Chapter 13 Marketing in Asia

Building the Price Foundation

Prepared by:
Mary Asley C. Robillos
Khriszea Baslao

LEARNING OBJECTIVES (LO)

LO1 Identify the elements that make up a price.
LO2 Recognize the objectives a firm has in setting prices
and the constraints that restrict the range of prices a firm
can charge.

LO3 Explain what a demand curve is and the role of

revenues in pricing decisions.

LEARNING OBJECTIVES (LO)

LO4 Describe what price elasticity of demand means to a
manager facing a pricing decision.

LO5 Explain the role of costs in pricing decisions.

LO6 Describe how various combinations of price, fixed cost,
and unit variable cost affect a firms breakeven point.

NATURE AND IMPORTANCE OF PRICE

What is a Price?
Price
- Is the money or other
considerations (including other goods
and services) exchanged for the
ownership or use of a good or
service.
Barter
- The practice of exchanging goods and services for other
goods and services rather than for money.
Price Equation
Final Price= list price (Incentives + Allowances) + Extra Fees

The price a buyer pays can take different names depending

on what is purchased.

Price and the Global Marketplace

To generate profits in todays global marketplace, international firms look around the
world to find both new markets to increase revenues and suppliers whose efficiencies
and lower hourly wages can reduce the prices the buying firms must pay.
IKEA is both opening new stores and contracting with furniture manufacturers around
the world. To compete in China, IKEA has slashed prices to appeal to consumers in
the countrys growing middle class. The strategy seems to be working: IKEAs first
store in Beijing floor space the size of eight football fields and can handle 6 million
customers annually.

Price as an Indicator of Value

Value
- The ratio of perceived benefits to price, or
Perceived Benefits
Value =
Price

Value-Pricing
- Engaged by creative marketers, simultaneously increasing
product and service benefits while maintaining or decreasing
price.

Price in the Marketing Mix

Pricing is a critical decision made by a marketing executive
because price has a direct effect on a firms profits. This is
apparent from a firms profit equation:
Profit = Total Revenue Total Costs
= (Unit Price x Quantity Sold) Total cost

The six steps in setting price.

The Six Steps in Setting Price

1. Identify pricing objectives and constraints
2. Estimate demand and revenue.
3. Determine cost, volume, and profit relationships.
4. Select an approximate price level.
5. Set list or quoted price.
6. Make special adjustments to list or quoted price.

IDENTIFY PRICING OBJECTIVES AND

Step 1
CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES
Pricing Objectives
- specifying the role of price in an organizations marketing and
strategic plans.
Pricing Objectives
1. Profit 4. Unit Volume
2. Sales5. Survival
3. Market Share 6. Social Responsibility

IDENTIFY PRICING OBJECTIVES AND

Step 1
CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
Pricing Constraints
- Factors that limit the range of prices a firm may set.
Pricing Constraints
1. Demand for the Product Class, Product, and Brand
2. Newness of the Product: Stage in the Product Life Cycle
3. Single Product versus a Product Line
4. Cost of Changing Producing and Marketing the Product
5. Cost of Changing Prices and Time Period They Apply
6. Type of Competitive Markets
7. Competitors Prices

Pricing, product, and advertising strategies available to firms in four

types of competitive markets.

Step 2

ESTIMATE DEMAND AND REVENUE

Newsweek Pricing Experiment

Houston newsstand buyers: US$2.25
Forth Worth, New York, Los Angeles, Atlanta: US$2.00
San Diego: US$1.50
Minneapolis-St. Paul, New Orleans, Detroit: US$1.00
Competitors Price Difference: US$1.95

(A) Demand curve under initial conditions

(B) Shift the demand curve with more favorable conditions

Demand curves for Newsweek showing the effect on annual sales (quantity demanded per
year) by a change in price caused by (A) a movement along and (B) a shift of the demand
curve

The Demand Curve

This is a graph relating the quantity and sold and price, which
shows the maximum number of units that will be sold at a given
price.
Key factors in estimating demand:
1. Consumer tastes
2. Price and availability
3. Consumer income

Demand Factors:
1. Consumer Tastes
- These depend on may factors such as demographics, culture,
and technology.
2. Price and availability of similar products
- A point to remember, as price of substitutes falls on their
availability increases, the demand for a product will fall.
3. Consumer Income
- In general, as real consumer income (allowing for inflation)
increases, demand for a product also increases.

Fundamentals of Estimating Revenue

While economists may talk about demand curves,
marketing executives are more likely to speak in
terms of revenues generated, which are the
monies received by the firm for selling its products.
Three Concepts to Pricing Decisions:
1. Total Revenue
2. Average Revenue
3. Marginal Revenue

Fundamental
Concepts about
revenues, which
are the monies
received from
selling the
product: Total
revenue, average
revenue, and
marginal revenue.

Demand curve for Newsweek

showing the effect on annual
sales by a change in price
caused by a movement along
the demand curve

Demand curve for Newsweek

showing the effect on annual
sales by a change in price
caused by a shift of the
demand curve

How Newsweeks
downward-sloping
demand curve affects
total, average, and
marginal revenues.

Price Elasticity of Demand

Price elasticity of demand, or the percentage change in quantity
demanded relative to a percentage change in price. It is
expressed as
Percentage change in quantity demanded

E = ---------------------------------------------------Percentage change in price

LO4

Price Elasticity of Demand Three Forms

1. Elastic Demand
- exists when a 1 percent decrease in price produces more than a
1 percent increase in quantity demanded, increasing sales revenue.
2. Inelastic Demand
- exists when a 1 percent decrease in price produces less than a
1 percent increase in quantity demanded, decreasing sales revenue.
3. Unitary Demand
- exists when the percentage change in price is identical to the
percentage change in quantity demanded so that sales revenue
remains the same.

DETERMINE COST, VOLUME, AND PROFIT

Step 3
RELATIONSHIPS
Fundamental concepts
about costs, which are
the monies the firm pays
out to its employees and
suppliers: Total cost,
fixed cost, variable cost,
and marginal cost.

Marginal Analysis and Profit Maximization

A basic idea in business, economics, and indeed everyday life is
marginal analysis, which is a continuing, concise trade-off of
incremental costs against incremental revenues.
*As long as revenue received from the sale of an additional
product (marginal revenue) is greater than the additional cost of
producing and selling it (marginal cost), a firm will expand its
output of that product.

Break-Even Analysis
This is a technique that analyzes the relationship between total
revenue and total cost to determine profitability at various levels
of output.
Break-even point (BEP) is the quantity at which total revenue
and total cost are equal.
Fixed Cost

FC

BEPQuantity = ----------------------------------- = -----------------Unit price Unit variable cost

Price - UVC

Calculating a Break-Even Point

Example 1: Pretty Asley, a frame store owner wish to identify how many
pictures she must sell to cover her fixed cost a given price. Assume that the
demand for her framed pictures has increased so the average price
customers are willing to pay for each picture is $100.
Fixed Cost

Fixed Cost
FC
: $28,000
BEPQuantity = ----------------------------------- = ----------Unit Variable Cost : $30
Unit price Unit variable cost
Price UVC

Break-Even Quantity: $400

$28,000
-----------------$100 - $30

= 400 pictures

Profit is maximum at the

quantity at which marginal
revenue and marginal cost.

Calculating a break-even point for a picture frame store. Calculating a

break-even point for the picture frame store shows its profit starts at 400
framed pictures per year

Applications of BreakEven Analysis

Frequently used by
marketers
to study
the impact on profit
changes in price, fixed
cost, and variable
cost.
Answers what if
questions about the
effect of changes in
prices and costs on
their profit.

Calculating a Break-Even Point

Example 2:

For a higher level of fixed costs on profit:

Profit = Total revenue Total cost
= (P x Q) [FC + (UVC x Q)]
So profit at 1 million units of sales before automation is:
Profit = (P x Q) [FC + (UVC x Q)]
= ($10 x 1,000,000) [$1,000,000 + ($7 x 1,000,000)]
= $10,000,000 - $8,000,000
After automation, profit is:
Profit = (P x Q) [FC + (UVC x Q)]
= ($10 x 1,000,000) [$4,000,000 + ($2 x 1,000,000)]
= $10,000,000 - $6,000,000
=$4,000,000

Chapter 14 Marketing in Asia

Building the Price Foundation

Prepared by:
Mary Asley C. Robillos
Khriszea Baslao

The six steps in setting price.

Step 4

SELECT AN APPROXIMATE
PRICE LEVEL

A key to a marketing managers setting a final price for a product is to

find an approximate price level to use as a reasonable starting point.
Four Common Approaches
1. Demand-oriented
2. Cost-oriented
3. Profit-oriented
4. Competition-oriented

Four approaches for selecting an approximate price level

Demand-Oriented Approaches
Demand-oriented

approaches

weigh

factors

underlying

expected customer tastes and preferences more heavily than

such factors as cost, profit, and competition when selecting a
price level.
Include skimming, penetration, prestige, price lining, oddeven, target, bundle, yield management.

1. SKIMMING
A firm introducing a new or innovative product can use
skimming pricing, setting the highest initial price that customers
really desiring the product are willing to pay.
Skimming pricing is an effective strategy when:
2. Enough prospective customers are willing to buy the product
immediately at the high initial price to make these sales profitable.
3. The high initial price will not attract competitors
4. Lowering price has only a minor effect on increasing the sales volume
and reducing the unit costs
5. Customers interpret the high price as signifying high quality

2. PENETRATION PRICING
Setting a low initial price on a new product to appeal
immediately to the mass market.
Example:
Nintendo consciously chose a penetration strategy when it
introduced Nintendo DS, its newest generation handheld video
game player to compete with Sonys PSP handheld player, which
used a skimming pricing strategy.

3. PRESTIGE PRICING
- Involves setting a high price so that quality- or statusconscious consumers will be attracted to the product and buy it.

Demand curves for two

types of demandoriented pricing
approachesprestige
pricing and price lining
apply to different kinds of
products.

4. PRICE LINING
- Often a firm that is selling not just a single product but a line
of products may price them at a number of different specific
pricing points.
Example,

department

store

manager may price a line of womens

casual slacks at US$59, US$79,
US$99

5. ODD-EVEN PRICING
- Involves setting prices a few dollars or cents under a
rounded priced at something over US$900 rather than about
US$1,000.
Example:
Carrefour Singapore offers an Asus notebook for US$999, Sony
markets its VAIO notebook for US$4,999, and Cold Storage
Singapore prices its semillion Sauringon Blanc at US$19.90.

6. TARGET PRICING
- Manufacturers deliberately adjusting the composition and
features of a product to achieve the target price to consumers.
7. BUNDLE PRICING
- The marketing of two or more products in a single package
price.
Example: Cathay Pacific Airlines Dragon Holidays offers
vacation packages that include airfare, car rental, and lodging.

5. YIELD MANAGEMENT PRICING

- The charging of different prices to maximize revenue for a
set amount of capacity at any given time.
- A complex approach that continually matches demand and
supply to customize the price for a service.
Example:
Airline flights are priced differently within a coach class.

Cost-Oriented Approaches
With cost-oriented approaches a price setter stresses the cost
side of the pricing problem, not the demand side. Price is set by
looking at the production and marketing costs and then adding
enough to cover direct expenses, overhead, and profit.
Approaches are standard markup, cost-plus, and experience
curve.

1. STANDARD MARKUP PRICING

- Entails adding a fixed percentage to the cost of all items in a
specific product class.
Example:
Singapores main supermarkets such as FairPrice, Cold Storage,
and ShopNSave have different markups for staple items and
discretionary items.

2. COST-PLUS PRICING
- Involves summing the total unit cost of providing a product or
service and adding a specific amount to the cost to arrive at a
price.
Two Forms:
3. Cost-plus percentage-of-cost pricing
4. Cost-plus fixed-fee pricing

3. EXPERIENCE CURVE PRICING

- A method based on the learning effect, which holds that the
unit cost of many products and services declines by 10 percent to
30 percent each time a firms experience at producing and selling
them doubles.
- This cost-based pricing approach complements the demandbased pricing strategy of skimming followed by penetration
pricing.

Profit-Oriented Approaches
A price setter may choose to balance both revenues and costs to
set price using profit-oriented approaches. These might either
involve a target of a specific dollar volume of profit or express this
target profit as a percentage of sales or investment.
Approaches are target profit pricing, target return-on-sales
pricing, target return-on-investment pricing

Panasonic expects to be a
leader in the successful
commercialization of HDTV.

1. TARGET PROFIT PRICING

- A firm may set an annual target of a specific dollar volume or
profit.
Suppose a picture framing store owner wishes to use target profit
pricing to establish a price for a typical framed picture and assumes
the following:
. Variable cost is a constant $22 per unit.
. Fixed cost is a constant $26,000.
. Demand is insensitive to price up to $60 per unit.
. A target profit of $7,000 isi sought at an annual volume of 1,000 units (framed
pictures.)

The price can be calculated as follows:

Profit = Total revenue Total cost
Profit = (P x Q) [FC + (UVC x Q)]
$7,000 = (P x 1,000) [$26,000 + ($22 x 1,000)
$7,000 = 1,000P ($26,000 + $22,000)
1,000P = $7,000 + $48,000
P = $55

Note that a critical assumption is

that this higher average price of a
framed picture will not cause the
demand to fall.

2. TARGET RETURN-ON-SALES PRICING

- Firms such as supermarket chains often use target returnon-sales pricing to set a typical prices that will give them a profit
that is a specified percentage, say,1 percent, of the sales volume.
Suppose the owner decides to use target return-on-sales pricing
for the frame shop and makes the same first three assumptions
shown previously.

The owner now sets a target of 20 percent return on sales at an

annual volume of 1,250 units. This gives
Target profit

Target return on sales = --------------------Target revenue

TR TC
20% = ----------------------TR
P x Q [FC + (UVC x Q)]
0.20 = --------------------------------------------TR
P x 1,250 ($26,000 + ($22 x 1,250)
0.20 = ------------------------------------------------------------- =
P x 1,250

P = $53.50

So at a price of $53.50 per unit and an annual quantity of 1,250

frames.
TR = P x Q = $53.50 x 1,250 = $66,875
TC = FC + (UVC x Q) = $26,000 + ($22 x 1,250) = $53,500
Profit = TR TC = $66,875 - $53,500 = $13,375
As a check,
Target profit
$13,375
Target return on sales = ---------------------- = ---------------- = 20%
Total revenue

$66,875

2. TARGET RETURN-ON-INVESTMENT
- A method of setting prices to achieve return-on-investment.
Firms such as the Development Bank of Singapore set annual
return-on-investment (ROI) targets such as ROI of 20 percent.
.Suppose the store owner sets a target of ROI of 10 percent,
which is twice that achieved the previous year. She considers
raising the average price of a framed picture to $54 to $58up
from last years average of $50.

Results of
computer
spreadsheet
simulation to
select price
to achieve a
target return
on
investment

Competition-Oriented Approaches
Rather than emphasize demand, cost, or profit factors, a price
setter can stress what competitors or the market is doing.
Approaches are customary pricing, above-, at-, or belowmarket pricing.

1. CUSTOMARY PRICING
- Used for some products where tradition, a standardized
channel of distribution, or other competitive factors dictate the
price.
.Tradition prevails in the pricing of Swatch watches. The US$40
customary price for the basic model changed little in 10 years.

2. ABOVE-, AT-, OR BELOW-MARKET PRICING

- For most products, it is difficult to identify a specific market
price for a product or product class. Still, marketing managers
often have a subjective feel for the competitive feel for the
competitors price or market price. Using benchmark, they then
may deliberately choose a strategy of above-, at-, or belowmarket pricing.
.Rolex takes pride in emphasizing that it makes one of the most expensive
watches you can buy, a clear example of above-market pricing.

3. LOSS-LEADER PRICING
- Selling of products below its customary price to attract
attention to it.
.Supermarkets such as NTUC FairPrice and Prime often sell
soft drinks, cooking oil, or tissue paper at about half of their
suggested retail price to attract customers to their stores.

Step 4

SET THE LIST OR QOUTED PRICE

ONE-PRICE VERSUS FLEXIBLE-PRICE POLICY

One-Price Policy
- also called fixed pricing, is setting one price for all buyers of
a product or service.
Example:
When you buy a Seiko watch from a watch shop, you are offered
the product at a single price. You can buy it or not, but there is no
variation in the price under the sellers one-price policy.

SET THE LIST OR QOUTED PRICE

ONE-PRICE VERSUS FLEXIBLE-PRICE POLICY
Flexible-price policy
- also called dynamic pricing, involves setting different prices
for products and services depending on individual buyers and
purchase situation.
- Flexible pricing means that some customers pay more and
others less for the same product or service.

Company, Customer, and Competitive Effects on

Pricing
Company Effects
For a firm with more than one product, a decision on the price
of a single product must consider the price of other items in its
product line or related product lines in its product width. Within a
product line or width there are usually some products that are
substitutes for one another and some that complement each
other.

Company, Customer, and Competitive Effects on

Pricing
Customer Effects
In setting price, retailers weigh factors heavily that satisfy the
perceptions or expectations of ultimate consumers, such as the
customary prices for a variety of consumer products.
Competitive Effects
Regardless of whether a firm is a price leader or follower, it
wants to avoid cutthroat price wars in which no firm in the
industry makes a satisfactory profit.

MAKE SPECIAL ADJUSTMENTS TO THE LIST OR

Step 4
QUOTED PRICE

SPECIAL ADJUSTMENTS TO THE LIST OR

QUOTED PRICE
DISCOUNTS
- are reductions from the list price that a seller gives a buyer
as a reward for some activity of the buyer that is favorable to the
seller.
Four Kinds of Discounts
1. Quantity
2. Seasonal
3. Trade (functional)
4. Cash discounts

Structure of Trade Discounts

SPECIAL ADJUSTMENTS TO THE LIST OR

QUOTED PRICE
ALLOWANCES
- like, discounts, are reductions from list or quoted prices to
buyers for performing some activity.
- include trade-in allowances and promotional allowances.

SPECIAL ADJUSTMENTS TO THE LIST OR

QUOTED PRICE
GRAPHICAL ADJUSTMENTS
- are made by manufacturers or even wholesalers to list or
quoted prices to reflect the cost of transportation of the products
from seller to buyer.
Two General Methods for Quoting Prices
1. FOB origin pricing method
2. Uniform delivered pricing
1. Single-Zone Pricing
2. Multiple-Zone Pricing
3. FOB with Freight-Allowed (Absorption) Pricing

Legal and Regulatory Aspects of Pricing

Five most common deceptive pricing practices