Module 1: Understanding Pricing

“Price is the one element of the marketing mix that produces revenue;
the other elements produce costs. Prices are perhaps the easiest element of the marketing
program to adjust; product features, channels, and even communications take more time.”

-Kotler & Keller (2012)

Overview

Price is the only element in the marketing mix that generates revenue. Without proper
pricing of our commodities, consumers will not be able to afford goods and services and businesses
will not be earning the much needed profit that they are aiming for.

In this module, you will be able to learn what is pricing and how businesses price their
commodities. You will also be able to understand how we, as consumers, affect the pricing
decisions of managers and marketers. Assessments are found after every topic. Suggested readings
are included to further enhance your learning.

Learning Outcomes

At the end of this module, you are expected to:

1. Define pricing and the different terminologies in pricing.

2. Compare commodities in the market with its suggested retail prices.
3. Design a pricing scheme based on consumer psychology.
4. Analyze how businesses price their commodities.

1.1. What is a Price

Have you gone to the market lately? Or perhaps in the sari-sari store in your neighborhood?
Have you noticed the price of the commodities that you are buying? Did you ever wonder how
they are priced and why they are priced that way?

Price is not just a number on a tag. It comes in many forms

and performs many functions. Rent, tuition, fares, fees, rates,
wages, and commissions are all the price you pay for some good or
service that you avail. When you go to the sari-sari store in your
neighborhood to buy soy sauce, you will pay its corresponding
price. The fare you pay when you ride a jeepney or tricycle is the
price for that service that you have availed. If you have an online

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business or you are selling various items, you have prices for the different items that you have.

Price is the amount of money charged for a product or a service. It is the sum of all the
values that customers give up to gain the benefits of having or using a product or service
(Armstrong, et al, 2017).

Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Price is also one of the most flexible marketing mix elements. At the same time,
pricing is the number one problem facing many marketing executives, and many companies do not
handle pricing well.

1.2. How Do Companies Price

Do you ever wonder why a certain commodity is priced differently from the others that are
similar to it? Or why it is priced differently from one seller compared to another?

Stores price their products and services differently. Some

businesses have their boss or owners do the pricing. Others, those
which are large and have many product lines have product line
managers that comes up with how their products would be priced.

Pricing is a major consideration for executives. When a

product is incurring cost rather than profit, top level management
must review their pricing strategies. Some businesses do not
perpetually review their pricing. Sometimes the price of their
products are no longer appealing to their market or is not enough to
cover production cost anymore.

In order for these businesses to create and implement a

pricing strategy, they must understand their consumers’ pricing psychology and how these
consumers adapt to the ever changing prices. This understanding would later on help the business
in designing a systematic approach to setting, adapting and changing prices.

1.3. Consumer Psychology and Pricing

Reflect on this: When you are in a store and you find something that you really like, do you
usually go and buy it or you try to find another store with a lower price or a similar item that is
cheaper?

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 It is assumed by many economists that consumers are “price takers” that accept the prices
of commodities at “face value” or as give. Most consumers would purchase commodities with its
given price tag. Some, would wait and do research as to where they can purchase at a cheaper price
or look for substitutes with a lower price.

Consumers’
purchase decisions are
affected by how they would
perceive prices. Customers
may have a lower price
threshold below which
prices signal inferior or
unacceptable quality, as
well as an upper price
threshold above which
prices are prohibitive and
the product appears not
If customers perceive that a product’s price is greater than its value, worth the money (Kotler
they won’t buy it. If the company prices the product below its costs, and Keller, 2012).
profits will suffer. Between the two extremes, the “right” pricing
strategy is one that delivers both value to the customer and profits
to the company.
We have to
understand how consumers
create perceptions of prices. This is an important marketing priority. We have to consider three
key topics—reference prices, price–quality inferences, and price endings.

Reference Prices is comparing an observed price to an internal reference price they

remember or an external frame of reference such as a posted “regular retail price”. It simply says
that consumers would compare prices of commodities with its suggested retail price (SRP) or with
prices of other similar commodities. Let us say that you are in a grocery store and a pack of noodles
would cost P10.00. You have heard in the news that the SRP of the noodles is just P8.00. You
would now think that the noodles that the store is selling is expensive therefore you would not buy
them.

Possible Consumer Reference Prices

• “Fair Price” (what consumers feel the product should cost)
• Typical Price
• Last Price Paid
• Upper-Bound Price (reservation price or the maximum most consumers would pay)
• Lower-Bound Price (lower threshold price or the minimum most consumers would
pay)
• Historical Competitor Prices
• Expected Future Price
• Usual Discounted Price
Source: Adapted from Russell S. Winer, Pricing, MSI Relevant Knowledge Series (Cambridge, MA: Marketing Science
Institute, 2006).

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 In Price-Quality Inferences, a consumer often use price as a predictor or indicator of a
commodities’ quality and typically overestimate the strength of this relation. Think of it this way,
when you are in a store or looking at an online shop, you typically look at the prices and
unintentionally, you would associate the price with its quality. Higher priced commodities, like a
laptop for example, would be faster and sturdier than lower priced ones. You would think of the
cheaper ones as low quality and therefore slower and can easily be broken.

The last one is Price Endings or simply the

ending digits of a price affects how a customer would
perceive the price of the product. Ever noticed how
some products in the market are sold with a price tag
ending in “9” (for example P199 or P25,999)? Or
why Lazada and Shopee always have these crazy 3-
day or 1-day only sales almost every month?

Consumers, like you and me, oftentimes are

attracted to these and give in into buying whatever
that item is, anyway it’s just P199 or it’s on sale. The
psychology behind this is that we read from left to right. So we see first the “1” in “199” rather
than “2” when we round it to “200”. There is less mental activity that way, so we exert less time
and energy to it.

1.4. Setting the Price

Why is the new phone that was launched in the market last month only P5,000 while the other
one that was launched 1 year ago is still P35,999? Why is my friend selling face masks at
P700 per box while my neighbor is only selling it for P450? Ever wondered why they are priced
that way?

A firm must set a price for the first time when it

develops a new product, when it introduces its regular
product into a new distribution channel or geographical
area, and when it enters bids on new contract work
(Kotler & Keller, 2012).

So for us to properly price our products we follow

these 6 steps in setting the price (please take note that a
more thorough discussion on this will be found in the
succeeding modules):

1. Setting the Pricing Objective – The company

Source: Adapted from Kotler and Keller,
first decides where it wants Marketing Management, 14th Edition (2012).

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 to position its market offering. The clearer a firm’s objectives, the
easier it is to set price. Five major objectives are: survival,
maximum current profit, maximum market share, maximum
market skimming, and product-quality leadership.

2. Determining Demand – Each price will lead to a different level of demand and have a
different impact on a company’s marketing objectives. The normally
inverse relationship between price and demand is captured in a
demand curve. The higher the price, the lower the demand. For
prestige goods, the demand curve sometimes slopes upward.

3. Estimating Costs – Demand sets a ceiling on the price the company can charge for its
product. Costs set the floor. The company will to charge a price that
covers its cost of producing, distributing, and selling the product,
including a fair return for its effort and risk. Yet when some
companies price products to cover their full costs, profitability isn’t
always the net result.

4. Analyzing Competitors’ Cost, Prices, and Offers – A firm must take competitors’ costs,
prices, and possible price reactions into account. If the firm’s offer
contains features not offered by the nearest competitor, it should
evaluate their worth to the customer and add that value to the
competitor’s price. If the competitor’s offer contains some features
not offered by the firm, the firm should subtract their value from its
own price. Now the firm can decide whether it can charge more, the
same, or less than the competitor.

5. Selecting a Pricing Method – Companies select a pricing method that includes one or
more of these three considerations—Costs set a floor to the price,
competitors’ prices and the price of substitutes provide an orienting
point, customers’ assessment of unique features establishes the
price ceiling.

6. Selecting the Final Price – Pricing methods narrow the range from which the company
must select its final price. In selecting that price, the company must
consider additional factors, including the impact of other marketing
activities, company pricing policies, gain-and-risk-sharing
pricing, and the impact of price on other parties.

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Summary:

Pricing, unlike the other Ps in marketing, generates income for the business. Proper pricing
must be used depending on the goals and chosen strategies. This must not be taken for granted
since this has a huge impact on any business entity. You must understand the psychology behind
how different products are priced in order to entice customers to buy from your business.

Congratulations! You have finished Module 1. You can now move to module 2.
If you are still not confident with what you have learned, you can further enhance
it with the suggested reading. You can also reread this module.

References:

Armstrong, Gary, et at, Marketing: An Introduction, 13th Edition, Pearson Education

Limited, 2017

Kotler, Philip and Keller, Kevin Lane, Marketing Management, 14th edition, Pearson
Education, Inc. 2012

Suggested reading(s):

For more discussion on this topic, you can read Chapter 14 of the book Marketing
Management (14e) by Philip Kotler and Kevin Lane Keller.

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