Download Pricing Strategies - Lindbergh School District

Price Planning
Chapter 29
Marketing I
What is Price?
(value of money placed on a good)

Product Value to customers
• features in relation to other
products
• seller’s objective is to set high
enough to make a profit yet not
to exceed value perceived by
customers

Price comes in many forms
• rent, dues at a club, fees,
interest, salaries, tuition
Importance of Price
Success or failure of a
business
 Establishes &
maintains a firm’s
image, competitive
edge, & profits
 Main thrust of
advertising strategy

Goals of Pricing
 Gaining market share(firm’s % of total sales
generated by all competitors)
• need to watch competitors to maintain market
position(relative standing in relation to competitors) and
market share, may lower price to increase them
 Return on Investment=profit/investment
• If you are given a certain ROI, you would work the formula
backwards
 Meeting the Competition
• follow industry leader or calculate average price of all
competitors (automobiles, soft drinks)
Market Factors Affecting Prices

Costs and Expenses
• Responses to Declining Profit Margins
– smaller size, drop features not valued, improving product to
justify increase in price
• Responses to Lower Costs/Expenses
– take higher profit, lower price, improve product and keep same
price
• Break-even Point
– Figured when marketing a new product or establishing new price
– total costs/selling price=break even point
Market Factors Affecting Prices
 Supply and Demand
• Elastic demand(change in price creates
change in demand)
– Availability of substitutes
– Price Relative to Income
– Brand loyalty
– Luxury vs. Necessity
– Urgency of Purchase
• Inelastic demand (change in price creates
little change in demand)
 Consumer Perceptions (subjective price)
• Equate quality with price (status, prestige)
• Personalized service
Market Factors Affecting Price

Competition
• Price conscious target market
means you must you price
competition
• Not price conscious means you
can use nonprice competition
• In price competition, change
prices to reflect demand, cost
or competition
• Price war (fast food, airlines)
Government Regulations
 Price Fixing(competitors agree on certain
price ranges)
• Need collusion to prove, that means
communication took place between competing
firms (Sherman Antitrust Act)
 Price Discrimination
• cannot sell to one customer at one price and
another at another price in similar situations
(Clayton Antitrust Act)
Government Regulations
 Resale Price Maintenance
• manufacturers unable to tell retailers what to
sell for, can only offer suggested prices
• Can tell retailers in advance that they will not
be able to sell product if they don’t adhere
 Minimum Price laws
• prevents retailers from selling goods below
cost plus a % for expense and profit
• In states with out these laws, retailers use loss
leaders(item priced at cost to draw customers
in) to pull in customers
Government Regulations
 Unit Pricing
• Consumers must be able to compare similar
products based on a cost per standard unit of
measure
 Price Advertising
• Must offer product at original price before
advertising reduction
• May not say prices are lower without proof
• Pre-marked price cannot be used if not sold at that
price
• Bait-and-switch advertising is illegal
Pricing Strategies
Part I
Basic Pricing Concepts

Cost-Oriented Pricing
• Markup pricing- difference b/t a price of an item and
its cost. Usually a percentage, must include cost and
expected profit
• Cost-plus pricing- expenses calculated for each
good and then profit added, mainly used by
manufacturers and service providers
Computing Cost-plus Pricing

Print Job
•
•
•
•
•
•
•
40 reams paper=$400
labor=$100
materials=$60
artwork=$140
expenses=$50
profit=$50
Total price to
customer=$800
Basic Pricing Concepts
•
Demand Oriented Pricing
• Determine what customers will & pay for product
• Based on perceived value
• Effective when few substitutes available
•
Same product different price based on demand—
stadium seating
Basic Pricing Concepts

Competition Oriented Pricing
• Competitive Bid pricinggovernment agencies, schools
• Going-Rate Pricing-almost all
firms do this, studying
competitors to keep in-line
Combining Pricing Considerations
•
Most marketers use all three to
determine prices
• Cost-oriented used to determine the floor
price
• Demand oriented used to determine the
range
• Competition used to determine final price
matches relation firm wants to have to
competitors
Pricing Considerations
Need to look at what retailers and wholesalers will
charge
 Pricing backward from retail price
• 1st-retail price set, then markups desired by
wholesalers & retailers, finally manufacturer’s price set

Pricing forward from manufacturer’s cost
• 1st-wholesaler & retailer markups added, then retailers
markup added, look at demand & competition, set final
price
Pricing Policies

One-Price- all customers charged the same. Prices
quoted by means of signs and price tags, no
deviations

Flexible- Price -price quoted by buyer or seller,
bargaining starts (cars, houses, antiques)
Product Life Cycle
New Product Introduction
• Skimming-Set price high, earn high profit
margin, can lower price and not insult target
market, attracts competition though, may be set
too high and lose sales
• Penetration-set initial price low to generate trial
purchase of product, need mass production,
promotion and distribution to be effective, block
competition by capturing market, lure away from
competition who is priced higher, if demand not
high=losses
Product Life Cycle Pricing
Other Stages
• pricing in subsequent stages
determined by initial pricing
strategy
• goal during growth-keep in
this stage as long as possible
• goal during maturity-look for
new market segments
• goal during decline-maintain
profitability
Pricing Strategies
Part II
Psychological Pricing- techniques that
create an illusion for customers

Odd-Even Pricing-setting prices that end in odd or even
numbers (odd=bargain image, even=quality image)
• When using round numbers, don’t use cents
• Price $3-4 higher than round amts.
• Price slightly lower, when below round numbers
Psychological Pricing

Prestige Pricing
• Setting higher than average
prices
• suggest status
Many customers assume
that higher prices mean
higher quality
 Avoid exceeding customer
limits, do your research

Psychological Pricing
Multiple pricing-suggests a bargain, will sell
more at 3 for .99 than at .33 each
Promotional Pricing-temporary
loss leader-at cost to draw to store
special-event pricing-reduced in price for short period
of time (24-hour sale)
rebates, coupons, discounts
Price Lining-all product in a given category at
certain price level(need a low, middle and high
level)
Discount Pricing-offering reductions off
the usual price
Cash discounts-offered to
encourage quick payment of bills
(2/10, net 30)
 Quantity discounts-encourage large
orders which have lower selling
costs

• noncumulative-one order
• cumulative-all orders over specified
period of time
Discount Pricing
Trade discounts-way
manufacturers quote
discounts to wholesalers and
retailers based on list price
 Seasonal Discounts-offered to
encourage buying before or
after a product’s peak season
 Promotional discounts-willing
to promote or advertise
certain product

Steps in Setting the Price
Step 1-Determine Pricing Objectives
volume or revenue, image
Step 2-Study Costs
Step 3-Estimate Demand
market research
Step 4-Study Competition
range, floor price, ceiling price
Step 5-Decide on a Pricing Strategy
Step 6-Set Price