Principles of Marketing: Pricing Strategies and Calculations

This set covers vocabulary and formulas related to pricing principles, including cost factors, break-even analysis, and various pricing strategies such as psychological, premium, and bundle pricing.

Price

The amount of money charged for a product or service or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Internal Factors of Pricing

Factors within a company that influence price setting, including Marketing objectives, Marketing mix strategy, Costs, and Organizational considerations.

Marketing Mix

A strategy consisting of the 4 P’s: Product, Price, Place, and Promotion.

Fixed Costs

Costs that stay the same regardless of sales, such as rent, salaries, and insurance.

Variable Costs

Costs that change depending on the number of units produced, such as raw materials and packaging.

External Factors of Pricing

Forces outside the company that affect pricing, including Market and demand, Competition, and environmental factors like economic conditions, resellers policies, government, and social concerns.

Cost-based pricing

A pricing approach concerned with the expenses of the company in creating a product, calculated as $\text{Selling Price} = \text{Total Cost} + \text{Markup (profit)}$ or $\text{Selling Price} = \text{Cost} \times (1 + \text{Markup rate})$.

Demand-based pricing

A pricing focus on the needs of customers, which may also be based on the concept of peak and off-seasons.

Break-even pricing

The price at which total revenue equals total costs, meaning the business makes neither a profit nor a loss.

Break-Even Point (in units) Formula

$$\text{BEP} = \frac{\text{Fixed Costs}}{\text{Selling price per unit} - \text{Variable cost per unit}}$$

Contribution Margin per unit

$$\text{Contribution margin} = \text{Selling Price} - \text{Variable Cost}$$

Break-even Sales (Pesos) Shortcut Formula

$$\text{Break-even Sales} = \text{BEP in units} \times \text{Selling Price}$$

Contribution Margin Ratio (CMR)

$$\text{CMR} = \frac{\text{Selling Price} - \text{Variable Cost}}{\text{Selling Price}}$$

Break-even Sales Formula (using CMR)

$$\text{Break-even Sales (in pesos)} = \frac{\text{Fixed costs}}{\text{Contribution Margin Ratio (CMR)}}$$

Psychological Pricing

A method that appeals to customers’ ideas regarding affordability and value, such as Odd-even pricing (e.g., $P\,99$ instead of $P\,100$).

Time-based pricing

A pricing method that charges customers according to time, such as happy hour discounts, weekday movie tickets, or higher airline fares during Christmas.

Location-based pricing

Pricing based on proximity and the quality of the area, such as $P\,8,000$ for VIP seats and $P\,5,000$ for Lower Box seats.

Competitive pricing

Setting prices that match those of popular or well-known rival products on the market.

Premium pricing

Prices set higher than similar offerings to show they are exclusive and of the highest quality, used by brands like Apple, Rolex, and Gucci.

Market-skimming pricing

Setting a high initial price for a new product to skim maximum revenue from segments willing to pay the high price.

Market-penetration pricing

Setting a low initial price for a new product to attract many buyers and a large market share.

Bundle pricing

A sales strategy involving offering two or more related products and services as a package at a discounted price.