Download Chapter 11 Section 1 Notes

Chapter 11 Section 1 Notes
Continued…….
Pricing Strategy Decisions
1. Select a basic approach
a. Cost Based
-Must consider your businesses costs and your profit goals.
-To Calculate: Price = Cost to Make the Product + Related Costs of doing business+
Projected Profit Margin(Markup)
b. Demand Based
-Find out what customers are willing to pay
-Set price accordingly (Useful only when certain conditions exist) i.e. when customers
believe your product is different from or has greater value than the competitor’s
c. Competition Based
-Find out what your competitor’s charge
-Determine if you should go higher, lower, or stay the same, this in no way takes into
account the demand of the product
2. Pricing Policies
a. Flexible-Price Policy
-This policy allows customers to bargain for price
-Gives you the opportunity to make sales you would otherwise lose
-Takes into account increased and decreased demand and competitor’s prices and it
allows you to react to these factors through your prices. (Dealerships)
b. A One-Price Policy
-All customers are charged the same price
-Strongly recommended for service businesses and consistently used in retail stores
3. Product Life Cycle Pricing
a. Stage 1: Introduction
-Sales Volume is relatively low, marketing costs are high, and profits are low or even
negative.
-Two methods commonly used when introducing a product- Price Skimming or
penetration
-Price Skimming involves charging a high price to recover costs and maximize profit as
quickly as possible. Then the price is dropped when the product is no longer unique.
-Penetration Pricing builds sales by charging a low initial price to keep unit costs to
customers as low as possible.
b. Stage 2: Growth
-Sales Climb rapidly, unit costs are decreasing, and the product begins to show a profit,
and competitors come into the market.
-If you previously price skimmed, you would lower prices to appeal to price-conscious
customers in the growth stage.
-If you used price penetration, you would only make minor price changes
c. Stage 3: Maturity
-Principal goal of this stage is to stretch the life cycle of your product.
-Sales begin to slow and Profits Peak
-To maintain steady prices, businesses must identify new markets or make product
improvements
-If efforts are unsuccessful the product moves into the decline stage
d. Stage 4: Decline
-Sales and Profits Continue to fall
-Could cut prices to generate sales and clear inventory.
-Reduction in manufacturing and promotional costs
-Eventually phased out
4. Pricing Techniques
a. Psychological Pricing
Techniques that are based on the belief that customer’s perceptions of a product are strongly
influenced by price. (Commonly used by retail businesses)
-Prestige Pricing
A technique in which higher-than-average prices are used to suggest status and prestige
to the customer.
-Odd/Even Pricing
A technique in which odd numbers, such as 19.99, are employed to suggest bargains.
This is based on a psychological principle on which the technique is based is that odd
numbers convey a bargain image, and even prices, such as $20, suggest higher quality
-Price Lining
A technique in which items in a certain category are priced the same, for example, jeans
at $25, $50, and $75. When deciding price lines, entrepreneurs must be careful to make
sure they set a line that represents low, middle, and high prices to define each products
quality.
-Promotional Pricing
Lower prices are offered for a limited time period to simulate sales. The main
characteristic of promotional pricing is that it is temporary. Prices go back to normal
after promotion is over.
-Multiple-Unit Pricing
Items are priced in multiples, such as 3 items for 99 cents. This suggests a bargain and
can increase sales volume.
-Bundle Pricing
Several complementary products are sold at a single price. The Price is typically lower
than it would be if the customer would buy the products individually. Example,
Computer companies sell products in this fashion.
b. Discount Pricing
Offers customers reductions from the regular price
-Cash Discounts
Given to customers for prompt payment. (2/10,n/30)
-Quantity Discounts
Encourage buyers to order larger quantities than they would normally buy.
Buyer gets a reduction in price, Seller reduces selling expenses and may shift part of the
storing
-Trade Discounts
Discounts given to the distribution-channel members who provide marketing functions
for the manufacturer
Based on the MSRP and specify wholesaler and retailer discounts
-Promotional Discounts
Used when manufacturers want to pay wholesalers or retailers for carrying out
promotional activities
Discounts may be given in the price paid for promotional goods or made by direct cash
payment
-Seasonal Discounts
Are used for products that have a high seasonal demand