PMPST- PRICING STRATEGY

MODULE 7: EXTERNAL FACTORS TO CONSIDER IN SETTING THE PRICE-MARKET DEMAND and COMPETITION
Reynaldo N. Salvador

INTRODUCTION:
Internal Factors External Factors
Marketing Objectives Pricing Nature of the market
Marketing Mix Strategy and demand
Costs
Decisions Competition
Other environmental
Organizational
factors ( economy,
Considerations resellers, government,
social concerns)

External Factor Affecting Pricing Decision: Three primary considerations affect the pricing decision externally they
are: Market demand, Competition, Price elasticity

1. Market Demand: Different prices create different market demand. Consider the telecom industry. The start of the hyper
boom in mobile phone sales in middle 1998, when the cheaper and more convenient prepaid card service was introduced.
Consumer had to walk inside a store and have phone activated, immediately loading airtime on per need basis. Earlier, they
had to submit many documents to apply for credit line under the higher priced post-paid service. Today, almost all new
subscribers are under the prepaid plan.

Price, needless to say, is not the sole criterion that influences a consumer to buy or not to buy. The other 3P’s (Product ,
Placement and Promotion ) contribute equally important factors.

Two of the most common ways in setting the prices under the MARKET DEMAND BASED PRICING STRATEGY are:
1. Perceived value, where marketers used the perception of customers in establishing its price.
2. Demand Differentials, where marketers chose a price level that would support their planned sales volume profit.

Market Demand- while costs set the lower limit of prices, market and demand set the upper limit. Pricing freedom varies with
different type of market:

a. Pure competition is a market where many buyers and sellers trade in a uniform commodity. No single buyer or
seller has much effect on the on-going market price. Sellers in this type of market do not spend much time
constructing strategy
b. Monopolistic competition is a market where the buyers and sellers trade over a range of prices rather than a single
market price. Sellers try to develop differentiated offers
c. Oligopolistic competition is a market where there are few sellers who are highly sensitive to each other pricing and
marketing strategies. In this market, the seller is never sure that advantage can be gained by cutting prices over the
long term.
d. A pure monopoly is a market where there is a single seller-it may be a government monopoly, a private regulated
monopoly, or a private non-regulated monopoly. Monopolist do not always charge a full price because they:
 do not attract full competition
 want to penetrate the market faster
 fear of government regulation.

Pricing freedom also varies with consumer’s perception of price and value. When consumers buy a product, they exchange
something of value (the price) to get something of value ( the benefits of having and using the product).Effective buyer-
oriented pricing involves understanding how much value consumers place on benefits. A company is hard to measure the
values that consumers will attract to a product

Another factor to determine is the price-demand relationship. A demand curve is a curve that shows the number of unit
the market will buy in a given period at different prices that might be charged .In a normal case, demand and curve are
inversely related. The demand curves slopes downward in either a straight or a curve line For prestige goods, the demand
curve sometimes slope upward. Most companies try to measure their demand curves since the type market makes a
difference. Economist’s show the impact of non-price factors on demand through shifts in the demand curve rather than
movements along it.

Finally, Price Elasticity of Demand will influence the price-demand relationship. Price elasticity is a measure of the sensitivity
of demand to changes in price.
1. Demand is inelastic if it hardly changes with a small change in price.

San Mateo Municipal College Module 2 Pricing Strategy

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College of Business and Accountancy Prepared by Reynaldo N. Salvador
 2. Demand is elastic if it change greatly Influences includes;
a. Buyers are less price sensitive when the product they are buying is unique or high in quality , prestige , or
exclusiveness
b. Buyers are less price sensitive when substitutes product are hard to find or cannot easily be compared
c. Buyers are less price sensitive when the total expenditures for a product is low relative to their income or
the costs is shared by another party.(4)If demand is elastic rather than inelastic, sellers will consider
lowering the price.

2. Price Elasticity - means that demand will change if change in pricing occurs. Price elasticity measurement allows
companies to evaluate how price changes will affect total revenue

Elasticity-the term elasticity connects the relationship between changes in price and quantity of sales demand. It is a
consumer response to price changes.

Elastic goods include luxury items and certain food and beverages as changes in their prices affect demand.
Inelastic goods may include items such as tobacco and prescription drugs as demand often remains constant despite price
changes.

Elastic demand is used to describe the scenario where the change in demand is sensitive to a small change in price.
Ex1 if we see a large change in the price of “Lays Chips” , consumers are more likely to shift to a different brand, driving the
demand down and vice versa.
Ex2. Elastic goods include clothing or electronics.
Inelastic goods are items like food and prescription drugs.
Cross elasticity measures the change in demand for one good given price changes in a different, related good.

Price elasticity means that demand will change if change in pricing occurs. Price elasticity measurement allows companies to
evaluate how price changes will affect total revenue The price elasticity has a cut-off value of 1.00; this means that the
percentage change in people who will still buy is equal to the percentage in price.

Price elasticity refers to the extent to which changes in price affect the demand for a product. In other words, it measures the
responsiveness of consumers to changes in the price of a product. If a product is price elastic, a small change in price will
result in a large change in the demand for that product.

Price elasticity of demand measures the responsiveness of demand after a change in a product's price. The price elasticity of
demand for a product is the ratio of the percentage change in quantity sold to the percentage change in price as follows:

Price Elasticity of Demand = %change in the quantity sold

% change in price
` Ex. If the quantity demanded for a product increases 15% in response to a 10% reduction in price,
The price elasticity of demand would 15% / 10% = 1.5

Conversely, Price inelasticity means that demand will not change even when changes in pricing occur

1. If the price elasticity of demand is more than one , we can say that the demand is elastic. This means that a price
increase will affect the number of consumers who will continue to buy the product and will still buy is equal to the percentage
change in price.
a. *The price elasticity of San Miguel Beer has risen from (1. 06 ) in 1990 to (1.40) in 1998. , this explains their market
share pattern versus other hard liquor substitutes. Some beer drinkers who, prefer to get more alcohol for their
investment have switched to stronger drinks to get better value for their money

San Mateo Municipal College Module 2 Pricing Strategy

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College of Business and Accountancy Prepared by Reynaldo N. Salvador
 b. **Other products that are price elastics are biscuits , noodles and toothpaste. A 25 centavo difference between two
instant noodle brands made the cheaper brand market leader in Mindanao.

2. If the price elasticity of demand is less than one, we can say that demand is inelastic
This means people will most likely continue to buy product despite price increase. In elastic product usually have few or no
substitutes and enjoy continuous revenue growth.
a. *Expensive branded bags like Hermes’ , Birkin and Channel 2.55 quilted double flap are in such demand that there is
limited number released t stores with buyers willing to wait for their allotment.
b. *In Business-to-Business, heavy machinery equipment manufacturer caterpillar has the advantage of strong brand
image and product performance , couple d with its buy-back guaranteeThe resulting price elasticity will usually be
negative but the negative sign is usually ignored when talking about elasticities.

3. Williams (Consumer Behavior, 1982 ) has the following significant findings on price elasticity:
a. *“Consumers tends to be more price-elastic towards an impending price increase than what actually takes place
when the price increase happens” Claimed price elasticity tends, therefore , to be greater than realized price
elasticity.
b. *“Consumers appear to be more sensitive to price decreases than to price increases” They are more “downside
elastic than being upside elastic.*“The consumers price elasticity is observed to diminish when shopping with
afreind or when being persuaded by a salesman perceived as an expert” Consequently, it seems to increase when
shopping alone and when the consumers feels self-confident about her own buying decisions.

3. Competition-is another external factors affecting the company’s pricing decision, competitors costs and prices , and
possible competitor reactions to the company own pricing moves.
Ex.a consumer who is considering the purchase of a mobile phone will evaluate Samsung’s price and value against the prices
and values of comparable products made by Nokia, Sony Erickson, Motorola and others. In addition, the company‘s pricing
strategy may affect the nature of the competition. A low price, low margin strategy may stop competitors or drive them.

Competition-Since we say that marketing is satisfying customer better than competition, the dynamic of competition must
therefore come into play. In competition based pricing, there are two common ways in setting the price:
a. Going rate , where marketers begin and work within the prevailing market price . Commodities like gasoline have
similar prices except for self-service stations which charge little less. Thus forms can price their products lower than
the going rate. , or price their product at partly with competition and emphasize their other product value.
b. Sealed Bid , where marketers price their product or service depending on how competitors are expected to price
theirs. Most of the time , this pricing policy is required by government offices.
While external factors may be similar to competing companies, internal factors are not. Different companies have different
objectives, different cost structures, and different strengths. Abusing and overusing pricing is common practice among lazy
marketers. Marketers must remember that the more unique products are, the more flexible they can be in formulating pricing.
They must not keep on doing what competition competitor’s price is also doing.

a. Extraderm called their product exfoliant to get out of the astringent mindset and set their prices 250%nmore than the
astringent. Today, Extraderm and sister brand maxi-Peel sell product worth’s hundreds of millions of pesos a year.
b. Waters Bio Mineral pot has chosen the premium segments since its launching in 1995. It is priced at more than five
times the average competition. Today, Waters commands the highest peso sales in the water purifier industry and
is the leading Waters company in Southeast Asia.
4. Other external factors:
a. Economic conditions such as boom or recession, inflation or interest rates
b. Resellers policies must be considered especially if they do not match the suppliers
c. Because of its regulatory power , the government must be considered
d. Social concerns may affect the firm short-term sales, market share, and profit goals.

LEARNING RESOURCES: Book/E-book:

 Marketing Management An Asian Perspective , 2018 Ed. Philip Kotler, Kevin Lane Keller, Swee- Hoon Ang , Chin Tiong
Tan, Siew Meng Leong . Pearson
 Principles of Marketing ,2009 Ed, Maria Victoria M. Ac-Ac ,Anvil Publishing
 Fundamental Marketing in the Philippine Setting,2nd Ed .Josiah Go, Chiqui Escaller-Go. Mansmith
 Pricing Strategy : Price levels , Price Discounts and Price Structures; Tim J. Smith ,CENGAGE Learning 2012 E

END OF MODULE :

San Mateo Municipal College Module 2 Pricing Strategy

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College of Business and Accountancy Prepared by Reynaldo N. Salvador
 MODULE 7: PRICING STRATEGY: FACTORS TO CONSIDER IN SETTING THE PRICE : DEMAND and COMPETITION

San Mateo Municipal College Module 2 Pricing Strategy

Page 1
College of Business and Accountancy Prepared by Reynaldo N. Salvador