Three Basic Methods in Setting the Price:

1) Cost-based pricing - refers to the setting of prices on the basis of costs. The total costs are
calculated and an amount is added to cover the firm’s profit goal.
a) Cost-plus pricing- price is determined by adding a predetermined profit to costs. The term
literally means cost plus mark-up . The formula for cost-plus pricing is
Price = Total fixed costs + Total variable costs + Projected profit
Units produced
Example: A woodcraft manufacturer has a total fixed costs of P50,000, variable costs of P500
per unit, desires P10,000 as profit, and plans to produce 100 chairs. What is the selling price for each
chair?
b) Markup pricing- a firm sets price by calculating per-unit merchandise costs and then
determining the markup percentages that are needed to cover selling costs and profit. It is commonly
used by wholesalers and retailers. The formula for markup pricing is
Price = Merchandise costs_____
(1- Markup per cent)
Example: A retailer pays P30 for cloth. The retailer wants a markup on selling price of 40 per
cent (30 per cent for selling costs and 10 percent for profit). What is the final selling price for each
cloth?
c) Break-even technique- determines the sales quantity in units or pesos that is necessary for
total revenues (Price x units sold) to equal total costs (fixed and variable) at a given price.
Break-even point (units) = Total fixed costs___________
Price-Variable costs (per unit)
Break-even point (sales pesos) = Total fixed costs
1 - Variable costs (per unit)
Price
Example: A candy manufacturer has total fixed costs of P100,000 and variable costs per unit of
P0.10. The firm sells its candy for P0.15 per bar. What is the break-even point in units? In sales pesos?
The other way to present the break-even technique

The break-even technique- break even is the level of sales volume where the sales receipts are equal
to total costs. The formula for break even is:
TOTAL SALES = TOTAL COSTS
To get the break-even selling price, one must understand the following equations:

a). Total Sales = Unit Selling price (USP) x Volume (Y)

b) Total Cost = Total Fixed Cost (TFC) + Unit Variable Cost (UVC) x Volume
c) At break –even: Total Sales = Total Cost or
USP x Y = TFC + UVC x Y, simplifying it you get

USP = TFC + (UVC x Y)

Y
 Given: Total fixed cost = P50,000
Unit variable cost = P10
Volume = 10,000 trays

Suppose the price of product is P25.00. How much will your profit be?
2) Demand-based pricing- a firm determines the price consumers and channel members will pay
for goods and services, calculates the markups needed to cover selling expenses and profits,
and then determines the maximum it can spend to produce its offering. In this way, prices and
costs are linked to consumer preferences and channel needs, and specific product image is
sought.
a) Demand-minus (demand-backward) pricing- the firm ascertains the appropriate selling price
and works backward to compute costs.

The final selling price is determined through consumer surveys or other research. The markup
percentage is derived from selling expenses and desired profit. The maximum acceptable merchandise
costs are computed. The formula is:
Maximum merchandise costs = Price x {(1-Markup per cent)
Example: A farm equipment manufacturer has conducted consumer research and found that
farmers are willing to spend P800.00 for a complete set of its brand. The firm’s selling expenses and
profits are expected to be 30 per cent of the selling price. What is the maximum amount the company
spend to produce each set of equipment?
b) Chain-markup pricing -extends demand-minus calculations from the retailer all the way back
to the manufacturer. The final selling price is determined, markups for each channel member are
examined, and the maximum acceptable costs to each member are computed. It is used when there
are independent channel members.

In traditional channel, the chain is composed of :

b.1) Maximum selling price = Final selling price x [1- Retailer’s markup]
to retailer
b.2) Maximum selling price = Selling price to retailer x [1- Wholesaler’s mark-up]
to wholesaler
b.3) Maximum merchandise = Selling price to wholesaler x [1- Manufacturer’s markup]
costs to manufacturer
Example: A textile manufacturer has determined that consumers will pay P50.00 for a pair of T-
shirt and short pants. The company sells through a channel of wholesalers and retailers. Each requires
a markup of 30 per cent; the manufacturer requires a 25 per cent markup.
1) What is the maximum price that retailers and wholesalers will spend for a pair of T-shirt and short
pants?
2) What is the maximum amount the manufacturer can spend to make a pair of T-shirt and short
pants?

3. Competition-oriented pricing – a firm resorts to this approach when its pricing is based chiefly on
what its competitors are charging. This does not necessarily mean that it charges exactly the same
price as the competitors do but rather that it keeps its prices constantly higher or lower than competition
by a certain percentage.
Price Adjustments
Recall that the list price is the basic “official” price of a product. In many industries, it is
common for list prices to be adjusted with discounts. Discounts are reductions from list price that are
given by a seller to a buyer who either gives up some marketing function or provides the functions
himself.
a) Quantity discounts are discounts offered to encourage customers to buy in larger amounts. This will
make a seller get more of a buyer’s business, or shifts some of the storing function to the buyer, or
reduce shipping and selling costs or all of these. Such discounts are of two kinds:
a.1) Cumulative quantity discounts apply to purchases over a given period such as a year and
the discount usually increases as the amount purchased increases. It is intended to encourage repeat
buying, For example, the building contractor is not able to buy all of the materials needed at once, but
the wholesaler wants to reward the contractor’s patronage and discourage shopping around.
a.2) Non-cumulative quantity discounts apply only to individual orders. Such discounts
encourage larger orders but do not tie a buyer to the seller after that one purchase. Its main use is to
encourage bigger orders. For example, a wholesale lumber yard may purchase and resell the products
of several competing producers. One producer might encourage the wholesaler to stock larger
quantities of its products by offering a non-cumulative quantity discounts.
a.3) Seasonal discounts are discounts offered to encourage buyers to stock earlier than present
demand requirement.
b) Cash discounts are reduction in the price to encourage buyers to pay their bills quickly. 2/10, net 30
means that a 2 percent discount off the face value of the invoice is allowed if the invoice is paid within
10 days. Otherwise, the full face value is due within 30 days. And it usually is stated or understood that
an interest charge will be made after the 30-day free credit period.
c) Trade functional discount is a list price reduction given to channel members for the job they are
going to do. A manufacturer, for example, might allow retailers a 30 percent trade discount for the
suggested retail list price to cover the cost of the retailing function and their profit.
MARKETING CHANNEL
Marketing channel – refers to an inter-organizational system made up of a set of interdependent
institutions and agencies involved in the task of moving products from their point of production to the
point of consumption.
A marketing channel is a set of practices or activities necessary to transfer the ownership of
goods, and to move goods, from the point of production to the point of consumption and, as such,
which consists of all the institutions and all the marketing activities in the marketing process.
Nature of Marketing Channels

Marketing channels vary according to the type of commodity-handled, time and location. One
product in a particular time and place will definitely require a unique setup of institutions and agencies,
assuming that it is distributed through the channel system. These agencies and institutions
(intermediaries) that form the marketing channel also charge through time. Their number might
increase or decrease, depending on the existing economic condition. Consider a simple case of a
marketing channel with only one middlemen as shown below. As the market grows and develops,
wholesaler-retailers or wholesalers might enter the channel and become additional intermediaries in the
movement of the product.

Producer Retailers Consumer

Reasons for Choosing Marketing Outlet
1. High price
2. Convenience
3. Only choice
4. Credit marketing tie up
5. Good image
6. Regular buyer
7. Relative/friendly
8. Repayment or favor
9. Cash on Delivery

Marketing Channels of Selected Products

There are seven different types of intermediaries which can be identified according to their
contributions and functions. These are the contract-buyers, wholesalers, commission agents,
wholesaler-retailers, assembler-wholesalers, butcher-retailers and retailers.
Definition and Types of Middlemen
Middlemen – are those individuals or concerns that specialize in performing the various marketing
function involved in the purchase and sale of goods as they move from producers to consumers.
a. Merchant middlemen – take title to and therefore own the product they handle. They buy and sell
for their own gain. Types of merchant middlemen:
a.1 Contract buyers – practice contract buying of agricultural products. They
estimate the total value of the crop by appraising the probable harvest multiplied by
the expected price at harvest time.
a.2 Wholesalers – sell to retailers, other wholesalers and industrial users, but do
not sell in significant amount to ultimate consumers.
a.3 Retailers – buy products for resale directly to the ultimate consumers of the
goods.
a.4 Processor- one who alters the product from raw materials to a new product.
a.5 Grain millers
b. Agent middlemen – act only as representatives of their clients. They do not take
title too and therefore do not own the products they handle. They receive
income in the form of fees and commission. Types of agent middlemen:
b.1 Commission agents – normally take over the physical handling of the product,
arrange for the terms of sales, collect, deduct his fee and remit the balance of his
principal.
b.2 Brokers – usually do not have physical control of the product
Demand and Supply
Demand – various quantities of a product which consumers will buy at all possible prices, all other
factors affecting demand held constant.
Effective demand – consists of both the desire for the product and the ability to pay for it.
Law of demand – states that price and quantity vary inversely. When prices are high relatively little will
be purchased. This could be explained in terms of substitution and income effects. Substitution effect
arises because consumers shift their purchases toward the relatively cheaper product as price change.
Income effect arises because a change in the price of one commodity, changes the consumer’s real
income, a decrease in price increases the purchasing power of a given money income.
Market demand – alternative quantities of a commodity which all consumers in a particular market are
willing and able to buy as price varies , all other factors held constant. Or it is the summation of
individual demand relations.
Factors affecting demand
1. Price of the good itself
2. Consumers’ income
3. Consumers expectation of the future price
4. Prices of related commodities/goods
5. Consumers’ taste and preferences
6. Environment/climate
7. Ranges of goods available in the market
Supply schedule is a relation between prices and quantities of a given commodity in a given
market and a given period of time. Quantity offered for sale is made to depend on price.
Supply curve – graph of prices and quantity supplied. A normal supply curve should slope upward and
to the right.
Law of supply - states that price and quantity supplied have direct relationship with each other.
Producers presumably are willing to offer larger quantities as the price rises.
Factors Affecting Changes in Supply:
1. Changes in prices of resource inputs or factor prices
2. Prices of closely related commodities/profitability of competing products
3. Changes in technology
4. Changes in the prices of joint products
5. Sellers expectation of future prices
6. Weather
Effects of Food Price Ceilings and Floor Price:
Price ceiling – legally set price below the equilibrium price.
Floor price or support price – legally imposed price above the equilibrium level.
The two prices prevent buyers and sellers from reaching a market clearing price. Price floor
generates surplus of supply over demand markets (Q0-Q1). This may stored, dumped or sold in non-
competing markets. Price ceiling results in black market rationing and out-of-stock problems.

Surplus
Ps
Pe Shortage

Pc

Marketing Margins and Costs

Marketing margin – refers to the difference between prices at different levels of the marketing
system. It can also be defined as the difference between what the consumer pays and what the
producer receives for his agricultural produce. It is also known as “price spread.” It is expressed in
notation as PR – PF ,
Primary demand is determined by the response of the ultimate consumers. In empirical
analysis, retail price and quantity data are customarily used to determine primary demand relationships.
Derived demand is used to denote demand schedules for inputs which are used to produce the
final products.
Primary supply, however, refers to the relationship at the producer level. The supply relation
at retail (derived supply) is derived from the primary relation by adding an appropriate margin.
Thus, a retail price is established at the point where the primary and derived supply relation
intersect. The farm level price is based on derived demand and primary supply.

Pri SR (Derived
ce Supply)
PR SF (Primary
Supply)
Mar
gin DR (Primary
DF Demand
(Derived
PF Demand)
Q
Figure 1. Illustration of the definition of
the marketing margin.
Components of the Marketing Margin
The value of the marketing margin may be subdivided into different components. One way of
subdividing this margin is in terms of its returns to the factors of production used in providing the
processing and marketing services rendered between the farmers and consumers. These include
wages as a return to labor; interest as return to borrowed capital; rent as a return to land and buildings;
and profit as a return to entrepreneurship and risk of capital. All these things are referred to as
marketing costs.
Another way of subdividing marketing margin is to categorize returns according to the various
agencies or institutions involved in the marketing of product such as: the return to retailers for their
services, to wholesalers for their activities, to processors for their manufacturing activities and to
assemblers for the work they perform. This subdivision is referred to as marketing charges.

Types of Margins
Absolute constant margin. Absolute margins are expressed in terms of pesos and are constant
over all quantity ranges. In other words, regardless of the volume marketed, the absolute peso
difference between prices at various levels remains constant.
Percentage margin. On the other hand, percentage margin is the absolute difference in price,
i.e., the absolute margin divided by the selling price.
AB
x 100
% margin = RP

Where absolute margin = selling price – buying price.

AB
x 100
% mark-up = BP
Prepared by:
JAN RAY A. ARIBUABO