Chapter 13

Price and
Pricing Policies
In a free market economy, price represents the cornerstone upon which all exchange transactions
take place. Essentially, a free market exists when producers are free to produce the goods they
like that are not repugnant to society and offer them in the market in competition with others
just as consumers are free to decide for themselves what goods to buy or not to buy.
Each producer sets the price for his own goods; each con-sumer, on the other hand, makes up his
own mind as to what price he will pay for the goods he wants. Out of this competitive bidding for
goods and services emerges the measure by which goods or services are exchanged. Such
measure of exchange is known as price.
PRICE
Students of economics look at price as the whole amount of money paid for a quantum of goods
or, if the goods are of a homogeneous character or standardized kind, sold by measure or
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weight - the amount of money given for each unit of the goods maybe regarded as the price.
Alternatively, price may be defined not as a quantity of money but as a ratio between the
quantity of money and the quantity of goods.
Invariably, a distinction is made between the conceptions of price as a ratio of quantities and as a
ratio of volume. Thus, if ten units of money are required to purchase one unit of a certain kind of
commodity, then it can be inferred that a unit of a commodity is ten times as valuable as a unit of
money and that the price ratio merely gives expression to that fact. This explains the reason why
the standard definition of price is that it is "the exchange value of a piece of goods expressed in
terms of money.".
On the Part of the Seller. On the part of the seller, price is a basic tool of day-to-day competitive
tactics. Of all the tools in the marketing arsenal, only price can be put into effect even without
previous notice to the buyers. So important is price to the seller that it represents a potential
source of income and profit, that is, when the price he has set includes a markup over his
production cost. However, pricing decisions are far from simple. Not only is the latitude for price
decision open to a firm limited by industry patterns, customs and buyer attitudes, at the same
time, not infrequently, it is the buyer rather than the seller who exercises great influence over
price.
Moreover, it is extremely difficult not to say impossible to predict with unerring accuracy the
public's reaction to particular levels of prices. This is because customers react differently to
different price levels and/or to different market situations. A high price, for instance, may attract
customers in the belief that high prices stand for high quality. High prices, on the other hand,
could be a deterrent to the sale of merchandise. Most customers are unwilling to buy products
beyond a certain price level and thus may shop around for the same product in other stores.
A low price will most likely contribute to an increase in sales volume, depending of course on the
elasticity of demand. Necessities are relatively inelastic. Consumers will buy the same amount of
the product, for instance rice and salt, regardless of any change in price
 Prices During Early Times. There was a time when prices
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were determined largely by law and custom. People during the Middle Ages talkedof "just
prices", "fair prices," etc. At that time, when a seller sought to exact a price higher than the
customary price, he at once laid himself to suspicion. So did the buyer who sought to propel a
price lower than the customary one. In general, a price was just if it was as it always had been;
the just price was the customary price. Custom was powerful in those days, and the mere force of
custom alone had great influence in preventing serious fluctuations in prices. To the aid of
custom came law, civil and religious, which undertook more or less com-pletely, to prescribe
what were the fair and just customary prices and to forbid departure therefrom. But neither law
nor custom was able to permanently prevent the price changes which followed in the wake of
changed economic conditions. Saint Thomas Aquinas, pride of the scholastics, for his part
formulated his famous dictum justum pretium or the doctrine of just price. This doctrine rested
upon the notion of value. Briefly stated, the doctrine of "just price" was that every commodity
has some one true value which is absolute, and is to be determined and be made objective on
the basis of the common estimation of the cost of production, which usually covers labor. Thus,
according to Aqui-nas, a man might lawfully charge more than he had paid "either because he
had improved the article in some respects, or because the price of the article had been changed
on account of difference of place or time, or on account of the danger to which he exposed
himself in transferring the article from place to place, or in causing it to be transferred." This
generalization, however, was qualified to the extent that only those costs which were incurred in
producing things which satisfied normal or natural wants were determining.
In a nutshell, "if either the price exceeds the value, or, con-versely, the value of the thing exceeds
the price of the thing, the balance of justice is destroyed," wrote Thomas Aquinas.
Significance of Prices. The heart of any operational market is pricing. Basically, prices which result
from trading activities are very significant for a number of reasons. Among others, the volume of
production within the economy is influenced greatly by price. Price helps determine how people
will spend their in-

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comes, since the price of goods often influences the decision to buy. Prices fix the level of profits.
For the consumer, prices control the standard of living, since the relation between wages and
prices is a measure of the purchasing power of the public.
Also, prices help to move varying quantities of goods through different marketing channels. They
inform consumers what goods are scarce and abundant; and they cause producers and
merchants to maintain proper stocks of seasonally-produced goods over the year.
Price is also a very potent influence on patronage demand.
However, it is not always the most important one. Two others, quality and service, are generally
of equal or even of greater im-portance. It is true that a lower price is the most obvious item of
evidence a company can offer its customers. But if customers find out from their purchases that
 the product does not measure up to their expectations, as for instance, the lack of desired quali-.
ty, then customers will shy away from buying such product in spite of its low price.
Direction of Prices. Historically speaking, prices have fluctuated widely from one period of the
business cycle to another although the general trend is toward higher prices. Inflation is the term
used to describe a condition in which prices are rising and money is losing its purchasing power.
Purchasing power is a measure of the relation between income and price. Price changes result
from a change in the relationship between goods available and purchasing power, or money
available for spending. This is another way of saying that prices change as a result of the
interaction between the market forces of supply and demand. When there is a strong demand for
goods, and the supply is not ade-quate, prices will rise until supply and demand are
approximately even. On the other hand, if there is a large supply of goods and little demand,
prices will tend to drop.
However, we must not forget this tendency of supply and demand to balance. If the goods in
heavy demand and short supply are controlled in price, then no price increase will follow.
Further, a period of rising prices does not necessarily mean that every product increases in price.
Quite often, the price of fann products, for example, has actually fallen during a period of in-

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flation, or risen during a deflationary period.
During a period of rising prices, as for instance, an inflationary period, setting of correct prices
assumes a far reaching significance and could prove difficult and very distressing indeed. As Rover
Dolan has aptly observed,
"inflation is greatly increasing
the cost of errors in pricing products. Mistakes, which several years ago may have been masked
by the overall profitability of the com-pany, may now be fatal.?
THE PRICING FUNCTION
Pricing, like most other business functions consists of two major and interrelated parts, to wit:
decision-making and execution or administration. Perhaps, more than any other business activity,
setting forth of prices for particular products represents a pure decision problem. Not only is the
setting of prices as a business function different from other activities but price is significantly
different from the elements in the marketing mix.
Pricing Decisions. The businessman is under constant pressures that force him to price new
products and make changes in the prices of old products. Rising costs and declining sales often
necessitate the making of decisions which involve many dimen-sions, the most important of
which is on the basis of time. On this basis we can distinguish between (a) price decisions
intended to endure indefinitely or for a substantial period; (b) price decisions covering many
transactions but intended to prevail for only a short period as those relating to sales events or
promotions, etc; and (c) single-transaction price decisions.
Management charged
with the task and responsibility of
making price decisions must also consider the following: (1) what to charge for each product and
service sold by the firm; (2) what to charge different customers whether to give quantity
discounts and, if so, of what size; and what volumes of purchase to make
Lyman A. Keith and Carlo E. Gubellini, Introduction to Business Enterprise (New York: McGraw-Hill
Book Company, Inc., 1962), pp. 304-305.
Robert J. Dolan, "Pricing, the Panic of the 80'%", Sales and Marketing Manage-ment, reprinted in
World Executive Digest, August 1983.

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the breaking point; (c) whether to charge different types of distributors the same price, and how
to distinguish distributors from retailers in borderline cases; (d) whether to vary price
systematically over time - such as setting the price high on a new item and reducing it in planned
steps, and having a regular seasonal pattern of price changes; (5) whether to give discounts for
cash and how quickly payment should be required to ear them; (6) whether to invoke price-
maintenance powers when legal or otherwise enforceable; (7) whether to suggest resale prices
or only set the price charged one's own customers; (8) whether to price all items separately or
whether to price them as a team (including promotional items, loss leaders, etc); (9) whether to
limit output on some items below what the market would absorb in order to push sales of other
items in the line; and (10) how many different price offerings to have for each item and when to
add and drop particular items.3
Also, management may have to decide whether it would be satisfied with a smaller profit if it can
produce goods which involve slight risk or loss. If the possibility is too high, a larger profit is
usually considered necessary to make for the greater risk involved. Management may not always
set its sights on immediate, large profits. In fact, a businessman may often be satisfied to break
even or even accept a small loss when a new product is being introduced to the market. But it is
doubtless important for any management to state its profit requirement, both in the short run
and in the long periods, before it attempts to fix the selling price of its merchandise.
Pricing Probleis. Pricing is an area of primary importance in marketing. It is central to the
profitable operation of a busi-ness. Once the price of a product has been established in the
consumer's mind, even in the form of a price range, that price will become the "fair" or normal
price. If the price is then increased without other perceptible changes, the customer will not
receive the price cue as a valid indicator of higher quality. Thus, the pri-

Alfred Rx. Oxenfeldt, Executive Action in Marketing (Belmont, California:

Wadsworth Publishing Co., Inc., 1966), P. 241.

MAKKETING MANAGEMENT
184
cing approach is most appropriate during the introduction of a new product or
after a radical and perceptible change in the
product.
Pricing certainly cannot be separated from the rest of the marketing mix. If management desires
to make the consumer think of its product as one of higher quality than its competitors' based on
higher price, obviously, it must make the other perceptible cues consistent with this image that
management would like to impart in the minds of the buying public. Advertising, packaging and
other functions must be considered along with pricing.
Pricing problems revolve around the following:
Basic price.
This involves the determination of the com-
pany's price level or basic price, including its adaptation to cyclical fluctuations.
b. Product-line pricing.
This relates to the determination
of the relation of prices of members of a product line. Prices of products belonging to a particular
product-line are generally within a specified range.
Price discount structures. Management must take into account the discounts and allowances, if
any, that it will grant to its customers taking into account the quantity purchased, terms of
payment and the like.
Pricing of new products.
This is a difficult problem
since in pricing new products, there are not specific information available which could serve as
basis for its pricing. However, a company which prices a new and unique product is not restricted
by the amount it may charge its customer although to be sure, a wrong price may ruin the
business. And a price policy is not entirely dependent on the merchandise although it cannot be
denied that the merchandise forms the core around which a price policy is developed.
Prices are too high when very little can be sold because of price. Expressed in another way, a
price is too high when a seller repels most customers by the price he ask
However, relatively few sales can also result from the fact that the product is little known by
potential customers due to poor communication and distribution arrangements. Imperfections in
the product might also explain a lack of sales; it might not be purchased no matter what the price
asked for it.

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PRICE AND MARKET SITUATIONS
At the very outset of this discussion, we need to recognize the fact that prices are affected by
existing marketing situations.
Thus, prices at which sellers are able to market their goods vary widely. At one extreme are
sellers who market their goods under conditions approximating those of pure competition. In
pure com-petition, sellers exercise no control over the prices set on their goods; they sell at the
market price or not at all. (Pure competition is said to exist when, first, there are a large number
of small sellers and buyers and, second, the products offered for sale by all sellers are identical in
the minds of all buyers and are sold under similar conditions).
At the other extreme is the monopolist who, within fairly broad limits, can actually establish his
selling price, not to say dictate, as for instance, when the product is unique or when there is no
good substitute for it.
Between these extremes is the typical seller - one operating under conditions of imperfect
competition. While he does not enjoy the pricing freedom that is the privilege of the monopolist,
nevertheless, his control over prices is far greater than that of the seller under pure competition.
One characteristic of imperfect competition is product differentiation which may be defined as
including any norprice step taken by a particular seller to induce buyers to prefer his goods over
those of other sellers. All attempts at branding, advertising the products of a particular seller, and
offering additional services in connection with the sale of a product represent attempts at
product differentiation.
Product differentiation is more typical of our economic system than either pure competition or
monopoly. Many firms produce fish sauce or "patis" but the product of each differs from its rivals
in one or more respects.
The significance of product differentiation is two-fold. First, despite the presence of a relatively
large number of firms, mono-politically competitive producers have limited amounts of control
over the prices of their products owing to product differentia-tion. Consumers have preferences
for the products of specific sellers and within limits will pay a higher price to satisfy those
preferences. Sellers and buyers as such are no longer linked at

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random as observed in a purely competitive market situation. On the other hand, the fact that
products are differentiated adds a new and complicating factor to our analysis: nonprice compe-
tition. Because products are differentiated, it can be supposed that products can be varied over
time and that the differentiating features of each firm's product will be susceptible to advertising
and other forms of sales promotion. (Product differentiation means that at any point in time the
consumer will be offered a wide range of types, styles, brands, and quality gradations of a given
product).
One other market situation that has to do with pricing is known in economics as oligopoly.
Oligopoly is a market situation in which there are relatively few firms that have enough market
power that they may not be regarded as price takers (as in perfect or pure competition) but are
subject to enough rivalry that they cannot consider the market demand curve as their own. In
most of these cases entry is neither perfectly easy nor wholly blocked.
The basic characteristic of this market situation is "fewness'.
It exists whenever a few firms dominate the market for a product.
When we hear of the "Big Three," Big Four* or "Big Five", we can be relatively certain that the
industry is oligopolistic. This does not mean, of course that the Big Three or Four necessarily
share the total market. The dominant few may control say 75 or 90 per cent of a market, with a
competitive fringe - a group of smaller firms - sharing the remainder of the market.
An individual oligopolistic firm's control over price tends to be closely circumscribed by the
mutual interdependence which characterizes such markets. Specifically, if a given firm lowers
price, it will initially gain sales at the expense of its several rivals.
Conversely, if a given oligopolist increases his price, rival firms stand to gain sales and profits by
adhering to their present prices.
PRICING POLICIES
A price policy is a standing answer to recurring questions. A systematic approach to pricing
 requires that decisions on individual pricing situations be generalized and codified into a policy
coverage of all the principal pricing problems. Policies can and should be tailored to various
competitive situations. Most goods

187
have substitutes. If substitutes exist, the company cannot impose prices arbitrarily without taking
into account those of its compe-titors. More so, if they are high prices. To do so is to price the
goods outside the market.
Inasmuch as pricing is never an end in itself but merely a means to an end, it is desirable that the
company formulate its pricing objectives in clear and explicit terms. This is necessary since pricing
is the fundamental guide to a company's overall goals and objectives. Without doubt, the
broadest of these is survival.
But on a more specific level, company objectives are inextricably linked to growth and greater
share of the market and of course, the making of profits for the owners of the business.
Pricing Objectives. The following are some of the specific pricing objectives of some companies
engaged in marketing their products:
Prices should aim at maximizing profits for the entire product line, e.g., they should stimulate
profitable combination sales.
b. Prices should be set in such a way that they will promote a long-range welfare of the firm, e.g.,
to discourage competition and those which may seek entry into the field.
c. Prices should be. adapted and individualized to fit the diverse competitive situations
encountered by different products.
d
Pricing should be flexible enough to meet changes in economic conditions of the various
customer industries.
A predetermined and systematic method of pricing new products should be provided.
Replacement parts prices (in the case of machinery and equipment) should be determined from
an organized classification of parts by type and manufacture.*
g. Recover the development cost and investment.
h. Gain speedy acceptance of the product.
Minimize risk of large loss.

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SPECIFIC PRICING POLICIES
At this point, we may identify some commonly used techniques of some leading business firms in
the determination of prices for the goods they sell. They are:
Cost-Plus Pricing. This is probably the most common pricing method in use today. Management
determines the cost of the
profit, and arrives at the selling price.
product above or below the market frequently establish a general policy regarding the relation of
price to cost. In this connection, they consider selling products at a price that permits a "normal
profit" above cost. Briefly stated, this method calls for the addition to some base cost of a margin
to cover profit. Many different bases are employed, and the margin added to cost is also selected
by the use of different criteria. Despite individual differences, cost-plus pricing builds price on a
cost base that roughly measures average costs of production; to this is added a margin, generally
figured as a percentage of cost, which remains constant over long periods of time.
Flexible Markup Metnod.
Another pricing method is the
flexible markup method which is a special form of cost-plus pric-ing. In place of a constant
margin, it calls for a markup to be varied on the basis of several considerations.
A markup may be described as the difference between the selling price of an article or
merchandise and the cost price. Markup may be expressed as a percentage of cost price, which is
called
"markup on cost" or as a percentage of the sales price, which is called "markup on retail." All
markups refer to a percentage of the selling price.
Intuitive Pricing.
Occasionally, businessmen will set the
price of their goods simply by estimating how much people will be willing to pay for them, and
without regard to cost. This is particularly true of pricing for "fad" items or other goods that
people buy on impulse and seldom purchase a second time.
Briefly then, it can be said correctly that this method involves reliance on the price setter's
guesses and hunches. Inasmuch

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189
as it is almost impossible to determine what happens when an executive relies on intuition than
make use of a scientific basis, this method cannot be described except possibly as a non-explicit
approach.
Less-than-Cost Pricing.
This is sometimes known as the
"market-minus price policy" and is based on the theory that it is desirable to sell goods at prices
below the cost to the seller. Declining sales often necessitate the making of such a decision; the
need to dispose of the merchandise as fast as it can be done. This is supported by the belief that
it is better to sell at a loss of say 25 per cent than not to be able to sell at all and therefore incur a
total loss of 100 per cent.
Perishable goods are often sold below cost simply to get rid of them. So are style goods which are
going out of fashion. In the field of international trade, this is exemplified by the adoption of a
sporadic type of dumping applied to the bargain basement principles.
Price Maintenance. This method consists of adhering to the price that has been charged in the
past. Price maintenance is a method that keeps prices stable whenever feasible.
Other Pricing Policies. There are other pricing policies that should not escape our attention. For
instance, there is what is known as product-line pricing. Inasmuch as many manufacturers
produce several related products, product-line pricing assumes an important phase of the
company's price policy. The problem of product-line pricing is to find the proper relationship
among the prices of members of a group of related products. This problem is here broadly
conceived to include not only pricing products that are physically distinct from one another but
 likewise the pricing of those which, though appearing physically the same, are nevertheless sold
under demand conditions that give the seller an opportunity to charge different prices. Thus, use-
differentials, as powdered milk and milk for babies are examples that have to do with product-
line pricing. The same holds true with respect to milk in cartons and those in cans. Others are
soya milk and goat's milk.
Also to be considered are demand characteristics peculiar to certain product lines. They are
important for pricing purposes.

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The first is the interaependence of the demand for various members of the product line. Such
interdependence may manifest in a number of forms. For instance, products may be substitutes
for each other, as in the case of different models of radios or grades of tires. They may be
complementary as in the case of punched cards and tabulators.
In other instances, the sale of one product tends to tie the customer to future purchases of other
products, as for instance, the sale of a stereo casette recorder and the consequent purchase of
casette tapes.
Another pricing policy is designed to take the "cream" of the market by setting the price of a
particular product at a high level. This is called skimming price policy. This pricing policy is useful
for gauging the market demand. Proponents of this policy contend that it is easier to start with a
high price and subsequentiy reduce it when customers are observed to be disinclined to buy the
product at a high price rather than starting with a low price and then raising it afterwards.
Penetration pricing policy is the opposite of skimming pricing policy. Under a penetration policy,
the price is set at a low level to serve as an instrument for penetrating mass market early. The
active approach in probing possibilities for market expansion by early penetration pricing policies
requires research, forecasting and courage. One of the objectives of most low-pricing policies in
the pioneering stages of market development is to raise entry barriers to prospective
competitors.
In some fields, a number of sellers if not most, fix their prices by accepting the price set forth and
announced by a leading firm.
As a general observation, small firms whose output is not a significant part of the over-all volume
of goods offered for sale in the market, may have little choice but to follow the price policies of
the larger firms in the industry. Large-scale producers can set prices for the entire industry if they
command sufficient respect in the market. When there are two or more large producers, the
extent to which they enter into competition will help determine the market price for all the firms
manufacturing that particular product. This is described as "price leadership" invariably called
"follow the leader price".

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191
Some stores adopt a variable price poltcy wherein the price paid by a customer at a given time
for a certain item is determined by a bargaining process between the customer and the
salesperson. This means that the customers may pay lower or higher prices for the same
 merchandise, depending upon how adept they are at bargaining.
Then there is what is known as odd-pricing. Some retailers believe that prices have a
psychological effect on customers and that pricing at odd-amounts will induce people to buy. This
pricing policy is based on the belief that customers feel, for example, that P4.95 is much lower
than P5.00 because they pay more attention to the peso value than to the centavo figure.
GEOGRAPHICAL PRICING POLICIES
Every seller irrespective of whether he is a manufacturer, a retailer or wholesaler must establish a
policy as to the price differentials he will charge as a result of the different locations of his
customers.
F.O.B. Factory. When prices are quoted F.O.B. factory (free on board), the buyer is responsible for
paying the cost of trans-portation. Under this term, the price quoted applies only at inland
shipping point, and the seller arranges for loading of the goods in railway cars, trucks, lighters,
barges, aircrafts, or other conve-yances.
Under this quotation, the seller must:
place the goods in a conveyance, or deliver to an inland carrier for loading;
provide a clean bill of lading or other transportation re-ceipt, freight collect;
be responsible for any loss or damage, or both, until goods have been placed in a conveyance at a
loading point, and a clean bill of lading or other transportation receipt has been furnished by the
carrier;
render the buyer, at the buyer's request and expense, assistance in obtaining the documents
issued in the country of origin, or of shipment, or of both, which the buyer may require either for
purposes of exportation or of importation at destination.

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C.I.F. (named port of destination).
Under this term, the
seller quotes a price including the cost of the goods, the marine insurance, and all transportation
charges to the named point of destination.
Under this quotation, the seller must:
provide and pay for transportation to named point of destination.
b. pay export taxes, or other fees or charges, if any, levied because of exportation..
provide and pay for marine insurance.
obtain and dispatch promptly to the buyer, or his agent, a clean bill of lading to named point of
destination including marine insurance certificate.
provide at the buyer's request and expense, certificates of origin, consular invoices, or any other
document issued in the country of origin, or of shipment, or both, which the buyer may require
for importation of goods into the country of destination, and, where necessary for their passage
in transit through another country.
Zone Pricing. For those engaged in the sale of bulky goods, the cost of delivery to distant points is
such an important part of the delivered price that a freight-allowed policy to all customers cannot
be followed, (f.o.b. factory). Under this policy, the company's marketing area is divided into
zones. While delivered prices may vary from zone to zone, all customers within the zone pay the
 same delivered price.
Basing-Point System.
Basing point systems have been used
for many years by a long list of manufacturers as a method of quoting delivered prices. The
basing point is the place from which the delivered prices are computed on all deliveries,
regardless of whether they originate at that point of elsewhere. Under a "single basing-point
system," all sellers regardless of their locations quote delivered prices which are the sum of the
(a) basing point price and (b) published freight tariffs from the basing point to the particular point
of delivery. Thus, the delivered prices quoted by all sellers for a given point of delivery are
uniform regardless of the place from which the delivery is made.

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PRICING METHODS
Price represents one of the four major variables over which the marketing manager exercises
some degree of control in the absence of government fiat or regulations. The price decisions he
lays down and implements are vital to the success of his firm. In fact, price can never be ignored
or dissociated when developing a marketing mix. Under highly competitive conditions, the
marketing manager or entrepreneur has little choice as to the price he may charge if he is to sell
his goods. His crucial decisions are cost decisions rather than price decisions. Likewise under
conditions of monopoly or collusion, the cooperating firms will usually pay littie attention to
prices once they are set.
However, while there may be a number of ways of arriving at a price, under competitive market
conditions, the most common are the following:
Selling at prices somewhat higher than its competitors.
This is especially true with those firms which enjoy a good reputation for selling only quality
goods.
b. Prices in line with those of its competitors. This may be designed to eliminate the possibility of
generating a price war among selling establishments that could only prove destructive to their
interests.
Prices below those of its competitors for certain products
- the intention being either to draw the attention of new customers and thus increase volume of
sales or to dispose of some items where the demand is becoming less and less thereby paving
the way for new supplies of goods.
Some companies may resort to the use of price leadership.
In some fields, many sellers fix their prices by accepting the price announced by a leading firm.