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Transcript
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