. Local Government Units

1. Barangay-A barangay clearance is a pre-requisite

for the issuance of the local government business permit.

2. City Government or Municipal Government-All businesses are required to register their business with
the City Government or the Municipal Government. Unfortunately, the procedure for the registration may
differ depending on the city or municipality concerned. Below is a list of the general requirements needed
to secure a Business/Mayor’s permit.

Requirements:

a) Barangay Clearance

b) Community Tax Certificate with Gross Receipt

c) Financial Statement (Partnerships and Corporations)

d) BIR Clearance

e) SSS Clearance

Additional Requirements for New Businesses:

a) DTI Registration (Sole Proprietorships)

b) SEC Registration (Partnerships and Corporation)

 B. Bureau of Internal Revenue (BIR)

The corporation is required to register with the BIR for the issuance of the TIN as well as the issuance of
the Authority to Print (for receipts) and the registration of the new set of the books of accounts that the
corporation will be using.

BIR Procedure: Application of Tax Identification Number (TIN), Authority to Print (ATP) and
Registration of Books of Accounts

Issuance of TIN

Documentary Requirements:

1. Accomplished BIR Form 1903

2. Copy of SEC Registration and Articles of Incorporation

3. Copy of Mayor’s Business Permit or duly received application for Mayor’s permit, if the former is still in
process with the LGU

4. Other documents, if applicable:

a. Contract of Lease

b. Certificate of Authority of Barangay for Micro Business Enterprise

c. Franchise Agreement

d. License to do Business in the Philippines, in case of resident foreign corporation

e. Pr oof of registration/Permit to Operate with BOI , Subic Bay Metr opolitan Authority ( “SBMA”),
Philippine Bases Conv ersion and Development A uthority (“BCDA”), PEZA.

For new application of ATP

Documentary Requirements:

1. BIR Form 1906

2. Job Order

3. Final and Clear Sample of Principal and Supplementary Receipts/Invoices

For the registration of the Books of Accounts

Documentary Requirements:

New set of books of accounts

Procedure:

a) Accomplish BIR Form 1903 and submit the same together with the documentary requirements to the
Revenue District Office (“RDO”) having jurisdiction over the place where the head office and branch,
respectively.

b) Pay the Annual Registration Fee (P500.00) at the Authorized Agent Banks (AABs) of the concerned
RDO.

c) Pay Documentary Stamp Tax (DST) (loose DST / BIR Form 2000* for DST on Contract of Lease, etc.).
Present proofs of payment.

d) Submit requirements for ATP and registration of books of accounts.

e) Attend the taxpayer’s initial briefing to be conducted by the RDO concerned for new registrants in
order to apprise them of their rights and duties/responsibilities.
f) The RDO shall then issue the Certificate of Registration (Form 2303) together with the “Ask for
Receipt” notice, Authority to Print and Books of Accounts.

Note:

1. Corporations shall accomplish and file the application on or before the commencement of the business,
or within 30 calendar days from the issuance of the Mayor’s Permit/Professional Tax Receipt (“PTR”) by
the LGU or Certificate of Registration issued by the SEC whichever comes earlier.

2. Where DST is required to be paid within 5 days after the close of the month, BIR registration shall be
done on or before payment of DST becomes due.

C. Other Government Mandated Benefits

Since the corporation will be hiring workers or employees, it is required under the law to register the
corporation as an employer, and register its employees, with the Social Security System, Home Mutual
Development Fund and Philippine Health Insurance Corporation.

FINANCING THE VENTURE INTRODUCTION:  

project need to have substantial start-up capital requirement nor does one have to be a millionaire to
start an entrepreneurial business endeavor.
*Capital Requirement 1.Fixed Capital - refers to the money needed to purchase fixed assets or
capital goods.
2.Working Capital - is needed to fund the day- to-day operations of the business.
3.Growth Capital - is not related to daily or seasonal requirements for funds of the business. It is
needed when an existing business is set to expand, diversity, or change its directions.
*Sources of Capital Internal fund sources generally refers to the funds which are owned by the
entrepreneur himself or the
government or by the law to extend financial assistance or other forms of support services to the
business and industry.
*Owners Equity In a corporation, the contribution of the owner to the capital of the business is called
equity and is evidenced by the issuance of stockholders certificate issued by the corporation.
*Long-term Borrowings Refer to organizations whose main businesses are generally meant for
providing such form of financial assistance.
FORMS 0F FUND SOURCES: 1.Mortgage- form of fund generation by way of pledging a designated
property as security or collateral for the loan. 2.Bonds- forms of indebtedness of the issuing company
that promises a fixed amount of interest to the bondholders upon maturity or call by its holders. 3.Long-
term commercial papers- are commercial documents issued by large companies with credible track
records.
* Short-term creditors - take the form of financiers on a short-term basis lasting to one year or less. -
serve as a stand-by credit facility to the entrepreneurs, which can be tapped as needed.
Types of creditors: 1.Commercial Banks - are duty-bound to provide both short- term and long-term
financing to any viable business project. 2.Merchandise Suppliers - the company’s inventory or stock can
be procured either through cash or credit terms.
3.Credit card companies - is the most convenient, yet the most expensive loan terms. It is actually
one of the most overlooked avenues in obtaining start-up capital.
4.Capital equipment suppliers - desire to sell equipment, suppliers will often make every favorable
term available even to new companies. The sellers retains ownership or title until the last installment
payment is made and received.
5.Leasing and companies -they make possible the procurement of capital items or equipment for the
company.
6.Recievable factors -specialized organizations like credit and collection companies or even or even
individuals who take risk of buying receivables and discount rates.
7.Deferral of payables in general - entrepreneurs should not overlook the fact that in crisis periods,
some of the employees might be willing to defer portions of their salary or other benefits either as
gesture of solidarity, loyalty, fellowship, or practical measures to avoid being laid-off.
*Venture capital companies  - refer to private and for profit organizations that provide funds to new
business ventures by way of purchasing equity positions in new or young businesses believed to have
potentials to produce maximum returns within short period of time.
Other Sources: 1.Lending investors - small business organizations duly licensed by Bangko Sentral
ng Pilipinas (BSP) to provide quick financing with less paper works as compared to commercial lending
sources like the banks.
2.Government institutions - are special government financing packages meant for entrepreneurs in
need of funds as seed capital as assistance to those in dire need of funds.
3.Non-Government Organization (NGOs) - mandates or major programs are really meant for
upcoming small- scale entrepreneurs and providing assistance to the unprivileged.
4.Political Sources - politicians are philanthropist and are, therefore, in a position to provide grants of
financial assistance for self employment and livelihood projects without bothering to pay later.
5.Friends and relatives. - they are abound or are just around willing to be tapped. 6.Purchase order
financing - also called PO financing, this scheme can be arranged with commercial banks or financing
institutions like Technology and Livelihood Resource Center.
7.Employees - nobody has a greater stake in the health of the company other than the
entrepreneur/owner and the employee.
8.Usurers - usurers have helped a thousand and more small entrepreneurs mostly in sari-sari store
business to bankroll their daily financial needs.
*Angel Investors Entrepreneurs may start-up capital with private investors called “angels” as
referred to by the entrepreneurs magazine.
*The stock market and the IPO - entrepreneurship is not purely new venture creation, but also
connotes expansion of efforts and through some innovations. When ownership decided over having loans
or borrowings, availing of the benefits of the stock market via initial public offering can be explored.
What is IPO  it means going through the stock market system under the auspices of the Philippine
Stocks Exchange (PSE).
THE IPO PROCESS: 1.The entire process can take as little as six months to complete, but some
companies take eighteen months or longer to go public. 2.Minimum of one and preferably two or more
officers of the corporation will spend much of their time interfacing their attorneys, auditors etc.
3.As the effective approaches, roadshows as a means of showing off the company and improving the
potential price performance in the after market. 4.During the process, the firm’s owner and managers will
be answering questions.
The risk in B. Managing the liquidity resulting from the company sale become burden for some.A. The
entrepreneur may lose some focus and direction in life, focus that had been provided by owning a
company. going public
Borrowing from the banks The banks exist to lend money and this is up for entrepreneurs to grab.
The C’s of credit 1.Collateral – all formal sources of funding generally require a collateral in the form of
real estate, equipment, or any other form saleable property. 2.Capacity – refers to the capacity of the
entrepreneur or borrower to pay the loan.
3.Character – more of the personal standing of the entrepreneur or borrower in his community, as well
as his own personal capability. 4.Contract – each loan or borrowings transaction has to have contract or
agreement defining the obligations of the contracting parties.
5.Conditions – forming part of the major content of the contract or the terms and conditions set forth
in the contract or agreement.
On using someone It is conventional for prospective entrepreneur to shell out personal capital in
putting up the business, rather than borrowing from someone else.else’s money
“ if the G. Greenbusiness is successful, you will need your cash later to help it grow and expand. If it
is not successful you will have some cash left to start another business”
Production of Goods & Services

Factors of Production

An economic concept that refers to the inputs needed to produce goods and services

What are Factors of Production?

Factors of production is an economic concept that refers to the inputs needed to produce goods and
services. The factors are land, labor, capital, and entrepreneurship. The four factors consist of resources
required to create a good or service, which is measured by a country’s gross domestic product (GDP).

In factors of production, the word “production” refers to a process of transforming inputs into outputs,
which are finished products that can be sold as a good or service. In order to do so, the input will go
through a production process and various stages to reach the hands of consumers.

Land as a Factor of Production

Land is a broad term that includes all the natural resources that can be found on land, such as oil, gold,
wood, water, and vegetation. Natural resources can be divided into renewable and non-renewable
resources.

 Renewable resources are resources that can be replenished, such as water, vegetation, wind
energy, and solar energy.
 Non-renewable resources consist of resources that can be depleted in supply, such as oil,
coal, and natural gas.

All resources, whether it is renewable or non-renewable, can be used as inputs in production in order to
produce a good or service. The income that comes from using land and its natural resources is referred
to as rent.

Besides using its natural resources, land can also be utilized for various purposes, such as agriculture,
residential housing, or commercial buildings. However, land differs from the other factors of production
because some natural resources are limited in quantity, so its supply cannot be increased with demand.

Labor as a Factor of Production

Labor as a factor of production refers to the effort that individuals exert when they produce a good or
service. For example, an artist producing a painting or an author writing a book. Labor itself includes all
types of labor performed for an economic reward, such as mental and physical exertion. The value of
labor also depends on human capital, which is determined by the individual’s skills, training, education,
and productivity.

Productivity is measured by the amount of output someone can produce in each hour of work. The
income that comes from labor is referred to as wages. Note that work performed by an individual purely
for his/her personal interest is not considered to be labor in an economic context.

The following are several characteristics of labor in terms of being a factor of production:

 First, labor is considered to be heterogeneous, which refers to the idea of how the efficiency
and quality of work are different for each person. It differs because it depends on an individual’s
unique skills, knowledge, motivation, work environment, and work satisfaction.
 Additionally, labor is also perishable in nature, which means that labor cannot be stored or
saved up. If an employee does not work a shift today, the time that is lost today cannot be
recovered by working another day.
 Also, another characteristic of labor is that it is strongly associated with human efforts. It
means that there are factors that play an important role in labor, such as the flexibility of work
schedules, fair treatment of employees, and safe working conditions.

Capital as a Factor of Production

Capital, or capital goods, as a factor of production, refers to the money that is used to purchase items
that are used to produce goods and services. For example, a company that purchases a factory to
produce goods or a truck that is purchased to do construction are considered to be capital goods.

Other examples of capital goods include computers, machines, properties, equipment, and commercial
buildings. They are all considered to be capital goods because they are used in a production process and
contribute to the productivity of work. The income that comes from capital is referred to as interest.

Below are several defining characteristics of capital as a factor of production:

 Capital is different from the first two factors because it is created by humans. For example,
capital goods like machines and equipment are created by individuals, unlike land and natural
resources.
 Additionally, capital is also a factor that can last a long time, but it depreciates in value over
time. For example, a building is a capital good that can endure for a long period of time, but its
value will diminish as the building gets older.
 Capital is also considered to be mobile because it can be transported to different places, such as
computers and other equipment.

Entrepreneurship as a Factor of Production

Entrepreneurship as a factor of production is a combination of the other three factors. Entrepreneurs use
land, labor, and capital in order to produce a good or service for consumers.
 Entrepreneurship is involved with establishing innovative ideas and putting that into action by planning
and organizing production. Entrepreneurs are important because they are the ones taking the risk of the
business and identifying potential opportunities. The income that entrepreneurs earn is called profit.

Cost of production is all the costs that a company incurs when offering a service or manufacturing a
product. It comprises various expenses, including the cost of materials, employee wages, factory
maintenance and shipping costs.

MAKING PRODUCTION, PLANNING AND PRODUCIN

Are you a manufacturing firm? If so, you will need a production plan to ensure that you have all the
inputs for production ready at the right time to meet your product demand.

Production planning is “the administrative process that takes place within a manufacturing business and
that involves making sure that sufficient raw materials, staff and other necessary items are procured and
ready to create finished products according to the schedule specified”, as defined by the Business
Dictionary.

A production plan serves as a guide for your company’s production activities. It establishes and
sequences activities which must be carried out to achieve a production target, so that all staff involved
are aware of who needs to do what, when, where and how.

A production plan will help you meet product demand while minimizing production time and cost by
improving process flow, reducing the waiting time between operations, and optimizing use of plant,
equipment and inventory. In order to do this, you must align your production plan to your business
strategy and business plan, and support production planning by coordinating with other departments,
such as procurement, finance and marketing.

The diagram above shows the production planning and control process divided in five steps:

 Step 1: forecast the demand of your product

 Step 2: determine potential options for production
 Step 3: choose the option for production that use the combination of resources more effectively
 Step 4: monitor and control
 Step 5: Adjust

STEP 1. Forecast the demand of your product

Estimate your demand, so that you know how many products you need to produce during a specific time
period. You may have already some confirmed orders for the next couple of month, but on top of that,
you need to predict how many more may come.

Different methods exist to forecast your product demand. A traditional technique to estimate product
demand is based on historical information (e.g. orders placed by your customers in the past). While this
is a very common method, you need to consider external and internal events in your business
environment that could alter past patterns. For example, new market trends, a slowdown in the
economy, or a new marketing campaign that could increase or decrease your product demand compared
to what happened in the past.

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STEP 2. Determine potential options for production

Determine the different production options available to meet the forecasted demand of your product. For
example, if you want to produce 100 shirts, you need to use a certain number of machines, human
resources, materials, and time. Different combinations of these inputs can lead to different production
times and costs.

a. Start by mapping all the steps of your production process. When doing so, take into account if
tasks are sequenced or dependent on other tasks, or if they happen simultaneously or independently.
Below is an example of how a simple process-mapping flowchart could look. Each box represents a task
 of your production process. The map of the production process will be different and unique to each
company. Think about how to improve process flow by eliminating bottlenecks.

b. Determine the resources needed to complete each task involved in your production
process.
Look at how different combination of resources lead to different production times and costs:

 Human Resources. Determine the number of staff that will be involved in each phase of the production
process, their availability, and the cost. Make sure their time is well utilized.
 Machinery and Equipment. Identify the machines needed and their availability, including any
maintenance or replacement that may be needed.
 Materials. Make a list of all the materials needed for production and how you obtain them. Assess the
reliability of your suppliers, including delivery time. Having materials available when needed is crucial for
the production process.
 Inventory. It is important that you consider how to optimize your inventory. Keeping a large inventory is
expensive, but keeping a low inventory is risky if demand fluctuates on a regular basis. Having a good
inventory control system in place can help your firm accommodate variations in demand and mitigate
possible problems or delays that may occur during the production process. For more information about how
to manage your inventory, check out the video.
STEP 3. Choose the option for production that uses the combination of resources more
effectively
Compare the cost and time of each potential production option and choose the option that uses the most
efficient combination of resources and that allows you to meet product demand. The chosen option
should maximize the operational capacity of your firm.

Always make sure you can cover the costs involved in the production process (purchase of materials,
office rent, payment of staff salary, leasing, etc.)

You need to share your production plan with all the departments and staff that contribute or interact with
the production process, including human resources, procurement, finances, marketing, etc. If everybody
knows what to do, and what materials and equipment should be used for each task of the production
process, operations will be smoother.

STEP 4. Monitor and control

You want to ensure that your plan is working in the way it is intended. Monitoring and controlling is about
comparing what is happening with what should be happening. Having a control system in place helps you
detect problems as soon as they occur, allowing you more time to correct before it is too late.

STEP 5. Adjust
Be prepared to adjust the plan if needed. The production plan needs to be flexible to accommodate
changes in customers’ demand (e.g. an important order that gets cancelled). Also, you need to take into
account possible risks that may arise during the production process (e.g. a machine breaks, a worker
gets sick or a supplier does not deliver on time) and have a risk mitigation plan.

Inventory is the value of materials and goods held by an organization (1) to support production (raw
materials, subassemblies, work in process), (2) for support activities (repair, maintenance, consumables),
or (3) for sale or customer service (merchandise, finished goods, spare parts), as defined by the Business
Dictionary.

Inventory optimization is a method of balancing capital investment constraints or objectives and service-
level goals over a large assortment of stock-keeping units while taking demand and supply volatility into
account.

Inventory Management : How to Manage Small Business Inventory

Running out or having excessive stock are bad for your bottom line. Learn inventory management
techniques to have the right products when you need them.
 It’s important to evaluate your business on a regular basis to ensure that you’re on track to succeed.
One of the most integral parts of your business is inventory management. Marketing Management
Philosophies – 5 Marketing Concepts
Marketing concepts or marketing management philosophies are the philosophies used by the businesses
to guide their marketing efforts.

In simple terms, marketing concepts relate to the philosophy a business use to identify and fulfil the

needs of its customers, benefiting both the customer and the company.

Same philosophy cannot result in a gain for every business, hence different businesses use different
marketing concepts (also called marketing management philosophies).

Marketing concepts are driven by clear objectives like cost efficiency, product quality, customer’s need
fulfilment etc.

Marketing Management Philosophies

There are five marketing concepts. A company should choose the right one according to their and their
customers’ needs.

1. Production Concept
2. Product Concept
3. Selling Concept
4. Marketing Concept
5. Social Marketing Concept
Production Concept

This concept works on an assumption that consumers prefer a product which is inexpensive and widely
available. This viewpoint was encapsulated in Says Law which states ‘Supply creates its own demand’.
Hence companies focus on producing more of the product and making sure that it is available to the
customer everywhere easily.Increase in the production of the product makes the companies get the
advantage of economies of scale. This decreased production cost makes the product inexpensive and
more attractive to the customer.A low price may attract new customers, but the focus is just on
production and not on product quality. This may result in a decrease in sales if the product is not up to
the standards.This philosophy only works when the demand is more than the supply. Moreover, a
customer not always prefers an inexpensive product over others. There are many other factors which
influence his purchase decision.

Examples of Production Concept of Marketing Management Philosophies

 Companies whose product market is spread all over the world may use this approach.
 Companies having an advantage of monopoly.
 Any other company whose product’s demand is more than its supply.
Product Concept

This concept works on the assumption that customers prefer products of ‘greater quality’ and ‘price and
availability’ doesn’t influence their purchase decision. Hence the company devotes most of its time in
developing a product of greater quality which usually turns out to be expensive.Since the main focus of
the marketers is the product quality, they often lose or fail to appeal to customers whose demands are
driven by other factors like price, availability, usability, etc.

Product Concept
Examples of Product Concept of Marketing Management Philosophies

 Companies in the technology industry.

 Companies having an advantage of monopoly.
Selling Concept

Production and product concept both focus on production but selling concept focuses on making an
actual sale of the product. Selling Concept focuses on making every possible sale of the product,
regardless of the quality of the product or the need of the customer. The main focus is to make money.
This philosophy doesn’t include building relations with customers. Hence repeated sales are very less.
Companies following this concept may even try to deceive the customers to make them buy their
product.
Companies which follow this philosophy have a short-sighted approach as they ‘try to sell what they
make rather than what market wants’.

Selling Concept
Examples of Selling Concept of Marketing Management Philosophies

 Companies with short-sighted profit goals. This often leads to marketing myopia.
 Fraudulent companies.
Marketing Concept

Selling Concept cannot let a company last long in the market. It’s a consumers market after all. To
succeed in the 21st century, one has to produce a product to fulfil the needs of their customers. Hence,
emerged the marketing concept. This concept works on an assumption that consumers buy products
which fulfil their needs. Businesses following the marketing concept conduct researches to know about
customers’ needs and wants and come out with products to fulfil the same better than the competitors.
By doing so, the business establishes a relationship with the customer and generate profits in the long
run.

However, this isn’t the only philosophy that should be followed by all the businesses. Many businesses
still follow other concepts and make profits. It totally depends on the demand and supply and the needs
of the parties involved.

Marketing Concept
Examples of Marketing Concept of Marketing Management Philosophies

 Companies in perfect competition.

 Companies who want to stay in the market for a long time.
Societal Marketing Concept

Adding to the marketing concept, this philosophy focuses on society’s well-being as well. The business
focuses on how to fulfil the needs of the customer without affecting the environment, natural resources
and focusing on society’s well-being. This philosophy believes that the business is a part of the society
and hence should take part in social services like the elimination of poverty, illiteracy, and controlling
explosive population growth etc.

Societal Marketing Concept

Many of the big companies have included corporate social responsibility as a part of their marketing
activities.

Holistic Marketing Concept

Holistic marketing is a new addition to the business marketing management philosophies which considers
business and all its parts as one single entity and gives a shared purpose to every activity and person
related to that business. A business, like a human body, has different parts, but it’s only able to function
properly when all those parts work together towards the same objective. Holistic marketing concept
enforces this interrelatedness and believes that a broad and integrated perspective is essential to attain
the best results.

Pricing your Product - Pricing Principles

A beginners guide to Pricing Strategy - The role Pricing Principles play in maximising

returns, and the concept of Exchange Value to Consumer.

Introduction to Pricing

Pricing is something that only seldom gets its due importance. Many businesses, esp. startups, possibly
go to the n'th depth of the product design, but will mostly think of the price when the product is either
about to be launched in the market, or after it starts getting beaten in the market post launch. Even
then, only rarely they think of pricing strategically. Many a times, given limited resource, it’s just Cost-
Plus. Sometimes, competition pricing clouts the decision. Rarely, the value generated by the product
becomes the foundation for the pricing.

Result? Prices either end-up being set too low, or too high, or being offered with a completely wrong
pricing structure. Hence, businesses fail to find enough customers who pass down the funnel, and
product adoption fails to take-off. Pricing is about market perception. Pricing is about product adoption.
Pricing is about success or failure of the business. Hence, businesses should take strategic approach
pricing.

There are three components to the overall pricing strategy:

 Choice of a Pricing Principle: Cost-Plus, Competitive, Value-Based

 Choice of a Price Positioning: Market Skimming, Neutral, Penetration

 Choice of a Pricing Structure: Unit Pricing, Tiered Pricing, Bundled Pricing, Subscriptions
etc.

In this article, we will focus on the Pricing Principles, what and why of Value-based-Pricing, and why
Product Manager’s must understand as well as be skilful in the art and science of pricing.

So, what are the Pricing Principles?

As inferred from the report (Kurz & Toebbens, 2012), there are three fundamental Pricing Principles:

 In Cost-Plus Pricing approach, the list prices are mostly driven by company’s own cost
structures which could possibly also be heavy on unwarranted overheads.

 In Competitive Pricing, the list prices are mostly driven by competitor’s prices followed by
own cost structures. Customer’s ability and willingness to pay only seldom plays a role.

 In Value-Based Pricing, the list prices are mostly driven by the balanced consideration of
all three variable, namely, (a) Customer’s ability and willingness to pay, (b) Competitor’s
price levels, and (c) Company’s own cost structure and current price levels.

A lot has been said on these principles, and esp. in favour of Value-Based Pricing:A lot has been said on
these principles, and esp. in favour of Value-Based Pricing:

“When relying on Cost-plus or Competitive Pricing principles, pricing strategy and management are based
on a too narrow array of decision making criteria.” — Kurz and Toebbens (2012)

“in face of competitive realities, old dependence on cost-driven pricing strategies and techniques must
give way to profitable customer-driven pricing procedures.” — Forbis & Mehta (1981)

With specificity of B2B or industrial markets:

“To meet the demands of industrial customers seeking value, the seller must understand value from the
buyer’s point of view and use that information in determining price.” — Shapiro & Jackson (1978)
 Clearly, of the three pricing principles used in B2B markets — Cost Based, Competition Based and Value
Based — Value-Based approach is considered superior. However, Cost-Based and Competitor-Based
approaches continue to play a dominant role in practice. — Liozu & Hinterhuber (2012).

What is this Value-Based Pricing?

“Value-based pricing seeks to identify the value an offering delivers from the customer’s perspective and
then charge accordingly.” (Smith, 2016)

Value-based pricing requires collecting data that can be transformed into consumable information and
formulate customer’s perspective to answer:

 What do my customers need?

 How do my product impact those needs?

 What’s the perceived value of that?

The crux of the value-based pricing decision is then answering ‘How do I quantify this value?’ and ‘which
of the values is pertinent for pricing?’

From the customer’s perspective, the value he derives is the quantified benefits he gets less the price he
paid to get those benefits. Mathematically, this can be written as:

 Value (V) = Benefits (B) - Price (P) ...(i)

However, in a competitive market, there is no absolute Value-Based Pricing, but rather a combination

of Competitive and Value-Based. In this case, value for customer is not absolute, but rather relative
w.r.t. the alternative choices or offers he may have. Differential Value can thus be described as:

 Differential Value (dV) = Differential Benefits (dB) - Differential Price (dP) ...(ii)

If a: the firm, and b: closest competing alternative

 dB = Benefits'a - Benefits'b

 dP = Price'a - Price'b

Note that the customer will purchase only if the perceived differential value delivered is positive, i.e.,
criteria for purchase decision:

 Differential Value (dV) >= 0 ...(iii)

From the customer’s perspective, differential benefits generally cover both tangible and intangible
benefits that the customer derives, incl. any associated opportunity cost that he may save.

For example, the benefit of increased accuracy in e-commerce fulfilment can be quantified into reduced
return shipping due to wrong fulfilment. The intangible benefit on this aspect could be that the customer
is able to deliver better experience to his customer, which can be mapped into customer loyalty.

Concept of Exchange Value to Customer (EVC)

Exchange or Economic Value to Customer (EVC) of an offer is the maximum achievable price for the
customer to find the offer attractive. (Smith, 2016)

For purchase decision, as per equation (iii): dV >= 0. Rearranging equation (ii) while applying criteria for
purchase decision from equation (iii):

 EVC = Price'a <= Price'b + Differential Benefit (dB) ...(iv)

Hence, from equation (iv) above, the maximum price a firm can demand is price of its closest
competitor plus the value advantage its product has for the customer relative to that of its competitor’s
product (Tucker, Spring 2010).

Note that EVC denotes the maximum price a firm may charge. However, basis fairness effect (Sanfey, et
al., 2003), the firm may decide to forego some part of their differentiation value (Anderson, et al., Winter
2010).
Note: One of the most basic statistical tool to analyse EVC between two products, whether your own or
competitors is ‘Cojoint Analysis’.

A Simplified and Theoretical Application

Above theory though valid, is only applicable from the customer’s perspective. In the real practical
application, esp. in B2B scenarios, it’s not just difficult to get competitive prices in order to be able to
evaluate differential pricing, it’s nearly impossible.

So, in order to make a definitive case for pricing decision, one must resort to capital budgeting concepts
of Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. Each of the NPV, IRR and
Payback Period can be derived from above eq. (i) described earlier as: Value (V) = Benefits (B) - Price (P)

Using DCF methods and putting dollar number to this Value, the criteria for pricing and purchasing

decision could then be formulated as (Kapil, 2015):

 Net Present Value (NPV) > 0 ...(v)

 Internal Rate of Return (IRR) >= Cost of Capital (CoC%) ...(vi)

 Payback (ROI) <= N years ...(vii)

The final decision could be basis any of the above or a combination or all of the above. 

So, why should Product Team set and own Pricing?

“Your price is the exchange rate on the value that you’ve created.” — Patrick Campbell, CEO of Price
Intelligently