DEVELOPING THE

MARKETING MIX
PRODUCT PRICING
 PRODUCT PRICING:
Product Cost Estimation
MOTIVATION / ACTIVITY
■ Shown below is a big circle, with the word "price" inside the circle.
– "What comes to your mind when you see/hear the word "price" or
what word or group of words can you correlate with the word
Price?“

PRICE

■ Ask the students the following guide questions.

– Do you consider the price when you buy something?
– Does the product's price influence your purchasing decision?
IMPORTANCE OF PRICE

1. Price dictates product demand. Market patronizes products

because of their prices. Some factors must be considered, like
product quality and type of services given to customers by the
company's staff.
2. Price determines the level of expenditures of the market. Price
influences buyers’ decision whether to buy the product or not.
PRICE
■ The price that a marketer charges for a product or service is
a vital decision that has far-reaching consequences.
■ From the point of view of the business, products and
services are offered with the intention of making a profit.
■ Total cost of production must be taken into account before
determining the price of a product or service.
■ This is because it would make no business sense if the price
is less than the cost of production"
PRODUCTION COST ESTIMATION
■ Before determining the price of a product or services, the total cost of
production must be computed
■ With physical products, two types of cost are calculated:
1. Unit Variable Cost
– refers to all expenses incurred in manufacturing one unit of a product.
– this includes the cost of direct materials, direct labor, and direct
overhead.
2. Unit Share of Operating and other Expenses – Fixed Cost
– Refers to all expenses incurred by the organization that are not related to
the manufacture of the product.
– This includes executive and staff salaries, office rental, advertising and
promotions, professional fees, and other similar expenses
Note: Total fixed cost incurred in a specific period must be shared by all units of the product
produces in the same period.
VARIABLE COST: DIRECT MATERIALS
■ Direct materials used in the manufacture of a shirt may
include the fabric, thread, and button.

Material Cost Qty Cost per Shirt

Fabric P100.00 per meter 2 P200.00
Thread P4.00 per meter 5 P20.00
Buttons P5.00 per piece 6 P30.00
Cardboard box P10.00 per piece 1 P10.00
Total P260.00
VARIABLE COST: DIRECT LABOR
■ Direct labor would include the wages of all workers directly responsible for
making the shirt. If for example, workers are paid on a per-piece basis, its
unit direct labor cost would be as follows
Process Labor Cost per Piece
Fabric cutting P30.00
Sewing P25.00
Collar attachment P5.00
Button attachment P5.00
Total P65.00
■ If workers are paid on a daily, weekly, or semi-monthly rate rather than per
piece basis, the computation of labor cost would be more complex as the
total unit output per period of production would have to be included
VARIABLE COST: DIRECT OVERHEAD
■ Direct Overhead is the amount that was spent in the
manufacturing overhead (energy, water, and other utility costs) for
every shirt production
■ This can be computed by dividing the total factory manufacturing
overhead in a month by the number of units of shirt produced
within the same month.
■ Given:
o Total factory manufacturing overhead for a month = P20,000
o Number of shirts produced within the same month = 4,000
pieces
20000
➢ Direct overhead =
4000
➢ Direct overhead = P5.00
VARIABLE COST
■ The sum of the three costs (direct materials, direct labor, and
direct overhead which is P5.00) is the product’s unit variable
costs, or how much it costs to produce one unit of the product.

Cost Components Amount

Direct Materials P260.00
Direct labor P65.00
Direct overhead P5.00
Total P330

■ Therefore: Variable Cost = P330

FIXED COST
■ Fixed costs are expenses incurred by the organization that are not
related to the manufacture of the product.
■ These include executive and staff salaries, office rental, advertising,
and promotions, professional fees, and other similar expenses.
■ Total fixed costs incurred in a specific period must be shared by all units
of the product produced in the same period.
■ Given:
o Total fixed cost incurred for a month by shirt factory = P400,000
o Number of shirts produced within the same month = 4,000 pieces
400000
➢ unit Fixed cost =
4000

➢ unit Fixed cost = P100.00

TOTAL UNIT COST OF EACH SHIRT
Cost Components Amount
Direct Materials P260.00
Direct labor P65.00
Direct overhead P5.00
Unit fixed cost P100.00
Total P430.00
■ If the shirt factory is able to sell each of the 4,000 shirts it
produced in a particular month at its unit cost of P430.00, the
company would make profit but will also incur no loss. This is
called the break-even point.
■ Break-even point is the lowest possible price the company can set
for its shirts (under normal circumstances)
END OF PRESENTATION
PRODUCT PRICING:
Pricing Strategies
PRICING STRATEGIES
■ The following are the strategies that can be used in pricing a product
1. Mark-up pricing
2. Target return pricing
3. Odd pricing or Psychological pricing
4. Loss leader pricing
5. Price lining
6. Prestige pricing
7. Marginal pricing
8. Predatory pricing
9. Going rate pricing
10. Promotional pricing
■ When new products are introduced into the market, one of the two price
strategies that can be used
1. Price skimming
2. Penetration pricing
PRICING STRATEGIES: MARK–UP PRICING
1. Mark–up pricing
– Is a pricing strategy that allows the seller a fixed markup every time
the product is sold
– The biggest weakness of this pricing strategy is the inclusion of unit
sales in determining the product’s markup price. In reality, total unit
sales is affected by the producer’s final markup price.
– Formula for Markup price:
FC where:
■ UC = VC/U +
US UC Unit cost
VC/U Variable cost per unit
UC FC Fixed cost
■ MUP = US Unit sales
(1−DMU)
DMU Desired markup
MUP Marked-up price
PRICING STRATEGIES: MARK–UP PRICING
1. Mark–up pricing
FC UC
– Formula for Markup price: UC = VC/U + and MUP =
US (1−DMU)
– Example: Given
VC/U = P10.00
FC = P300,000
US = 50,000 units
DMU (desired markup) = 20%

FC UC
UC = VC/U + MUP =
US (1−DMU)
300,000 16.00
UC = 10.00 + MUP =
50,000 (1−0.20)

UC = P16.00 MUP = P20.00

PRICING STRATEGIES: TARGET RETURN PRICING
2. Target return pricing
– is a pricing method that allows a product manufacturer to recover a
certain portion of his/her investment every year
– Because unit sales is also included in its price determination, target
return pricing has the same weakness as that of markup pricing
– Formula for Target return price:
FC where:
■ UC = VC/U +
US UC Unit cost
VC/U Variable cost per unit
DR×IC FC Fixed cost
■ TRP = UC + US Unit sales
US
IC Invested capital
DR Desired return
TRP Target return price
PRICING STRATEGIES: TARGET RETURN PRICING
2. Target return pricing
FC DR×IC
– Formula for Markup price: UC = VC/U + and TRP = UC +
US US
– Example: Given
UC = P16.00
DR = 25%
IC = P1,000,000
US = 50000 units

DR × IC
TRP = UC +
US
0.25 × 1,000,000
TRP = 16.00 +
50,000
TRP = P21.00
PRICING STRATEGIES: ODD PRICING
3. Odd pricing or psychological pricing
– a pricingmethod is premised on
the theory that consumers will
perceived products with odd price
endings as lower in price than
they actually are.
– As such, consumers may find
products priced at P99.95 closer
to P99.00 than to P100.00
– There are about an equal number
of researches that say this is true,
and those that say that it is
inconclusive
PRICING STRATEGIES: LOSS LEADER PRICING
4. Loss Leader pricing
– a pricing strategy frequently utilized by supermarkets.
– It is based on the practice of housewives using only a few
selected essential products (ex. sugar, coffee, detergents, and
canned goods), as their sole basis for price comparison.
– Supermarket retailers will deliberately priced these loss leaders
or comparison items low to make their products appear more
affordable than others.
– The markup lost on these loss leader items are recovered from
other items where markups are higher.
PRICING STRATEGIES: PRICE LINING
5. Price lining
– a pricing strategy designed to simplify a consumer’s buying
decision.
– This method involves reducing the number of price points on
merchandise to a sa little as possible, in extreme cases to only
one price point.
– Japan Home Center for example, prices all the merchandise in their
store at P66.00 or P88.00
PRICING STRATEGIES: PRESTIGE PRICING
6. Prestige pricing
– a pricing strategy that disregards the unit cost of a product or
service.
– It capitalizes on the high value perception or positive brand reputation
of a product or service.
– It charges the price much higher than its unit cost

– This is a pricing strategy implemented by some fragrance and skin

care products
– Using prestige pricing, it would not be unusual for a fragrance brand
to have a unit cost of P1300 and a selling price of P3500
PRICING STRATEGIES: MARGINAL PRICING
7. Marginal pricing
– Where business organization prices its product at a range below its
unit cost but higher than its unit variable cost
– This is in order to offer the lowest price in a sealed bidding or other
highly competitive situations.
– The failure to adequately cover some or all of the company’s fixed
costs is justified by citing that these fixed costs are “sunk”, or would
be incurred whether or not the order is acquired.
– The main objective of marginal pricing is to outmaneuver competition,
expand customer base, and increase market share.
PRICING STRATEGIES: PREDATORY PRICING
8. Predatory pricing
– A price strategy is where the firm prices its product lower than unit
variable cost, initially resulting in short-term losses.
– The objective of this pricing strategy is to price a new or persistent
competitor out of the market
– After its purpose is achieved, the product’s original selling price is
restored and short-term losses recovered.
– Predatory pricing is illegal in most country including the Philippines
PRICING STRATEGIES: GOING RATE PRICING
9. Going rate pricing
– A pricing strategy where a company prices its product at the same
level as or very close to its competitors’ price
– This effectively maintains the product’s price competitiveness in its
market.
– The danger of going rate pricing is that it may result in price wars,
which each company trying to outprice another, to the detriment of all
industry participants.
PRICING STRATEGIES: PROMOTIONAL PRICING
10. Promotional pricing
– A pricing strategy involving a temporary reduction in the selling price
of a product/ service in order to induce trial or to encourage repeat
purchase
– Almost all companies especially those involved in fast-moving
consumer goods (FMCGs), implement promotional pricing at one time
or another.
PRICE STRATEGIES USED TO INTRODUCE NEW PRODUCT

1. Market skimming pricing strategy involves setting high initial

price for a product or services offered, and after a definite
period of time, companies either lower the price of the offering
or maintain its price.
2. Penetration pricing strategy involves setting low initial price for
new products offered in the market. The objective of penetration
pricing is to be able to enter the market immediately.
PRICE STRATEGY SELECTION
▪ The choice of pricing strategy depends almost exclusively on a company’s
objectives.
PRICING OBJECTIVE PRICING STRATEGY
Maximum revenue Penetration pricing
Marginal pricing
Going rate pricing
Promotional pricing
Maximum market share Penetration pricing
Marginal pricing
Going rate pricing
Promotional pricing
Maximum profit Price skimming
Prestige pricing
Survival Marginal pricing
END OF PRESENTATION
PRODUCT PRICING: Introduction
■ Price is the only "p" in the marketing mix that provides revenues to a
firm. The rest – product, place, and promotions generate expenses.
■ The firm's decision to produce new products or enhance the existing
products entails expenditures.
■ Choosing the right distribution channel for the product and
transporting the products to reach the distribution outlet, like
supermarket and department stores incur expenses.
■ In terms of promotion, the choice of broadcast programs or print
media, whether to utilize sales promotions or public relations as
mediums to reach target market adds to the budget consideration of
the company.
PRICING OBJECTIVES
■ Companies set a particular price for a purpose. It can be that
companies want to:
1. Meet their profit objective. Every company sets a specific profit
target for a particular product at a particular time. This profit
objective or target becomes the motivating force for companies’
marketing efforts.
2. Maintain or improve market share. Right pricing scheme can
enormously build customer traffic and an important factor for
brand shift decision of market
3. Control entry of new players in the market offering competing
brands. Companies do this by offering lower prices and
sometimes much lower than industry standard.
PRICING STRATEGIES
1. Pricing In Relation To Product Quality

a. Premium pricing strategy involves setting high price to products

produced with high quality.
b. Economy pricing strategy involves setting the price low because the
product is of low quality.
c. Value pricing strategy, companies that offer the same high quality
products but offer the customers with more value for their money
d. Overcharging pricing strategy, products are priced high but the
quality of the products is low.
PRICING STRATEGIES
2. Other Pricing Strategies
a. Penetration pricing strategy involves setting low initial price for new
products offered in the market. The objective of penetration pricing is
to be able to enter the market immediately.
b. Market skimming pricing strategy involves setting high initial price for
a product or services offered, and after a definite period of time,
companies either lower the price of the offering or maintain its price.
c. Bundle pricing strategy involves setting one price for a set or
complimentary products.
▪ For example, spaghetti pasta and spaghetti sauce are bundled and given
a price of P100.
▪ Some companies bundle fast-moving products with products that are
slow-moving.
▪ Services can also use bundle pricing strategy, like when resorts offer
packages that consist of accommodation, airfare, and meals.
PRICING STRATEGIES
2. Other Pricing Strategies
d. Geographical pricing involves setting price differently in different
locations. Producers of goods or channels of distribution like
wholesalers set geographical pricing scheme due to shipping cost or
transport cost. Under geographical pricing, seller offers varied
schemes in different situations. Some of these pricing schemes
under geographical pricing are:
▪ Zoning Pricing. This is a type of geographical pricing where the seller
sets up zones where markets within the zone pay the same price for
the products. The farther the distance of the market from the seller's '
zone, the higher will be the product price.
▪ Freight Absorption Pricing. In order to penetrate the market and
to maintain existing customers, some sellers shoulder part, if
not, the entire cost of the freight. Freight absorption strategy is
practiced by some companies in the belief that distribution cost
will be compensated by business done in volume.
REASONS FOR PRICE CHANGE
■ There are reasons why companies desire to increase or lower the
prices of their products. Companies cut price when:
1. There is excess capacity.
2. There is continuous decrease in market share.
3. Competitors lower their price offering and other companies
believe that it is advantageous to their companies to follow
the price decrease.
4. Company desires to regain lost market share and gain more
customers.
5. Company is anticipating new product model or design.
HOW CUSTOMER AND COMPETITORS REACT ON PRICE CHANGE
■ A customer, for instance, may interpret price change as:

1. good buy, especially if the same level of product quality is maintained

by the company (increase);
2. An upcoming new product or model to be launched by the supplier
(decrease);
3. A faulty product feature is present or product quality has been
reduced (decrease);
4. A company's greedy move to gain more profit (increase).

■ Competitors also react to any price change. Similarly, competitors may

also have interpretations to any price change. It may be perceived as the
company's move to get a higher profit margin or to grab a bigger slice of
the market share. Such moves can also be interpreted as a move for every
single firm in the industry to follow.
PRODUCT DISTRIBUTION
PRODUCT DISTRIBUTION: Introduction
■ One of the important decisions that management faces is determining
which marketing channel to use.
■ Product distribution is a critical factor in the efficient distribution of
products from the manufacturer to the final users of the products.
■ The objective of any product distribution is to get the right quantity of
goods at the right place and right time with the least possible cost.
■ Physical distribution of products and logistics deals with the same
activities. These consist of materials handling, order processing,
warehousing, transportation, and inventory.
■ Logistics is concerned with materials management and physical
distribution.
■ Physical distribution links manufacturing and customers, while material
management focuses on the link between the supplier and the
manufacturing.
DISTRIBUTION CHANNELS
■ Marketing intermediaries compose the distribution channel. They
are people who serve as the link between the firm or manufacturer
and the market. Some examples of intermediaries are sales agent
advertising agencies, wholesalers, and retailers. They perform tasks
such as purchasing, storing, selling, and transporting products.
■ Wholesaling intermediaries are those that purchase products from
manufacturers and sell these products to retailers and other
industrial users. Retailers, on the other hand, are those that
purchase products and resell them to final users or market for their
own use. Retailing is the final stage in the channel of distribution.
■ Physical distribution of products starts when there is order from
customers. How to handle such order in terms of quantity, date of
delivery, speed, price, and mode of transportation to use are
concerns of the distributors.
LEVELS OF CHANNEL DISTRIBUTION
1. Zero-Level Channel. From the manufacturer, products reach the
market directly. This is also known as direct marketing. No
marketing intermediaries or distributors are needed.
2. One-level Channel. Before products reach the market, products
pass through marketing intermediaries either through the
wholesalers or retailers.
3. Two-Level Channel. This consists of two channels of distribution
where products pass through before reaching the end users. These
channels are the wholesalers and retailers, respectively.
4. Three-Level Channel. Products from the manufacturer pass through
three middlemen or channels-the manufacturer's selling agent to
wholesaler, and to retailer before the products reach the market.
DISTRIBUTION STRATEGIES USED BY COMPANIES
1. Intensive Distribution. Firms place products in as many outlets as
possible, be it in supermarkets, department stores, convenience
stores, hotels, and hospitals, among others. This makes the
products accessible and available to all consumers anytime,
anywhere.
2. Selective Distribution. Products are distributed in a limited number
of outlets. Companies develop close business relationship with
selected channels.
3. Exclusive Distribution. In this type of distribution, an outlet is given
exclusive rights to carry the manufacturer's products within a
specific territory. This set-up is not convenient to the customers
because they have to go to that particular outlet where products
are distributed or being sold. Although in exclusive distribution
competition is less.
WHOLESALING
■ Wholesaling involves transaction where products are sold for
resale. The person involved in wholesaling is called the
wholesaler. Other functions of wholesalers are:
1. They buy in large quantities and break these into smaller
numbers for resale to retailers.
2. They provide product knowledge to the retailers as they
promote and sell the products.
3. They provide the manufacturer the necessary feedback or
market information about his product.
4. They handle the storage of the products.
5. They carry the inventory of the manufacturer's products.
6. They provide their own sales agents so that it helps the
manufacturer with minimizing manpower cost.
RETAILING
■ Retailing is the process of selling products to the end users.
Retailing is the last stage in the channel of distribution. The
person involved in retailing is called the retailer. Retailing is
an important industry because:
1. It helps the economy by creating jobs or providing
employment.
2. Majority of the market patronizes retail purchases.
3. It serves as links between the wholesalers' products
and the customers.
4. It sells products that end users can afford.
5. Retail stores are commonly accessible to the market.
CLASSIFICATION OF RETAILERS
■ Retailers can be classified based on the amount of service they
offer the market:
1. Self-service is the type used by sellers in convenience stores.
2. Full-service stores offer more choices of specialty products
providing more services to customers; thus, operating expenses
are high which result in higher product price.
3. Limited-service retailers carry more shopping goods, therefore
providing more sales assistance for customers who need
information about a product.
4. Personal-service retailers provide personalized service to
consumers. Personal services and facilities given to the
customer build up goodwill and increase the volume of sales,
as well as profit.
END OF PRESENTATION