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LESSON 3:
PRICING METHODS
PRICE HIGH OR
PRICE LOW
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PRICE HIGH OR PRICE LOW?

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“It does not always pay to be the most

affordable in the market!”
In highly competitive markets,
having higher prices can indeed lead to
lower sales, thereby putting your
business at risk as you have probably
priced yourself out of the market.
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On the other hand, if your product has no

substitutes and no competition, then high
markups can be sustained and the market
may learn to accept the set prices as givens.
While offering low prices can indeed be a
tool for attracting the market to your
products, what you do not want is a situation
where you offer low prices and attract a lot of
buyers yet without realizing that your low
margins actually do not even your total costs
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EXAMPLE:
A popular food franchise chain quickly
attracted a lot of hopeful investors to get
franchises of their branches after the
investors saw how long the lines of people
were. To their horror, the investor soon
realized during the course of operations that
the low prices that attracted throngs of
people would not even give them enough of
a margin to pay for their overhead
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Price is very sensitive element

because, unique among the components
of the marketing mix, it actually can make
or brake your products profitability if the
price is too low, you could lose money and
at first be driven out of business. If the
price is too high, you could price your
product out of the market and you could
lose buyers (and your business too).
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As it turns out, communication plays a

vital role in this balancing act. A higher
price helps to communicate higher
quality, while a lower price (if done
right) can communicate good value.
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PRICE-QUALITY STRATEGIES
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What exactly is a “high” price? What is

a “low” price? What is a “medium”
price?
The fact is, you really cannot tell if
the price is high or low until you get to
compare it with a point of reference.
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For most cases, the point of

reference will be the market leader
because, by definition it is the most
popular product in the category. The
market leader gets to dictate the going
rate for the product.
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1. Premium strategist, for instance, will

have to be committed in offering the
best quality so that the market accepts
that its price will also be at a premium
as a result.
2. Good-value strategists has to work to
ensure that it will always have
acceptable product quality at very low
prices.
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3. A rare case of a super-value strategist can

be found in Chinese tech firm Xiaomi whose
product regularly sell at staggeringly low
prices even for quality that is practically at
par with that of high-end smartphones and
other devices. It manages to do this through
a bold strategy of selling its products at a
price that just barely cover its costs. Xiaomi
only begins to make a money once the
costs of manufacturing the product go down
typically a year or so after a particular model
was first sold.
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PRICING OBJECTIVES
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What is your Pricing Objectives?

• Prices can be set low enough so as to
discourage potential competitors from
entering the market.
Profit per se is just one possible objective in
pricing. For instance, a product can be priced
primarily for the purpose or Survival. In this
case, price may be dropped temporarily just to
ride out the attrition, assuming that the firm is
strong enough to sustain itself during this lean
period.
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• Prices can be discounted for a limited

time in order to encourage immediate
purchase.
Most firms tend to price for the sake of
current profit maximization, especially the
management is being evaluated on an
annual basis. The risk with this strategy is
that sometimes, the long term is
compromised for the sake of boosting
current profits.
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EXAMPLE:
Time Magazine once decided to offer subscriptions at just
half price in an attempt to increase its readership. It worked.
People who would otherwise not bother to subscribe did.
Unfortunately, the effect of this drive was that the market profile
of a typical Tine reader was compromised. Whereas before the
typical Time readership was composed of well-educated
professionals, it was then diluted by students, etc. who could not
care less about the products being advertised. Advertisers
complained and threatened to pull out especially as the new
threatened to compromise the valuable "exclusivity" of the
magazine. So, Time had to let go of the new subscriber base
through attrition by placing the subscription rates back to normal.
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• Prices can be set high in order to

communicate a premium feel for the
product.
If the objective is market share leadership
then the price is set in such a way to
appeal to the mass market. However, if the
objective is product quality leadership then
a premium price may be set in order to
best communicate this attribute to the
market.
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SETTING THE PRICE

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Mark-up Pricing
⊸ Here, the cost of producing a product is
first estimated, with cost often being
primarily defined as the variable costs of
a product or the costs of its direct
components.
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Thus, if a bakeshop's pie uses 40 pesos worth of fruit, 5 pesos

worth of crackers,10 pesos in miscellaneous.
Other ingredients, then the cost is computed as 55 pesos. on
the other hand, it is not unusual for service-based industries to
also factor in the cost of all the physical activities involved (an
accounting procedure known as activity-based costing). In this
case, the labor involved in making that one pie-perhaps a cost
equivalent to one hour of the baker's wage-is added into the
computation as well, along with the cost of electricity (calculated
for that one pie) and perhaps even down to the depreciation
cost for the oven.
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Once the cost is estimated, a standard

markup percentage is pegged on. Thus,
if the cost of producing the pie is 55
pesos and the standard markup of the
firm is 100percent, then the markup price
becomes 110 pesos. Markup pricing is
possibly the simplest form of pricing that
can be used. How to determine the
standard markup?
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There is admittedly a lot of discretion in
determining this why use a standard markup in the first
place?
The answer is because it makes the pricing process
easier. Imagine if you have a bakeshop that produces
half a dozen new items every week. Having a standard
markup simplifies the determination of the selling price
for each new product that is developed target return
pricing is similar to markup pricing, except that it is
based on the Return on Investment requirements of the
firm.
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The formula for this is

Target Price=Unit Cost + (Desired Return) x Invested Capital)
Unit Sales

There is however, one possible flaw in the logic of

this model: it assumes unit sales can be predicted,
even before the price is set. This however goes
against the economic premise that sales are
supposed to be a function of price and not vice
versa.
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Firms which use target return pricing

therefore tend to resort to the
implementation of sales quotas. The
firm's sales personnel must achieve the
target unit sales or else the planned ROI
will not materialize at all
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Perceived value
➢ pricing is a proactive and marketing-
based (rather than accounting-based)
pricing method whereby the value of
the product to the market becomes the
basis for the price. this will require
some market research in order to
determine just how much the target
market believes the product is worth to
them.
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What if the target market undervalues a product, stating
that they will only pay an amount that will not even
cover the product's costs?
• Then the marketers will have their work cut out of
them.
• The next step would then involve the marketers
revamping the product-packaging, quality and other
communication points-in order to convince the market
that it is actually worth far more.
• Here, marketers will use all the other elements of the
marketing mix, namely product, place, and promotions
to build up the perceived value of the product.
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Going rate pricing

➢ is another relatively simple pricing
technique this time basing price on
industry rates rather than on either costs
or market perceptions.
In a way, going rate pricing is proactive
because it uses price as a communication
tool to inform the market about the value of
the product. In fact, this pricing technique
can be used to aggressively send messages
about your product vis-a-vis the competition.
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If you are producing brand b which

intends to challenge long-standing leader
brand a and you know that brand a is
priced at 98 pesos per unit, then you
may price your product at 95 pesos per
unit, just to communicate that your
product is a better value note how this
price is derived purely based on the price
point of brand a, rather than on your
actual costs or consumer perceptions.
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Assume that the market leader k's price

is 20 pesos per bottle of a beverage.
Because it is the market leader, k becomes
the reference price by which all other
products are compared.
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If you are selling the challenger product L, you may
choose to:
• Price slightly Lower than K at 19.95. There is hardly any
difference in price here, and yet it helps to
communicate that product L is a better value than K.
Hopefully, because of its proximity to k's price, it also
manages to communicate that it is as good as K.
• Price much lower than k at, say, 17 pesos. This
communicates good value, but only if the product
quality is as good as k in the first place. Otherwise, this
lower price presents a high risk of communicating that L
is actually an inferior product.
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If you are selling the challenger product L, you may
choose to:
• Price at a very low price point of, say 14 pesos.
Because of its remote proximity to k's price, this already
be classified as a different product category altogether.
This could be good or bad for L. Good because it may
no longer be perceived as being direct competition to k
and perhaps build up its own budget-seeking market
that could be huge. Bad because the product may not
be taken that seriously and there may be a need to
create a different selling strategy in order to survive
having a narrower profit margin as compared to k.
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If you are selling the challenger product L, you may
choose to:
• Price slightly higher than K at 21 pesos. This is a move that
very few are historically willing to take (because it seems
counter-intuitive to compete with a leader by having a higher
price), and yet the communication opportunities for doing so
are promising. For one thing, pricing slightly higher can both
communicate that product L is in the same league as K
(thereby building trust in the product) but the higher price
provides the added message that L may in fact be superior
to K. Because the price difference is negligible, this may
help to convince quality-prioritizing consumers to switch
from K to L.
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If you are selling the challenger product L, you may
choose to:
• Price very much higher than K at 24 pesos. This
communicates that L is in fact at a class of its own
and that it should not be compared to K because it is
superior in some way. This will only work, however, if
L does manage to communicate superiority, such as
with better packaging or through its advertising.
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If you are selling the challenger product L, you may
choose to:
• Price at a very high price point of, say, 28 pesos. This can
build up a premium category that did not exist before,
informing the market. That L is the premium brand and
should not be compared with K. Done properly, this may
help build up a market of premium consumer’s, effectively
creating an upward stretch in the category's product line.
But this may also require the development of a totally
different market strategy as the product may appeal to a
totally different market segment and may require special
executions in order to properly communicate and justify its
premium nature.
 THANK YOU!

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