PROF 3 – Pricing Strategy
Module no. 2
Name:____________________________________________________________ Date:________
Section:____________________ Schedule:______________________________
Lesson Title: The Foundation of Pricing Strategy and
Materials:
Price Adaptation Strategies & Price Adjustments
Module
Lesson Objectives:
At the end of this module, I should be able to;
References:
1. Identify the advantages and disadvantages of
The Strategy and Tactics of
the 7 pricing strategies.
Pricing, 6th Edition. T.T. Nagle and
2. Discuss the types of Price Adaptation Strategies.
G. Müller., Global Strategic
3. Understand the strategies through Philippine Leader, L. Guinn, K. Mitchell and
Context Examples
M. Bergen
I. LESSON PREVIEW
Imagine you are a marketing consultant helping a group of local artisans in Liliw, Laguna
price their hand-woven shoes. They cost ₱400 to make. Should you use Competitive Pricing and
match the ₱750 mass-produced imports found online? Or do you use Value-Based Pricing and
tag them at ₱2,500 by selling the story of eco-luxury Filipino heritage?
As a marketer, your choice isn't just about picking a number—it is a high-stakes executive
decision where every path has a hidden catch. A strategy that brings in millions of users overnight
might leave you with zero profit, while a strategy that guarantees massive margins might alienate
your core audience.
In this module, we will pull back the curtain on the Advantages and Disadvantages of the 7
Core Pricing Strategies. You will learn to look past the surface-level hype of flashy corporate
promotions and analyze the structural trade-offs of every model. By the end of this lesson, you
will confidently evaluate market dilemmas, calculate business risks, and defend your pricing
decisions like a seasoned Marketing Director.
II. LESSON CONTENT
Topic 1: Advantages and Disadvantages of the 7 Pricing Strategies
1. Cost-Plus Pricing
Advantages:
o Guaranteed Profit: It ensures you cover all operating expenses and make a
predictable return on every sale.
o Simple to Calculate: It requires minimal market research; you only need to know
your internal costs.
Disadvantages:
o Ignores the Market: If your production costs are high but competitors sell the item
cheaper, you will price yourself out of the market.
o Inversion Risk: It creates zero incentive to minimize production inefficiencies.
PROF 3 – Pricing Strategy
Module no. 2
2. Competitive Pricing
Advantages:
o Low Risk: By aligning with the market average, you avoid driving customers
away due to "sticker shock" (price surprise).
o Easy Customer Acquisition: Safe for new players entering an established market.
Disadvantages:
o The "Race to the Bottom": Competing purely on price can lead to destructive price
wars that destroy profitability for everyone.
o No Brand Differentiation: It treats your product like a commodity, making it hard
to convince customers that your brand is unique or better.
3. Price Skimming
Advantages:
o High Early Revenues: Maximizes profit margins from early adopters who are
insensitive to price, helping recover research and development costs quickly.
o Prestige Image: A high initial price tags the product as a premium, high-quality,
or cutting-edge item.
Disadvantages:
o Limited Volume: You sell fewer units initially, which can slow down market
penetration.
o Frustrates Early Buyers: Early adopters can feel cheated when they see the price
drop significantly just months after they bought it.
4. Penetration Pricing
Advantages:
o Rapid Market Share: Attracts a massive volume of consumers quickly, stealing
attention away from entrenched competitors.
o Creates Buzz: Word-of-mouth spreads fast when local consumers discover a high-
quality product at a shockingly low price.
Disadvantages:
o The "Cheap" Stigma: It can permanently damage brand perception; consumers
might assume the product is low-quality.
o The Price-Increase Backlash: Pulling off the "bait-and-switch" is tough. When the
introductory period ends and you raise prices, price-sensitive customers often
abandon the brand immediately.
5. Value-Based Pricing
Advantages:
o Extreme Profit Margins: Detaches the retail price from production costs, allowing
companies to charge immense premiums.
PROF 3 – Pricing Strategy
Module no. 2
o Deepens Customer Loyalty: Focuses heavily on the customer's needs and
emotional connection, reinforcing high brand equity.
Disadvantages:
o Difficult to Quantify: Measuring "perceived value" or emotional prestige
accurately requires expensive, continuous market research.
o High Marketing Costs: Requires heavy, sustained investment in premium
branding, packaging, and advertising to maintain that luxury perception.
6. Freemium Pricing
Advantages:
o Massive User Base: A "free" price tag removes all entry barriers, allowing millions
of users to try and integrate your product into their daily lives.
o Low Customer Acquisition Cost: Users onboard themselves, and active users
organically market the product to friends.
Disadvantages:
o Low Conversion Rates: Typically, less than 2-5% of free users ever convert into
paying premium subscribers, leaving the business to absorb the
server/operational costs of the other 95%.
o Free-User Entitlement: Free users can become vocal and angry if the business tries
to move previously free features behind a paywall.
7. Psychological Pricing
Advantages:
o High Impulse Buying: Triggers subconscious emotional impulses (like feeling
they are getting a "deal"), leading to faster checkout decisions.
o Incremental Volume Boost: Minor adjustments (like ₱299 vs ₱300) can cause
massive spikes in sales volume without changing the product.
Disadvantages:
o Loses Effectiveness Over Time: Consumers are becoming more financially
literate and immune to basic charm pricing tricks.
o Can Look Unprofessional: Overusing $.99 or cheap-looking font tags can make a
premium brand look like a bargain basement or a sketchy clearance center.
Topic 2: Price Adaptation Strategies and Price Adjustments
1. Product-Bundle Pricing (The Value Package) - Combining several individual products
together and selling the whole package for a lower price than if the customer bought each
item separately. It increases the average transaction value.
PROF 3 – Pricing Strategy
Module no. 2
Example: Fast Food Combo Meals (Jollibee / McDonald's). Buying a Chickenjoy, fries,
and a drink separately might cost around ₱180. But packaged as a "Value Meal," it is priced
at ₱150. The customer feels they are saving money, and the branch successfully sells three
items instead of one.
2. Functional / Trade Discounts (The Channel Reward) - Manufacturers offering lower
prices to wholesalers or distributors further down the supply chain because they perform
vital business services like bulk storage, shipping, or shelf display.
Example: Unilever Philippines to Divisoria Wholesalers. A single sachet of Sunsilk
shampoo retails for ₱7 at a sari-sari store. Unilever sells a box of 120 sachets to a massive
Divisoria wholesaler at a heavily discounted rate per unit (e.g., ₱4.50 per sachet) because
that wholesaler handles the logistics of breaking down the boxes and distributing them to
provinces.
3. Cash Discounts (The Liquidity Booster) - A price reduction given to buyers who pay
their bills promptly or choose to pay in straight cash rather than credit cards or
installments. This helps the business maintain healthy cash flow.
Example: SM Appliance Center or Abenson. When buying a major appliance like a
television or refrigerator, the price tag often shows two prices: the regular price for "12
months 0% installment via credit card" and a cheaper "Cash Promo Price" (usually 5% to
10% off) if you pay with physical cash or straight debit.
4. Segmented / Discriminatory Pricing (The Customer/Location Split) - Charging different
prices to different customer segments, at different times, or in different locations for the
exact same product, even though the cost of offering it is identical.
Example:
Customer Segment: The mandated 20% Senior Citizen and PWD discount across
restaurants and public transport.
Location Segment: Cinema Ticket Prices. A movie ticket for a standard cinema at
SM North EDSA might cost around ₱380, but the exact same movie at SM Aura
Premier or SM Mall of Asia Director’s Club will cost significantly more due to
target demographic positioning.
5. Promotional Pricing (The Urgency Creator) - Temporarily pricing products below list
price (and sometimes even below cost) to create buying urgency, clear out old stock, or
clear shelf space.
PROF 3 – Pricing Strategy
Module no. 2
Example: Shopee and Lazada "Double-Day" Mega Sales (9.9, 11.11, 12.12). Brands slash
prices for a strict 24-hour window, combining flash discounts with limited vouchers to
induce immediate, impulsive shopping behavior.
Indivitual Seatwork A. The Adaptation Diagnosis. 20-30 mins
Instructions: Read each local business scenario below. Identify the
specific Price Adaptation Strategy being utilized and write a 2-3 sentence
marketing justification explaining why this strategy is beneficial for that
specific business. Copy and answer, Write it in a piece of Yellow Paper.
1. Scenario 1: A premium resort in Boracay charges ₱12,000 per night during
the dry season (March to May) but drops its rates to ₱5,500 per night during the rainy
monsoon season (July to September).
o Strategy: _______________________________________
o Marketing
Justification: _____________________________________________________________
2. Scenario 2: A local skin-care brand sells a facial wash for ₱250, a toner for ₱200, and a
moisturizer for ₱300. To increase sales, they introduce a "Glowing Skin Starter Kit"
containing all three items for a total price of ₱600.
o Strategy: _______________________________________
o Marketing
Justification: _____________________________________________________________
3. Scenario 3: A university canteen offers a 10% discount on rice meals to students who
present a valid school ID card. Regular working professionals visiting the campus must
pay the full standard price.
o Strategy: _______________________________________
o Marketing
Justification: _____________________________________________________________
Seatwork B: The Pricing Consultant Challenge (Case Study)
Instructions: Read the localized case study below and answer the strategic questions that follow.
Case Study: "Kape-Kita" Coffee Shop Expansion
You have been hired as a marketing consultant for Kape-Kita, a highly successful local coffee shop
branch operating in a busy university belt area in Manila. Their signature item is an Iced Spanish
Latte priced at ₱130.
While their morning and late afternoon student traffic is massive, the shop experiences a major
"dead zone" between 1:00 PM and 3:30 PM when students are inside classrooms. Furthermore,
the owner wants to introduce new pastry items (croissants and cookies) but customers rarely buy
them because they focus only on the drinks.
1. Propose a Promotional or Segmented Pricing strategy specifically designed to solve the
1:00 PM to 3:30 PM weekday "dead zone." Give your promo a catchy local name and
explain how it drives traffic.
PROF 3 – Pricing Strategy
Module no. 2
o Your
Proposal: ________________________________________________________________
2. Utilize Product-Bundle Pricing to increase the sales of their slow-moving pastries
alongside their signature Iced Spanish Latte. Map out the exact pricing math (Original
separate prices vs. Bundle price) and justify your numbers.
o Your
Proposal: ________________________________________________________________
Frequently Asked Questions (FAQs) for the Student Copy
Q1: If Value-Based Pricing offers the highest profit margins, why don’t all
companies use it?
Answer: Because it is incredibly difficult and expensive to pull off. To use value-based pricing, a
business must convince the customer that the product is uniquely prestigious or life-changing.
This requires massive, sustained budgets for premium marketing, high-end packaging, and elite
customer service. If your branding doesn't match the premium price, local consumers will
immediately feel it is a rip-off.
Q2: Why is Penetration Pricing considered a high-risk strategy for small local startups?
Answer: It requires a lot of cash to survive. When a business enters the market with rock-bottom
prices to steal customers, it often makes zero profit (or even takes a loss) initially. Large
companies have the financial backup to survive months of losing money to crush competition. A
small business, like a new local milk tea shop, might run out of cash and go bankrupt before they
ever get the chance to raise their prices.
Q3: Is Price Skimming ethical? Won’t customers get mad when the price drops later?
Answer: It is entirely legal and standard practice, especially in tech and fashion. The key is
managing expectations. Early adopters are willing to pay a premium because they value
being first (social status, immediate utility). To prevent backlash when prices inevitably drop
later, companies usually introduce updated models, bundles, or frame the price drop as an official
"anniversary sale" or "markdown phase."
Q4: What is the main difference between a core Pricing Strategy and a Price Adaptation
Strategy?
Answer 1: A core pricing strategy (like Cost-Plus or Value-Based) is how you set the original,
baseline price tag of your product when it hits the market.
Answer 2: A price adaptation strategy (like Bundling or Segmented Pricing) is how
you dynamically adjust that original price on the fly to react to different customer types, locations,
buying seasons, or changes in supply and demand.
PROF 3 – Pricing Strategy
Module no. 2
Q5: Won't customers feel cheated if they find out someone else paid less due to Segmented
Pricing?
Answer: They can, which is why marketers must establish a clear "fencing mechanism"—a
logical, fair reason why the price is different. For example, regular commuters don't get angry
that Lolo and Lola get a 20% Senior Citizen discount on the LRT because society agrees it is a fair
social support. Similarly, people accept paying more for a movie ticket at a premium BGC cinema
compared to a provincial mall because the physical comfort and location are vastly superior.
Q6: Why do fast-food chains like Jollibee or McDonald's rely so heavily on Product-Bundle
Pricing (Combo Meals)?
Answer: It solves two major corporate problems simultaneously:
1. Increases Average Ticket Size: A customer who only walked in to buy a ₱95 burger is
enticed to spend ₱150 because they get fries and a drink for "just a bit more."
2. Moves Slow Inventory: If a restaurant has an oversupply of side dishes or drinks,
bundling them with a high-demand core item (like fried chicken) ensures the inventory
clears before expiring, without looking like a desperate clearance sale.
Q7: Can a business offer too many promotional discounts? What is the danger?
Answer: Yes, this is called "discount fatigue" or brand dilution. If a local clothing boutique runs
a "50% Off Sale" every single weekend, customers will stop buying items at regular price. They
will simply wait for the next weekend sale. Over-discounting trains your market to believe your
product was never actually worth its original price tag.