Seminar rules:

1. Put your phones on

silent mode.
2. Participate.
3. Share.
COSTING AND PRICING
RP Anunciado
AD Jumamil
How do you set the prices of your
products?

PRICE = COSTS + MARGINS ?

“Price is not merely a function of costs and margins,
It is an expression of VALUE”
 PRICE = COSTS + MARGINS

The amount The total Profit made

that is amount from the
asked or invested by product
received in the
exchange manufacturer
of for a in the
product product
VALUE = COSTS + MARGINS

MAXIMIZE MINIMIZE OPTIMIZE

 MAXIMIZE MINIMIZE OPTIMIZE
VALUE = COSTS + MARGINS

- Product performance - Production costs

- Usefulness & quality - Indirect costs
- Image/aspirations - Advertising costs
- Brand equity - Distribution costs
- Availability - Manufacturer’s margin
- Distribution strategy - Distributor’s margin
- Service - Seller’s margin
- Before, during & after-sales
services
Costs
And
Costing
COST COMPONENTS
VARIABLE COSTS
- Raw materials
- Direct labor (if salary depends on the number of
items produced)

FIXED COSTS
- Depreciation of tools and equipment
- Admin and overhead costs
- Utilities (Electricity, water, communications)
- Repairs and maintenance
- Marketing and distribution costs (as % of total costs)
STAGES OF COSTING

1. Preliminary costing - done during product

development before samples are made.
2. Cost estimating – final costing prior to production
(materials costing, labor costing).
3. Re-costing – done when there is a change in
production.
4. Actual costing – determined during production
 PRICE
And
PRICING
P 187,500 P 170
P 125 P 250
 2kg
2kg

P 144 P 236.49
MAJOR INFLUENCES ON
PRICING DECISIONS

- Customers
- Competitors
- Costs
 Influence prices through
CUSTOMERS their effect on demand

Influence prices through

COMPETITORS their actions
Influence prices
COSTS because they affect
supply

You can use any or a combination of

the three.
OTHER FACTORS

1. Organizational objectives
• e.g. to produce quality products – higher price
• e.g. to increase sales by 18% - lower price

2. Legal and regulatory issues

• Prices are set by the government or regulatory
body (commodities)
OTHER FACTORS

3. Distribution channels
• Large – price of the product is high
• Short – price is low

4. Price elasticity of demand

• Demand for the product changes due to
change in price (chicken)
OTHER FACTORS

5. Pricing objectives
• Setting the price lower than the competitor to
achieve an increase in market share
• Promos to increase customer’s decisions to buy

6. Product characteristics
• Nature of product, substitute, life cycle
PRICING METHODS

1. Cost-based pricing methods (CBP)

2. Market-based pricing methods (MBP)
COST-BASED PRICING
METHODS
1. Cost-plus pricing
2. Markup pricing
3. Target-return pricing
1. CBP: COST-PLUS PRICING

- One of the simplest pricing method

- Done by calculating the costs of production
incurred and adding a certain percentage
mark-up
- Markup is the percentage of profit
calculated on total costs i.e. fixed and
variable costs
1. CBP: COST-PLUS PRICING

General formula:

Cost base P X
Markup component Y
Prospective selling price P (X + Y)
1. CBP: COST-PLUS PRICING

Example: If Maria’s total cost of producing 1 ube halaya is

P 50 with a markup of 25% on total cost, the selling price
will be calculated as:

Cost base P 50
Markup component (50 x 0.25)
Prospective selling price P 62.50

Thus, Maria earns a profit of P 12.50 per ube halaya.

(Profit = Selling price – cost base)
1. CBP: COST-PLUS PRICING

Example: If Kim’s total cost of producing Lechon is P 3250

with a markup of 50% on total cost, the selling price will be
calculated as:

Cost base P 3,250

Markup component (3,250 x 0.50)
Prospective selling price P 4,875

Thus, Kim earns a profit of P 1,625 per Lechon.

(Profit = Selling price – cost base)
2. CBP: MARKUP PRICING

- A variation of the cost-plus pricing wherein

the percentage of markup is calculated on
the selling price
2. CBP: MARKUP PRICING

Advantages Disadvantages
- Rapid cost recovery - Ignores current
- Relatively simple demand
- IF used by the entire - Ignores consumer’s
industry, price tends perception of price
to be similar, thus, - Does not consider
competition can be competition
minimized
2. CBP: MARKUP PRICING

General formula:

Prospective P X
selling price 1 – desired return on sales
2. CBP: MARKUP PRICING

Example: If Anna produces a chocolate bar at P 16 and

wants to earn a markup of 20% on sales, then the markup
price will be:

P 16
1 – 0.20
Prospective selling price = P 20

Thus, Anna earns a profit of P 4 per bar of chocolate.

2. CBP: MARKUP PRICING

Example: If Aries produces a mosquito repellant at P 165

and wants to earn a markup of 25% on sales, then the
markup price will be:

P 165
1 – 0.25
Prospective selling price = P 220

Thus, Aries earns a profit of P 55 per bottle of mosquito

repellant.
3. CBP: TARGET-RETURN PRICING

- In this method, the price is set to yield a

required Rate of Return on Investment (ROI)
from the sale of goods and services.
 3. CBP: TARGET-RETURN PRICING

General formula:

Prospective = Unit Cost + (Desired return x Capital invested)

selling price Unit sales
3. CBP: TARGET-RETURN PRICING
Example: If Jen invested P 1,000,000 in soap business and
expects 20% ROI for producing 50,000 soaps with a direct
cost of P 20, the target return price is:

P 20 + (0.20 x 1,000,000)
50,000
Prospective selling price = P 24

Thus, Jen earns a profit of P 4 per bar of soap.

3. CBP: TARGET-RETURN PRICING
Example: If Nida invested P 50,000 in tinapa business and
expects 18% ROI for producing 625 kg of tinapa for a
direct cost of P 80, the target return price is:

P 80 + (0.18 x 50,000)
625
Prospective selling price = P 94.40

Thus, Nida earns a profit of P 14.40 per kg of tinapang

bangus
ADVANTAGES & DISADVANTAGES OF COST-
BASED PRICING METHODS

Advantages Disadvantages
- Required minimum - Ignores price
information strategies of
- Simple calculations competitors
- Insures sellers against - Ignores the role of
the unexpected customers
changes in costs
 MARKET-BASED
PRICING METHODS

1. Perceived value pricing

2. Going-rate pricing
3. Sealed bid pricing
4. Differentiated pricing
1. MBP: PERCEIVED VALUE PRICING

- Price is fixed based on customers’ perceived

value
- Customers’ perception can be influenced by
several factors such as advertising, effective sales
force and after-sales service staff
- Market research is needed to establish the
customers’ perceived value
1. MBP: PERCEIVED VALUE PRICING

Examples:

vs

vs
2. MBP: VALUE PRICING

- Low-priced products are designed with high-

quality offering.
- Prices are not kept low but the product is re-
engineered to reduce cost of production and
maintain the quality simultaneously.
2. MBP: VALUE PRICING

Example: TOYOTA

Toyota Wigo is designed to have

the necessary features that live
up to the Toyota quality but
offered at a comparatively
lower price.
3. MBP: GOING-RATE PRICING

- Price is set by major competitors

- If a major competitor changes its price, then the
smaller companies may also change their price,
irrespective of their costs and demands
- Reduces likelihood of price wars
3. GOING-RATE PRICING – SUB-METHODS

1. Competitors’ ‘parity method

• Same price as the major competitor’s price
2. Premium pricing
• Charging a little higher for some additional special
features compared to competitors
3. Discount pricing
• Charging a little lower for lacking certain features
as that of the competitors’
3. GOING-RATE PRICING – SUB-METHODS

Examples
3. MBP: GOING-RATE PRICING

Advantages
- The only way to set price when costs are difficult to measure
and competitor’s response is uncertain
- A more relevant method
- Brings uniform pricing in the industry while ensuring fair return
to the sellers
- Protects consumers’ from being cheated and misguided
- More options for the consumers at, more or less, the same
price
3. MBP: GOING-RATE PRICING

Disadvantages
- One-sided, only competition factor is considered
- Ignores company’s objectives, costs, qualities, services and
consumers’ perception of value
- It is senseless to follow blindly the leaders or strong
competitors as every firm has its special problems,
opportunities, situations and capabilities
- Temporary pricing of competitors may lead to erroneous
decisions
4. MBP: SEALED BID PRICING

- Adopted in the case of large orders or contracts

especially of industrial buyers and the government
- Companies submit sealed bids in response to
advertisement
- The buyer will choose the lowest possible price,
hence, the seller is expected to provide the best
possible quotation
5. MBP: DIFFERENTIATED PRICING

- Charging different prices for the same product or

service based in different factors
5. MBP: DIFFERENTIATED PRICING

1. Customer segment Pricing

- Prices depend on the size of order, payment
terms, etc.
5. MBP: DIFFERENTIATED PRICING

2. Time Pricing
- Prices for the same product depend on the
timing or season
5. MBP: DIFFERENTIATED PRICING

3. Area Pricing
- Same product is
priced differently
in different areas
5. MBP: DIFFERENTIATED PRICING

4. Product Form Pricing

- Different versions
of the product are
priced differently
but not
proportionately to
their respective
costs
Pricing Process
 • Selecting the price objective
1

• Determining demand
2

• Estimating cost
3

• Analyzing competitor’s costs, prices and offers

4

•Selecting a pricing method

5

•Selecting a final price

6
PRICING OBJECTIVES

1. Profit-oriented objectives
• Maximizing profit
• Achieving a target return

2. Sales-oriented objectives
• Increasing the sales volume
• Increasing or maintaining market share
PRICING OBJECTIVES

3. Status quo-oriented objectives

• Stabilizing the prices
• Meeting the competition
• Determining prices according to
consumer’s paying capacity
Adapting the Price
Develop a pricing structure that reflects variations in:
- Geographical demand and costs
- Market-segment requirements
- Purchase timing
- Order levels
- Delivery frequency
- Guarantees
- Service contracts
Price adaptation strategies
1. Geographical Pricing
• Should you charge higher prices to distant
customers to cover higher shipping costs?
• For exports – taxes and tariffs

2. Price discounts and allowances

• For volumes, off-season buying
Price adaptation strategies
3. Promotional Pricing
• Special event pricing
• Psychological discounting (from artificially high
price then offering substantial savings)
• Low interest financing

4. Discriminatory Pricing
• Depends on intensity of demand, volume,
customer groups (students, senior citizens)
Price-Quality Strategies
Price
High Medium Low
Premium High Super
Product Quality

High
Value Value Value

Over- Medium Good

Medium charging Value Value

False
Low Rip-Off Economy
Economy
 Price-Reaction Program for Meeting a
Competitor’s Price Cut
No Hold our price at present
Has competitor cut
level; continue to watch
his price?
No competitor’s price
Yes No
Is the price likely to Is it likely to be a
How much has his price
significantly hurt permanent price
Yes Yes cut been?
your sales? cut?

By less than 2% By 2 - 4% By more than 4%

Include discount coupon Include discount coupon Drop price to
for the next purchase for the next purchase competitor’s price
THANK YOU!