Republic of the Philippines Department of
Education
PUBLIC TECHNICAL –VOCATIONALHIGH
SCHOOLS
Unit of Competency : Determine Costing and Pricing of Products
and Services
Module Title : Determining Costing and Pricing of
Module No. 4 Products and Services
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LESS0N 2
DETERMINE PRICING OF PRODUCTS AND
SERVICES USING PRICING MODEL
WHAT IS THE LESSON ABOUT?
In this lesson, you will appreciate how to decide for the market
price of your products or services and choose your own pricing strategy.
WHAT WILL YOU LEARN?
At the end of the module you should be able to:
1. Come up with a pattern of computation to
price your own products or services; and
2. Compute for the price of your own business products or
services.
LET US STUDY
WORDS TO STUDY
Mark-up represents the difference between what is paid for the
merchandise and its end price to the clients
Pattern refers to an outline or model of one thing
Price indicates value of a commodity or service in the form of money
Product the result of the input and process in the form of output
Services is a type of business that has no product but purely services
Strategy is an approach or method used in business
Pricing strategy is a part of the pricing system wherein the government
becomes alert against those who are abusing and making unreasonable
prices. Keeping an enterprise pattern when it comes to pricing of
commodities and services, serve as guide for the entrepreneurs to
understand how their prices are computed objectively. However, lowest
price approach is the most risky activity in pricing and it should be avoided.
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The key secret of the business firms to compete for the price is
through the various pricing strategies. Giving focus on the competition for
cleanliness, convenience, delivery, easy credit options, guarantees, quality,
safety and service are only secondary concerns.
As a young entrepreneur, what is your idea about the different pricing
strategies? You may consider one of the following pricing strategies if you
still do not have your own strategy:
Value-based pricing (price increases when there are evident results)
Posting P9.95 instead of P10; P24.50 instead of P25.00; and others
Value pack (mixture of clustered products with varied prices in one
pack or bag)
Cost-plus-pricing method (setting up price targeting specific profit)
High Price Approach aiming to set quality and status. It is also called
as prestige strategy
Penetration market is common to the new entrepreneurs. They are
doing it in order to establish market and build up more customers.
Free tasting (Sampling Approach)
Result pay scheme (Trial Method)
Before you do the final pricing, you have to know the value of the
total revenues (TR) and the total costs (TC). When TR is greater than TC,
your business gained profit. If the TR is lesser than TC, it is loss. In
instances that the TR and TC are equal, there is neither profit nor loss. It is
called break-even. Break even analysis is used as an instrument or a tool to
solve managerial problems helpful among business leaders and economists.
Here are some models in pricing goods and services. These will help
you to know how you can compute prices of your own product and service
business. Find out if this pricing scheme is appropriate to use in the
production of your business:
1. Percentage Allocation Approach (PAA). This is good for product
business. Decide for the percentage value to be added to the actual
cost of your product or service. Below are examples:
A. Unit Cost of Product (UCP), TVE T-Shirt = P55.00
Target Profit in Percent (TPP) =40%
COMPUTATION = UCP + TPP
= P55.00 x .40 = P22.00
= P55.00 + P22.00
UNIT PRICE = P77.00
B. Volume Cost of Product (VCP), TVE T-Shirt by Volume Target
Profit (VTP) per dozen of Quantity (Q):
1 to 5 dozens = 38%
6 to 10 dozens = 35%
11 to 15 dozens = 32%
16 dozens & above = 30%
COMPUTATION for 1 to 5 dozens (maximum based) of TVE T-Shirts:
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VCP = UCP + VTP x Quantity (Q)
= P55.00 + 38% x 60
= P55.00 + 20.90 x 60
= P75.90 x 60
VOLUME PRICE = P4, 554.00
UNIT PRICE = P75.90
COMPUTATION for 5 to 10 dozens (maximum based) of TVE T-Shirts:
VCP = UCP + VTP x Quantity (Q)
= P55.00 + 35% x 120
= P55.00 + 19.25 x 120
= P74.25 x 120
VOLUME PRICE = P8, 910.00
UNIT PRICE = P74.25
2. Average Mark-up Approach (AMA). This is appropriate to the service
type of business. Mark-up consists of damaged merchandise,
employee discounts, markdowns, operating expenses, profits and
shortages. This is common in industries but differ in the way they
execute it supported by company rules and policies.
Here is how to compute for the pricing of a service type of business.
a. Assume that you are operating a laundry service business
b. Decide for 60% profit against actual cost of every laundry service,
where 20% intends to support and finance some operating
expenses like damaged merchandise, employee discounts,
markdowns, operating expenses, profits and shortages.
c. Consider a 40% mark-up to be added to the cost of the service
Price of laundry service per kilo:
Cost of laundry = P20.00
General Markup = 60%
*40% Target Profit (TP); 20% Operating Expenses (OE)
PRICE = Cost of laundry + TP + OE
= P20.00 + 40% + 20%
= P20.00 + P8.00 + P4.00
= P32.00
When you compute for 5 to 10 kilos (maximum based) of laundry
service, rendered to a single client, you may charge her/him with a friendly
discount of 5% from the total charge. When you do it, it will not bring any
business loss to you but an investment of a good reputation and goodwill.
Let us find out how much you will sacrifice to invest for a possible
goodwill using the data above:
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Unit price per laundry service P32.00 x 10 kilos -5% discount/10
= P32.00x10-5% /10
= P320.00-P16.00/10
= P30.40
Therefore, goodwill investment capital for 10 kilos of laundry service is
only P1.60 (P32.00 unit price less P30.40 discounted price) per kilo of
laundry service rendered to your customer.
It is suggested that the following goodwill investment package chart be
applied on your laundry business. You may also change it for further
improvement of your services:
a) 100% service fee of P32.00 per kilo of laundry
b) 5% discount from 5 to 12 kilos of laundry
c) 10% discount from 13 kilos and above of laundry
LET US REMEMBER
As a future entrepreneur, you have to value the importance of
honest and accurate computation in pricing. Pricing policy will
help every entrepreneur. The use of models or standard samples of
computation will facilitate the correct pricing procedure.
HOW MUCH HAVE YOU LEARNED FROM THIS LESSON?
ACTIVITY 1
Directions: Copy the activity and answer in one whole
sheet of paper.
1. If you have 10 jackets for P180.00 unit cost, how
much will be the unit price at 40% Target Profit in Percent (TPP)?
a. P272.00
b. P295.00
c. P252.00
2. Compute how much will be the price of a bottle of perfume when
the cost is P250.00 with 38%TPP?
a. P380.00
b. P299.00
c. P345.00
3. With 10% discount incentive, what will be the unit price of 10 kilos
laundry if the service is P32 per kilo?
a. P320.00
b. P232.00
c. P288.00
4. In a laundry shop, when do you give a discount of 10%
a. 5 to 12 kilos of laundry
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b. 10 to 13 kilos of laundry
c. 14 to 15 kilos of laundry
5. What is the effect in business when the TR is lesser than the TC?
a. There is a business loss
b. There is a profit
c. There is no gain and no loss
POST-TEST
Directions: Let us find out how much you have learned
about production cost and pricing of products or services.
Copy and Answer the questions honestlyin one whole sheet
of paper.
1. What is the business condition when the TR is greater
than TC?
a. There is a business loss
b. There is a profit
c. There is no gain and no loss
2. In a laundry shop, when do you give a discount of 10%?
a. 5 to 12 kilos of laundry
b. 10 to 13 kilos of laundry
c. 13 kilos of laundry and above
3. It refers to the value sets for rendering a service or product for sale or
the amount paid for commodities.
a. cost
b. price
c. profit
4. How much is the price of a bottle of perfume when the cost
is P250.00 with 38%TPP.
a. P380.00
b. P299.00
c. P345.00
5. A method of setting a price according to the values of the products or
services offered to the clients that usually increases when there are
evident results.
a. cost-plus-pricing method
b. return on investment pricing
c. value-based pricing
6. This describes a method of setting up price to target specific
profit from specific product or service.
a. cost-plus-pricing method
b. return on investment pricing
c. value-based pricing
7. Price is only one factor in purchasing which may lead to the most risky
activity in pricing. This is called _________________.
a. highest price strategy
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b. lowest price strategy
c. moderate price strategy
8. What type of costing is the direct labor cost and raw material in
production ?
a. direct cost
b. indirect cost
c. purchasing cost
[Link] on building, machines, maintenance, salaries, office costs,
selling cost and financial costs are better known as overhead
expenses. Which of the following costing does it fall?
a. direct cost
b. indirect cost
c. purchasing cost
10. It refers to the margin or difference between the cost price and the
selling price of an item.
a. mark-up
b. revenues
c. sales profit
