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MODULE 1

Name:
Course, Year & Section:
Prepared by:

Elvie B. Serdeña

Pricing Strategy 1
Introduction
Too many businesses set their pricing without putting much thought into it. This is a mistake
causing them to leave money on the table from the beginning. The good news is that taking the
time to get your product pricing right can act as a powerful growth lever. If you optimize your
pricing strategy so that more people are paying a higher amount, you'll end up with significantly
more revenue than a business who treats pricing more passively. This sounds obvious, but it's
rare for businesses to put much effort into finding the best pricing strategy.
This guide will cover everything you need to know about setting a pricing strategy that
works for your business.

Objectives:

 Discuss the definition of pricing strategy

 Identify the types of pricing strategy
 Discuss the economic value and pricing
 Enumerate Two Easy Steps to Implement and Two
Common Pitfalls to Avoid

Pricing Strategy 2
 Lesson 1
PRICING STRATEGY

Pricing strategy is the policy a firm adopts to determine what it will charge for its products
and services. Strategic approaches fall broadly into the three categories of cost-based pricing,
competition-based pricing, and value-based pricing. Pricing strategy is a key variable in financial
modelling, which determines the revenues achieved, the profits earned, and the amounts
reinvested in the firm's growth for its long-term survival. A number of pricing strategy options are
available, including mark-up pricing, target return on investment pricing, perceived value pricing,
competition-based pricing, penetration pricing, and skimming pricing. The choice of pricing
strategies adopted by the firm will depend on the overall corporate strategy, buyer expectations
and behaviour, competitor strategy, industry changes, and regulatory boundaries. Other factors
affecting the nature of pricing strategies are corporate image, geography, price discrimination, and
price sensitivity. Future trends in pricing policies are likely to focus on information-based
optimization through cost reduction of inefficiencies in the supply chain, the reduction of trade
allowances, an increase in responsiveness to changes in market conditions, greater pricing
flexibility, and a reduction of pricing disparity across different channels.

What is Pricing?

Pricing is defined as the amount of money that you charge for your products, but
understanding it requires much more than that simple definition. Baked into your pricing are
indicators to your potential customers about how much you value your brand, product, and
customers. It's one of the first things that can push a customer towards, or away from, buying your
product. As such, it should be calculated with certainty.

1. Pricing is one of the 4P’s of Marketing Mix which plays a very important role. All other P’s
are cost for the company whereas pricing is revenue for the company.
2. Pricing means determining the price of the product a firm is selling or going to sell.
3. While determining a price it involves various pricing decisions which are to be taken while
deciding a price of a product.
4. The price structure of a firm is a major determinant.

What is Pricing Strategy?

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.

 It is the activity under which the activities are aimed at finding the optimum price of a
product.
 It typically includes the marketing objectives, consumer demand, product attributes,
competitor’s price and market and economic trends.
 Finding the right pricing strategy is an important element in running a successful business.

Pricing Strategy 3
Objectives of Pricing Strategy

 To earn profits
 To increase sales volume
 Company Growth
 To maintain competitive edge
 Survival
 To create a good image of the product as well as about the company
 To discourage the competitors to cut the prices

Penetration Pricing

1. It is pricing strategy used by business to attract

customers to new product or service.
2. The price charged for products and services is set
artificially low in order to gain market share. Once this is
achieved, the price is increased.
3. It is to lure the customers away from competitors.

Pricing Strategy 4
 Price Skimming

1. Price skimming sees a

company change a higher price
because it has a substantial competitive
advantage.
2. The skimming strategy gets its name from skimming successive
layers of cream, or customer segments, as prices are lowered over
time.
3. As it starts with high pricing therefore it attracts new competitors
to enter the market as due to which the price eventually falls.

Competitive Pricing

1. It is the pricing strategy under which the companies use

the prices of their competitors.
2. As the company thought that the competitor has set this
price by assuming that the competitors have thoroughly worked on
the price.
3. Therefore, by setting the same price as its competitors, a
newly-launched firm can avoid the trial-and-error costs of the price-
setting process.

Product Line Pricing

1. Where there is a range of products or services,

the pricing reflects the benefits of parts of the range.
2. It refers to the practice of reviewing and setting
prices for multiple products that a company offers in
coordination with one another.
3. Effective product lone pricing by a business will
usually involve putting sufficient price gaps between
categories to inform prospective buyers of quality
differentials. Also called price lining.

Pricing Strategy 5
Psychological Pricing

1. It is a pricing as well as marketing strategy which

means that certain prices have a psychological impact on the
customers.
2. Retail prices are often expressed as “odd prices”: a little
less than a round number.
3. The theory that drives this is that lower pricing such as
this institutes greater demand than if consumers were perfectly
rational.

Premium Pricing

1. It is also known as image pricing or prestige pricing. It is used

when there is a unique brand.
2. It is a practice of keeping price of a product artificially high to
attract the favorable perceptions among buyers.
3. This approach is used where a substantial competitive
advantage exists and the marketer is safe in the knowledge that
they can charge a relatively higher price.

Optional Pricing

1. It is strategy when a company sells a base product

at a relatively low price, but sells complementary accessories
at a higher price.
2. Companies will attempt to increase the amount
customers spend once they start to buy.
3. Optional ‘extras’ increase the overall price of the
product or service

Bundle Pricing

1. It is a process
where companies sell a package or set of goods or services for
a lower price than they would charge if they bought them
separately.
2. It is a strategy where it allows the company to increase

Pricing Strategy 6
its profits by giving customers a discount.
3. It is an attempt to capture more of the consumer’s
surplus.
Cost Based Pricing

1. It is the pricing method in which the company add a

certain percentage in the cost of making product to get some
profit.
2. It uses manufacturing cost as the basis for coming
to the final price setting of the product.
3. It is a straightforward and simple strategy.

Cost Plus Pricing

1. It is the simplest pricing strategy. It is also known as

mark-up pricing.
2. It is nothing else than adding a mark-up value to the
price of the product. This mark-up value is for earning profit.
3. It appears to be simple but it ignores the demand and
competitors’ price. Therefore, it doesn’t lead to the best prices.

Pricing Strategy 7
 Lesson 2
ECONOMIC VALUE AND PRICING

ROLE OF ECONOMIC VALUE IN PRICING – VALUE-BASED PRICING

The term value commonly refers to the overall satisfaction that a customer derives from
using a product or service. Economists call this use value—the utility gained from the use of a
product. To give an example, on a hot summer day at the beach, the use value of a cold drink is
quite high for most people, perhaps $10 for a cold soda. But few people would actually pay that
price. So knowing use value is of little help to a drink vendor. Therefore, it is important to
understand the role of economic value in pricing decisions. How can you accurately set prices
based on the value that products or services generate for consumers? In the following, we will
closely investigate the role of economic value in pricing.

Value-Based Pricing

Value-based pricing is a technique for setting the price of a product or service based on the
economic value it offers to customers. This pricing strategy allows companies to capture the
maximum amount that a customer is willing to pay in order to significantly improve company
profits.

Product managers, especially in B2B settings such as industrial products, often adopt a
cost-plus pricing technique that can seriously impact both revenue and profitability. The cost-plus
approach is inefficient because prices may be set too high or too low, based on the cost of the
product. If prices are set too high, then the company will lose the business to competition. On
the other hand, if prices are set too low, the company will leave money on the table. Product
managers can use value-based pricing to solve this issue.

To understand value-based pricing, let's first understand True Economic Value (TEV). TEV
represents what a customer will pay for a product or service that delivers value in excess of its
closest competitor. HBR’s Marketer’s Toolkit [for purchase] defines TEV as:

TEV = cost of the best alternative + value of performance differential

Let's say you are launching a new Bluetooth headset with two hours of extra
battery life than the closest competitor's product, which is priced at $80. If the
consumer values the extra battery life at $5, then the TEV would be $80+
$5=$85. This simple equation offers a good starting point for calculating the
value to the customer. Though the TEV is the sum of the value offered by each
feature of the product, you do not need to calculate the value delivered by each
feature. Instead, determine the price of the closest alternative, making the
equation easier to solve.

Pricing Strategy 8
Two Easy Steps to Implement and Two Common Pitfalls to Avoid:
1. Not all customer segments are the same.

The TEV of your product can vary by different customer segments. A specific price may
work for one customer segment but you may have to repeat the exercise to price the product for
another. That's why it's important to go back to basic marketing exercises of segmentation,
targeting and positioning before you initiate your value pricing work.
In enterprise sales, sometimes the value-based pricing can even vary for each customer.
For example, while pricing power generation products at Cummins, my team found that the value
of these products — offered to different regional enterprises — differed by fuel prices in the region,
access to refuelling infrastructure and after-sales service capabilities of competitors in the region.
Product managers should note this at the beginning of the pricing exercise because it is
critical for your customer surveys. Selection of survey group should be made from the target
segment only. Otherwise, your analysis will not provide accurate results. For example, when
pricing snow removal equipment, you're unlikely to get an accurate answer from someone who
has always lived in Florida. Knowing your customer segment is very important throughout the
process.

2. Perceived value doesn't always equal delivered value.

The value that your customers see in your product or service can be vastly different from
how you value your product or service. Product managers often make mistakes due to
confirmation bias of their product. Remember, you have an in-depth understanding of the product
because you deal with it every day, but customers do not. The perceived value is often lower than
the TEV because customers may be less familiar with all the features or they may not have done
the math like a product manager would.
The good news is that you can easily fix this issue by determining the right marketing
tactics to educate your customers on the value of your offering. This might even affect the type of
sales professional or business development executive you hire — you'll need sales teams that can
sell the customer on value case.
To summarize, value-based pricing, when applied correctly, is a great way to improve the
profitability and hit rate of sales for your company. Additionally, the process itself helps you build
deeper customer insights.

Role of Use Value versus Role of Economic Value in Pricing

As said before, use value refers to the utility gained from the use of a product. But
customers know that in most cases, they do not have to pay a seller all that a product is really
worth to them. They know that competing sellers will usually offer a better deal at prices closer to
what they expect from past experience, like $2.00 for a soda instead of $10.

The difference between the use value of a product and its market price is called the
consumer surplus: the difference between the value derived from consuming a good minus what
you have to pay for it. Consumers know that some distance away may be a snack shop where
beverages cost just $1.50, and that a convenience store selling an entire six-pack for only $3.99 is
just a short drive away.

Pricing Strategy 9
Consequently, they will probably reject a very high price even when the product is worth much
more to them – and thereby maximize their consumer surplus.

Thus, use value is of limited help for determining ideal prices. However, the role of
economics value in pricing is much higher:

The value at the heart of pricing strategy is not use value, but economic value (or exchange
value). Economic value depends on the alternative’s customers have available to satisfy the same
need. Few people will pay $2 for a cola, even if its use value is $10, if they think the market offers
alternatives at substantially lower prices. On the other hand, only a small segment of customers
insists on buying the lowest-priced alternative. It is likely that many people would pay $2.00 for a
cola from the drink vendor strolling the beach despite the availability of the same product for less
at a snack shop or convenience store because the seller is providing a differentiated product
offering worth more than the alternatives to some segments. How much more depends on the
economic value customers place on not having to walk up the beach to the snack shop or not
having to drive to the convenience store. Some are willing to pay more for convenience, while
others who wouldn’t mind a jog along the beach, the premium they will pay for convenience will be
much less. To appeal to that jogger segment, the mobile vendor would need to differentiate the
offering in some other way that joggers value highly.

Pricing Strategy 10
 Economic value accounts for the fact that the value one can capture for commodity
attributes of an offer is limited to whatever competitor’s charge for them. Only the part of economic
value associated with differentiation, called differentiation value, can be captured in the price.

Differentiation value comes in two forms: monetary and psychological, both of which may
be instrumental in shaping a customer’s choice but require very different approaches to estimate
them. Monetary value represents the total savings or income increases that a customer accrues
as a result of purchasing the product. Psychological value refers to the ways that a product
creates innate satisfaction for the customer.

A product’s total economic value is calculated as the price of the customer’s best alternative
(the reference value) plus the worth of whatever differentiates the offering from the alternative (the
differentiation value). Total economic value is the maximum price that a fully informed, value-
maximizing consumer would pay.

Obviously, not every consumer is fully informed and value-maximizing. Often product and
service users, and particularly purchasing agents buying on the users’ behalf, may not recognize
the actual economic value they receive from an offering. That is, the offering’s perceived value to a
buyer may fall short of the economic value if the buyer is uninformed. Therefore, it’s critical that a
company’s sales and marketing communications ensure that features likely to be important to the
buyer come to the buyer’s attention.

PROFIT MAXIMIZATION

 Profit is the making of gain in business activity for the benefit of the owners of the
business.
Generally, profits are the primary measure of the success of any business.
 Profit maximization is the short run or long run process by which a firm determines the
price and output level that returns the greatest profit.
 Profit maximization refers to the sales level where profits are highest. You might assume
that the higher the sales level, the higher the profits, but that is not always true.

Definition

A process that accompanies undergo to determine the best output and price levels in order
to maximize its return. The company will usually adjust influential factors such as production costs,
sale prices, and output levels as a way of reaching its profit goal.
There are two main profit maximization methods used, and they are: Marginal Cost –
Marginal

Revenue Method and Total Cost-Total Revenue Method.

Profit maximization is a good thing for a company, but can be a bad thing for consumers if
the company starts to use cheaper products or decides to raise prices.

Important Terms

 Profit is defined as total revenue minus total cost. (Profit = TR – TC)

Pricing Strategy 11
Profit: The money left over once you pay all of your bills out of funds that come in from your
customers.

So, for example, if you sell 5 necklaces for $5 each, and the cost to purchase the necklaces
is $3, you will have revenues of 5 necklaces * $5 each = $25, and costs of 5 necklaces * $3 each
= $10 remaining.

TR: This stands for ‘Total Revenue’. Total Revenue simply means the total amount of
money that the firm receives from sales of its product or other sources or the total amount of
money the firm collects in sales.
TC: This stands for ‘Total Cost’. It’s the cost of all factors of production.
MC: This stands for ‘marginal cost’, which means the per-unit cost of your item. Marginal
cost is the additional cost incurred in producing one more unit of output.
MR: This stands for ‘marginal revenue’, which means the per-unit selling price of your item.
Marginal revenue is the additional revenue earned by selling one more unit of a product.
To maximize economic profits, the firm should choose the output of which Marginal Revenue is
equal to Marginal Cost.
i.e., MR = MC

Diagram of Profit Maximization

A firm can maximize profits if it produces

an output were Marginal revenue
(MR) = Marginal cost (MC)

Reasons for Aiming at Reasonable Profit

Preventing Entry of Competitors
Projecting a Favorable Public Image
Restraining a Trade Union Demand
Maintaining Customer Goodwill

Pricing Strategy 12
 ACTIVITY 1

Name: Date:
Year and Section:

Direction: Give concise, clear, and authoritative meanings. Express your judgement about the
merit or truth of the factors or views mentioned.

1. What do you think the impact of Covid-19 pandemic in the pricing strategy of all firms?
Explain briefly.

2. Can we measure the Economic Value of Environmental Amenities? How?

Pricing Strategy 13
2. List at least 5 criticisms or drawbacks of Profit Maximization.

3. Price is the sum of money that has to be paid by the consumers in order to obtain particular
good or services. Prices determine the worth of the goods and services. Prices are
determined by the producers and forces of demand and supply in the market system. Now,
think of 5 products that has a price that changes very infrequently.

4. Identify a situation in which price cost or price increases might be necessary.

“Out of the mountain of despair, a stone of hope.”

Pricing Strategy 14