CHAPTER 1

Introduction: Pricing as an Element of the Marketing Mix

I. Description
Anytime anything is sold, there must be a price involved. The focus of this book is to
present concepts, principles, and techniques that provide guidance to help a seller set the best price.
Our study of how to set the best prices will take the marketing approach. In this chapter, we will
describe the business context for pricing and provide an overview of how the basic principles of
marketing can guide effective price setting.
II. Objectives
The students will be able to:
• Understand Pricing as an element of marketing mix
• To know the definition of price
• “Price” Versus “Cost
• To know and understand the EARLY PRICING PRACTICES
• To be able to develop an understanding of how the pricing strategy concept has been
applied in various retail business
III. Duration
START: February 13, 2022
END: February 24, 2022

IV. Learning Content

Anytime anything is sold, there must be a price involved. The focus of this book is to
present concepts, principles, and techniques that provide guidance to help a seller set the best
price.
THE COMMERCIAL EXCHANGE
Although people often think of marketing as synonymous with advertising or
salesmanship, it is actually much broader. Marketing consists of the full range of activities
involved in facilitating commercial exchanges and having all of these activities be guided by a
concern for customer needs.
The central idea here is that of the commercial exchange (see Figure 1.1). This is where a
seller provides a product to a buyer in return for something in exchange (usually an amount of
money). The product could be something tangible, which is referred to as a good, or the product
could be the result of human or mechanical effort, which is referred to as a service. The buyer
could be a consumer—an individual who purchases a product for his or her own use—or the buyer
could be a business customer—an individual or group who purchases the product in order to resell
it or for other business purposes.
WHAT IS A PRICE?
From this understanding of the commercial exchange, we are now able to give a formal
definition of a price: that which is given in return for a product in a commercial exchange.
This essential role of price in commerce is sometimes disguised by the use of traditional
terms. If the product in the commercial exchange is a good, then the product’s price will most
likely be called “price.”

Price is:
• The money charged for a product or service
• Everything that a customer has to give up in order to acquire a product or service
• Usually expressed in terms of Peso per unit
Price is considered a vital element of the marketing mix because it dictates a company’s survival
and profit.

“Price” Versus “Cost”

Although a price may go by many names, one name it should not go by is cost. This is
because, in this book, we will usually be taking the viewpoint of the seller. If we were taking the
viewpoint of the buyer, this would not be an issue. Buyers, particularly consumers, will typically
use the terms price and cost synonymously. For example, a woman could tell her friend, “The price
of this sweater was only $30.” Or she could just as easily say, “This sweater cost me only $30.”
However, from the viewpoint of the seller, the difference between prices and costs is quite
important. A price is what a business charges, and a cost is what a business pays. Thus, a grocery
manager may set a price of $3.79 for a 17-ounce box of Honey Nut Cheerios, may price large navel
oranges at 3 for $1.99, or may sell ground chuck at the price of $3.49 per pound. But the manager
must also attend to his costs. These costs include, for example, what he pays the wholesaler per
case of Cheerios, what he pays employees to stock it on the shelves, what he pays for the building,
for heat and lights, for advertising, and so on.

PRICING AS A MARKETING ACTIVITY

Marketing activities are those actions an organization can take for the purpose of
facilitating commercial exchanges. There are four categories of marketing activities that are
particularly important, which are traditionally known as the four elements of the marketing mix:
▪ Product—designing, naming, and packaging goods and/or services that satisfy customer
needs
▪ Distribution—efforts to make the product available at the times and places that customers
want.
▪ Promotion—communicating about the product and/or the organization that produces it
▪ Pricing—determining what must be provided by a customer in return for the product
Note that there is an important way in which pricing differs from the other three elements of the
marketing mix.

EARLY PRICING PRACTICES

As you might imagine, the practice of pricing has a very long history. Consider the following:
The oldest records of prices ever found are clay tablets with pictographic symbols found in a town
known as Uruk, in what was ancient Sumer and what is now southern Iraq. These price records are from
3300 BC—they’ve survived 5,300 years. The documents—records of payment for barley and wheat, for
sheep, and for beer—are really receipts. “Uruk was a large city, at a minimum 40,000 people,” says UCLA
professor Robert Englund, one of the few experts on the Uruk documents. “So some of the quantities are
very high—hundreds of thousands of pounds of barley, for instance.
” But here’s the really remarkable thing. The earliest Uruk tablets aren’t just the oldest pricing
records ever found. They are the oldest examples of human writing yet discovered. In other words, when
humans first took stylus to wet clay, the first things that they were compelled to record were . . . prices.3
In the earliest commercial exchanges, goods or services were exchanged for other goods or
services. For example, the price that a farmer might pay for a bolt of cloth could be a bushel of corn. This
practice, termed barter, still goes on today, especially in less developed countries. Barter occurred in recent
years when Shell Oil purchased sugar from a Caribbean country by giving in return one million pest control
devices.4 Although barter is still used, it can make exchange difficult. For example, what if the seller of the
bolt of cloth had no need for the farmer’s bushel of corn? Because of such inefficiencies of barter, almost
all modern commercial transactions use a medium of exchange—something that is widely accepted in
exchange for goods and services in a market.5
A medium of exchange could be anything that the buyers and sellers in a society agree
upon. In the past, items such as cattle, seashells, dried cod, and tobacco have been used as a
medium of exchange. However, many of these presented certain difficulties. In his book The
Wealth of Nations, Adam Smith gives an example of this:
 The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for
it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep, at a time. He could
seldom buy less than this, because what he was to give for it could seldom be divided without loss. . .. 6
Over time, it became clear that the best medium of exchange is one that is finely divisible, such as
the metals of various weights used in coins. This use of coins and notes to represent them led to national
systems of money, such as dollars, yen, or euros. It is prices expressed in such monetary terms that will be
considered in this book.

This essential role of price in commerce is sometimes disguised by the use of traditional
terms. If the product in the commercial exchange is a good, then the product’s price will most
likely be called “price.” However, if the product is a service, then the product’s price may well go
by one of a variety of other possible names (see Figure 1.2).
Participants in the Pricing Activity
In a small business organization, the owner/manager will be heavily involved in, and most
responsible for, pricing activities. In a large business organization, it is likely that many people
within the organization will play a role in pricing activities. Some of the individuals in a large
organization who play a role in pricing will have very direct pricing involvement and
responsibility. Here are some examples of such direct roles:
▪ In a department store, it is usually the merchandise buyer who will do most of the price
setting for the items he or she buys to be sold in the store.
▪ In many large consumer products organizations, a brand’s product manager will have much
of the responsibility for setting the prices of a brand.
▪ In companies that sell to business customers, salespeople and their manager play a crucial
role in the negotiation processes by which prices are determined.
▪ In service industries, such as airlines and hotels, there will often be pricing departments
with specialists trained in revenue management, a set of complex price-setting techniques
that are frequently used in these industries.
There are also likely to be many people in a large organization who participate in pricing
activities but who do so in a way that is less direct. For example, employees in the accounting
department often provide information about the costs of products and of the operations involved
in getting products to the customer; accurate cost information is essential for effective price setting.
Lawyers and others in the legal department could establish legal and ethical guidelines for
pricing and could adjust proposed prices to comply with relevant laws and contracts. Analysts in
the finance department may be involved in assessing the degree to which pricing schedules
developed by product or sales managers are consistent with the profit goals of the organization. In
many large business organizations, higher-level managers are involved in approving, and perhaps
revising, proposed price schedules.
The Importance of Price
Why pricing is important? Pricing is one of the crucial elements of marketing programs.
Since the competition has reached the top, varieties of products prices are out there, customer
sovereignty is maintained, the importance of pricing has been increasing extensively.
Price is important:
▪ Price is one of the most important factors in the buying decision
▪ Price is the only income generator in the marketing mix
▪ Price suggests a positioning to the consumer
▪ Price is what the customer pays in the exchange process
Many companies do not handle pricing well. Common mistakes that they make are:
1. Pricing is too cost-oriented
2. Prices are not revised often enough to reflect market changes
3. Prices do not consider the other elements of the marketing mix.
4. Prices are nor varied for different product, market segment, and purchase occasion.
SUMMARY
A price is what is given in a commercial exchange in return for a good or service. A price
can have many names, such as “fee” or “rent” but should be not be confused with a company’s
“costs.” Pricing is one of the four activities of the marketing mix; it is the marketing activity
involved in capturing the value created by the other three marketing activities.
Early commercial transactions involved barter, but the advantages of using a medium of
exchange soon became evident and modern prices are typically expressed in terms of money.
Issues that arise in the setting of prices can be divided into three categories: (1) the question of
interactive versus fixed prices, (2) the pattern of an organization’s prices, and (3) how a price can
be expressed when communicated to potential buyers. The pricing activity consists of setting
specific prices and developing the rules that govern price-setting decisions. In large organizations,
many people play a role in the organization’s pricing activities and central coordination of these
price activities is important.
Given that all businesses are involved in pricing and that pricing is part of managing one’s
career, the study of pricing is an important part of one’s business education. The book begins with
the setting of an item’s initial price and continues with the modifying of existing prices to increase
profits. Key in effectively modifying a price is understanding the factors that determine the
market’s price-change response. The focus of the book is then expanded to the pattern of prices
set by a selling organization and to considering interactive prices, societal consequences of pricing,
and the integrated management of pricing activities.

References:
https://us.sagepub.com/sites/default/files/upm-
assets/43169_book_item_43169.pdf?fbclid=IwAR3ZVP9joB5nXiMGadMSpb9QXx96T3Br0ap
Az_ov8KA1oHj2ngvQGoJeV4E

Prepared and submitted by:

Faculty: Christian Jay R. Vitug

Email Address: [email protected]
Contact Number 0906-640-4707