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Pricing Theories and Strategies: Sti Academic Center Batangas

The document discusses pricing theories and strategies. It begins by explaining the theory of price and how market forces of supply and demand determine equilibrium price. It then defines supply, demand, and equilibrium. Examples are provided to illustrate these concepts. The document also covers prospect theory and how individuals make decisions based on perceived gains rather than losses. Finally, it lists various pricing strategies that businesses use such as cost-based pricing, target-return pricing, premium pricing, and bundle pricing.

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Jo Malaluan
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140 views19 pages

Pricing Theories and Strategies: Sti Academic Center Batangas

The document discusses pricing theories and strategies. It begins by explaining the theory of price and how market forces of supply and demand determine equilibrium price. It then defines supply, demand, and equilibrium. Examples are provided to illustrate these concepts. The document also covers prospect theory and how individuals make decisions based on perceived gains rather than losses. Finally, it lists various pricing strategies that businesses use such as cost-based pricing, target-return pricing, premium pricing, and bundle pricing.

Uploaded by

Jo Malaluan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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STI ACADEMIC CENTER

BATANGAS

PRICING THEORIES
AND STRATEGIES
COMPREHENSIVE DISCUSSION
STI ACADEMIC CENTER
BATANGAS
Price Theory
The theory of price involves the concept of supply and demand to
determine the appropriate price point for a good or service. This theory
aims to achieve equilibrium in which the quantities of goods or services
match the corresponding market's desire and ability to acquire the good or
service. The concept allows for price adjustments as market conditions
change.
For instance, market forces determine that it costs P5 for a bread loaf.
This suggests that the buyers are willing to forgo the utility in P5 to
possess the bread loaf and that the sellers perceive that P5 is a fair price
in exchange for giving up the bread loaf. The following factors are
associated with the theory of price:
STI ACADEMIC CENTER
BATANGAS
Supply. It denotes the amount of products or services the
market can provide. This includes tangible goods such as
automobiles or intangible goods such as the ability to make an
appointment with a skilled service provider. In each instance, the
available supply is finite in nature. There are only a certain number
of automobiles available and only a certain number of
appointments available, at any given time. The supply curve is
presented below as a graphical representation of the correlation
between the cost of a good or service and the quantity supplied for
a given period. In a typical illustration, the price appears on the left
STI ACADEMIC CENTER
BATANGAS
STI ACADEMIC CENTER
BATANGAS

Demand. It applies to the market’s desire to acquire a tangible or


intangible item. At any time, there is also only a finite number of potential
consumers available. Demand may fluctuate depending on a variety of
factors, such as whether an improved version of a product is available or if
a service is no longer needed. Demand can also be affected by an item's
perceived value or affordability, by the consumer market. The demand
curve is presented below showing the relationship between the price of a
certain item and the quantity that the customers are willing to buy given a
particular price as follows:
STI ACADEMIC CENTER
BATANGAS
STI ACADEMIC CENTER
BATANGAS

Equilibrium. It pertains to the price point that allows supply to


reasonably serve the potential customers. If the price is too high,
customers may avoid the good or service, resulting in excess
supply. In contrast, if a price is too low, demand may significantly
outweigh the available supply. Economists use price theory to
find the selling price that brings supply and demand as close to
the equilibrium as possible. The graphical approach to
equilibrium analysis is illustrated as follows:
STI ACADEMIC CENTER
BATANGAS
STI ACADEMIC CENTER
BATANGAS
EXAMPLE: A farmer is selling apples for P10 each. After a
month, he decided to lower the price at P8 since it is the fruit’s
full harvest season, expecting to yield more apples compared to
the previous month. This will allow the farmer to maximize sales
by allowing consumers to purchase more or to increase the
demand due to lower price and to avoid spoilage of excess
supply garnered during the harvest season. Thus, any
movement in supply or demand always triggers change in prices
resulting to shifting of price equilibrium to attain beneficial
impact to both the supplier and customers.
STI ACADEMIC CENTER
BATANGAS
Prospect Theory

This theory assumes that losses and gains are valued differently,
and thus individuals make decisions based on perceived gains
instead of perceived losses. The general concept of this theory
is that if two (2) options are presented before a consumer, both
equal, with one presented in terms of potential gains and the
other in terms of possible losses, the former option will be
chosen.
STI ACADEMIC CENTER
BATANGAS

EXAMPLE: An investor is given a pitch for the same mutual fund by two
(2) separate financial advisors. One advisor presents the fund to the
investor, highlighting that it has an average return of 12% over the past
three (3) years. The other advisor tells the investor that the fund has
above-average returns in the past 10 years but has been declining in the
recent years. Prospect theory assumes that though the investor was
presented with the exact same mutual fund, he is likely to buy the fund
from the first advisor, who expressed the fund’s rate of return as an
overall gain instead of the advisor presenting the fund as having high
returns and losses.
STI ACADEMIC CENTER
BATANGAS
According to the prospect theory, paying a price to purchase a product or
service generates negative utility. On the other hand, the purchase and use
of a product or service represents a gain and generates positive utility. The
following are the underlying assumptions of prospect theory:
 Free or paid. The prospect theory explains that the negative utility is
greater when a product or service is paid/bought personally by a
consumer. For instance, the odds that you go to the concert despite of a
bad weather is much greater if you paid for the ticket with your own
money than if you had received the ticket as a gift. The money is gone,
regardless of whether you attend the concert. But the urge to “earn
back” the price of the ticket is much higher if you paid with your own
money.
STI ACADEMIC CENTER
BATANGAS

 Better to pay in cash. The prospect theory explains that the negative
utility from a cash payment is greater in comparison to a cashless or
credit/debit card payment. This states that consumers who want to have
an overview of their expenditures tend to avoid paying with credit cards.
 Moon prices. The prospect theory explains that rebate provides the
customers with additional positive utility. For instance, sellers are pricing
products for P100 and offers a 25% discount, which allows the
customers to purchase the product for only P75. This states that the
discount received by the customers tend to create a positive perception
or utility.
STI ACADEMIC CENTER
BATANGAS
Pricing Strategies
The following are the various strategies and techniques that businesses use when setting
prices on their products and services:
 Markup pricing. It involves assessing various costs and adding a standard
percentage above the total cost, which will serve as profit.
 Cost-based pricing. It involves building a profit margin directly into the price of a
product or service. It requires calculating and enumerating the cost to deliver a
product or service, then adding a margin to the total computed cost.
 Target-return pricing. It involves setting the price of a product or service at a level,
which will yield target rate of return on investment made by the company.
 Break-even pricing. It involves determining the point wherein an organization would
incur neither profit nor loss.
STI ACADEMIC CENTER
BATANGAS
 Rate-based pricing. It involves pricing a service based on hourly pricing model.
Freelancers, consultants, and coaches most commonly use this strategy for pricing their
services.
 Project-based pricing. It involves pricing a product or service based on a flat fee
arrangement agreed for the launch of a project. The seller often makes an estimate of
how many hours s/he thinks the project will take and then price accordingly. For this to
work, the scope of work should be well-defined up-front.
 Pricing at a premium. It involves setting higher prices in comparison to the prices of the
competitors or companies that sell similar products or services. It is often most effective
in the early days of a product’s life cycle, and ideal for small businesses that sell unique
goods.
 Pricing for market penetration. It involves offering relatively lower prices of goods and
services. While many new companies use this technique to draw attention away from
their competition, this does tend to result in an initial loss of income for the business.
STI ACADEMIC CENTER
BATANGAS

 Economy pricing. It involves minimizing the costs associated with


marketing and production in order to keep the prices of products or
services relatively low. A wide range of businesses including generic food
suppliers and discount retailers uses this strategy.
 Price skimming. It involves setting higher rates during the introductory
phase of a product or service. The company then lowers prices gradually
as competitor goods appear on the market. One of the benefits of price
skimming is that it allows businesses to maximize profits on early adopters
before dropping prices to attract more price-sensitive consumers.
STI ACADEMIC CENTER
BATANGAS

 Psychology pricing. It involves the techniques that marketers use to encourage


customers to respond on emotional levels rather than logical ones in purchasing a
good or service. For example, setting the price of a watch at P199 is proven to attract
more consumers than setting it at P200, even though the true difference is quite small.
One explanation for this trend is that consumers tend to put more attention on the first
number on a price tag than the last. The goal of this pricing strategy is to increase
demand by creating an illusion of enhanced value for the consumer.
 Bundle pricing. It involves selling multiple products for a lower rate in comparison to
purchasing the items individually. This strategy is more effective for companies that sell
complimentary products. For example, a restaurant can take advantage of bundle
pricing by including dessert with every meal sold on a particular day of the week.
STI ACADEMIC CENTER
BATANGAS
 Optional product pricing. It involves increasing the amount customers spend once
they start to buy. For example, airlines charge for optional extras such as guaranteeing
a window seat or reserving a row of seats next to each other. Budget airlines are
prime users of this approach when they charge you extra for additional luggage or
extra legroom.
 Captive product pricing. It involves charging a premium price when the consumer has
no other option. For example, a razor manufacturer charges a low price for the first
plastic razor and recover its margin from the sale of the blades that fit the razor.
Another example is when printer manufacturers sell inkjet printers at a low price. In
this instance, the printer manufacturer knows that once the customers’ ran out of
consumable ink, they need to buy more and this tends to be relatively expensive.
STI ACADEMIC CENTER
BATANGAS

 Geographical pricing. It involves variations in price of a similar product


or service in different parts of the world. Some examples that affect the
price of a product depending on the location include the shipping costs,
taxes, and government legislation, which limit the number of products
that can be imported resulting to raise in price.
 Value pricing. It involves external factors such as recession or
increased competition, which forces companies to provide value
products and services to retain sales. Examples of this include the value
meals being offered in fast food chains and restaurants.

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