Download Pricing Strategies

Pricing Strategies
Chapter 26.1
Ch 26.1 – Strategies in the Pricing Process
What you’ll learn
• The various pricing techniques
• The steps in setting prices
• The use of technology in the
pricing function
Basic Pricing Concepts
Three basic pricing concepts to consider when
determining the price for any given product:
 cost-oriented pricing
 demand-oriented pricing
 competition-oriented pricing
Cost-Oriented Pricing
1. Marketers first calculate the costs making a
product and their expenses of doing business
2. Then add their projected profit margin to these
figures to arrive at a price. Two common
methods are:
 markup pricing
 cost-plus pricing
Markup Pricing
 used primarily by wholesalers and
retailers who are involved in acquiring
goods for resale
 The markup must cover the business’s
expenses
 Price = cost + markup (as percentage)
The mark-up varies from product to product:
Groceries
+ 25%
Clothes shops
+ 100%
Cost-Plus Pricing
 used by manufacturers and service companies
 Price = all costs + all expenses (fixed and
variable) + desired profit
Suburban Research Consultants
Questionnaire Design and
Printing
Postage
Labor (40 hours at $30)
$3,500
400
1,200
Refreshments
100
Expenses
350
Profit
950
Final Price to customer
$6,500
Cost-plus pricing breaks a
price down into its component
parts.
Demand-Oriented Pricing
Marketers who use demand-oriented pricing attempt
to determine what consumers are willing to pay for
given goods and services.
Demand-oriented pricing is effective when:
 there are few substitutes for an item
 there is demand inelasticity
Competition-Oriented Pricing
When marketers study their competitors to determine
the prices of their products
These marketers may elect to take one of three
actions:
 price above the competition
 price below the competition
 price in line with the competition
(going-rate pricing)
Combining Pricing Considerations
Most marketers use all three pricing policies to
determine prices.
 Cost-oriented pricing helps determine the price
floor (lowest selling price) for a product.
 Demand-oriented pricing helps determine a price
range for the product.
 Competition-oriented pricing ensures that the final
price is in line with the company’s pricing policies.
Pricing Policies
A basic pricing decision every business must make is
to choose between a one-price policy and a flexibleprice policy.
 A one-price policy is one in which all customers
are charged the same price for the goods and
services offered for sale.
 A flexible-price policy permits customers to
bargain for merchandise.
Product Life Cycle
Pricing plays an important role in the product life cycle.
In this sequence of events, products move through four
stages:
 introduction
 growth
 maturity
 decline
New Product Introduction
A business may elect to price a new product above, inline, or below its competitors. When a going-rate strategy
is not used, two polar methods may be used:
 skimming pricing
 penetration pricing
Skimming Pricing
A pricing policy that sets a very high price for a new
product to capitalize on the initial high demand for a new
product.
 Advantages: High profit margin; may cover
research and development costs.
 Disadvantages: Cost must eventually be lowered;
attracts competition; if price is too high no one buys.
Penetration Pricing
Sets the initial price for a product very low to
encourage as many people as possible to buy the
product.
 Advantages: Quick market penetration; can
capture a large market; blocks competition.
 Disadvantages: Low demand leads to
big losses.
Other Product Stages
Growth Stage: Very little price changes will be made
Maturity Stage: The goal is to stretch the life of a product
•Add new features
•Seek new markets in other nations
Decline Stage: Companies are forced to reduce prices to
generate sales
•Cut back on advertising and other
promotional activities
Activity
Pricing Case Study
1.
Read the case about priceline.com and answer
the following questions
2.
Be prepared to discuss with the class
Chapter 26.2: What You’ll Learn
 The various pricing techniques
 The steps in setting prices
Psychological Pricing
Psychological pricing refers to techniques that create
an illusion for customers or that make shopping easier
for them. Common psychological pricing techniques
are:
 odd-even pricing
 prestige pricing
 multiple-unit pricing
 bundle pricing
 promotional pricing
 everyday low prices (EDLP)
 price lining
Odd-Even Pricing
 Setting prices that end in either odd or
even numbers
 Odd numbers convey a bargain image
($19.99)
 Even numbers convey quality
($100.00)
Prestige Pricing
Setting higher-than-average prices to suggest status
and prestige
Examples:
–Perrier Water
–Nike – Air Jordan’s
–Lexus
Multiple-Unit Pricing
Pricing items in multiples to suggest a bargain and
increase sales volume (3 for .99)
 Suggests a bargain and helps
increase sales volume.
 Better than selling the same items
at $.33 each.
$.99 ea.
OR
3 for $2.50
Bundle Pricing
Including several complementary products in a package
and pricing them lower as a group than if they were
bought separately
Examples:
 Fast food
 Basic Cable
 Computer packages
 (Package deals)
Promotional Pricing
Promotional pricing is generally used in conjunction
with sales promotions when prices are lower than
average.
 Loss-leader pricing provides items at cost to
attract customers.
 In special-event pricing, prices are reduced for a
short period of time, such as a holiday sale (Back
to School, Veteran’s Day.
Everyday Low Prices (EDLP)
Low prices that are set on a consistent basis with no
intention of raising them or offering discounts in the
future.
Price Lining
Offering all merchandise in a given category at
certain prices, such as $25, $35, and $50
 Upper tier is better quality premium brand
 Middle tier is for average priced brands
 Lower tier for price-conscious customers
Activity
• Psychological Pricing
Discount Pricing
Discount pricing involves the seller's offering
reductions from the usual price. They include:
 cash
 quantity
 trade
 seasonal discounts
 promotional discounts and allowances
Discount Pricing
Cash discounts are offered to buyers to encourage
them to pay their bills quickly.
2/10 net 30
If paid by the 10th, receive 2% discount,
OR
full amount due by the 30th of the month
Quantity discounts are offered to buyers for placing
large orders.
 Noncumulative quantity discounts are offered
on one order.
 Cumulative quantity discounts are offered on all
orders over a specified period of time.
Discount Pricing
 Seasonal discounts are offered to buyers willing
to buy at a time outside the customary buying
season.
 Promotional discounts are offered to wholesalers
and retailers willing to advertise or promote a
manufacturer's products.
 Allowances are granted to customers for selling
back an old model.
Steps in Setting Prices
These are the six steps in determining a price for an
item:
1. Determine pricing objectives.
2. Study costs.
3. Estimate demand.
4. Study competition.
5. Decide on a pricing strategy.
6. Set price.
Activity
Market Price