The Pricing Approaches

Introduction The price that a company charges is somewhere between one that is too low to produce a profit and another that is too high to produce any demand. In setting prices, a company must consider the product’s total cost, the competitors’ offers and other internal and external factors, and the consumers’ perception of value.

Pricing Approaches 1. New Product Pricing Strategies 2. Cost-Based Pricing Strategies 3. Value-Based Pricing Strategy4. Competition-Based Pricing Strategies 5. Others

New Product Pricing Strategies 1. Market skimming pricing 2. Market penetration

Alternative pricing approaches: 3. Premium pricing 4. Good value pricing 5. Overcharging pricing 6. Economy pricing

Competition-based pricing strategies1. Going-rate pricing – a company bases its

price largely on the prices of competitors without due regard to its own costs and to its own demand.

2. Sealed-bid pricing Profit method

Product Mix Pricing 1. Product line pricing 2. Optional product pricing – offers to sell

optional or accessory products along with a main product

3. Captive-product pricing – offering products that are essential to the main product itself.

4. By-product pricing 5. Product bundle pricing

Price-adjustment strategies 1. Discount pricing

1. Cash discount 2. Quantity discount 3. Seasonal discount

2. Segmented pricing 1. Customer-segment pricing 2. Product-form pricing 3. Location pricing 4. Time pricing

Value-based pricing strategy Considers buyer’s perception of value as the

main ingredient in pricing.

Customers->Value->Price->Cost->ProductValue-Based Pricing Strategy

Product->Cost->Price->Value->CustomersCost-Based Pricing Strategy

Others Promotional Pricing PsychologicalGeographical pricing

Cost-based pricing strategies1. Cost-plus pricing2. Break-even pricing 3. Target profit pricing

Example # 1 JOMARICO enterprises would like to determine how many units of its product should it sell in order to break-even. The total fixed costs amounts to Php1,000,000 a year. Selling price is Php300 per unit. Variable cost covering direct materials and direct labor is Php200 per unit.

Example 2 If Jomarico enterprises estimates that it will be able to sell only 8,000 units the whole year due to declining demand, at what price must the company sell its products to break-even?

Example 3 As shown in Example 2, Jomarico Enterprises can sell 8,000 units at Php325 each with a variable cost of Php200 per unit and total fixed costs of Php1,000,000 per year. In this case, it will have no profit. What if the company wants to earn a target profit of Php400,000 for the year (instead of no profit at all)? At what price must Jomarico enterprises sell its product so that it can achieve this target profit?