Download Ch--11-Pricing

Pricing, Ch#11
Strategies
Terms Ch#11
Fixed
Variable
Gouging
Bait and Switch
Predatory
Resale Price Maintenance
Discount Pricing
Price Skimming
Mark-up
Mark-down
Odd / Even Pricing
Price Lining
Promotional Pricing
Multiple Unit Pricing
Bundle Pricing
Elasticity
Break-Even Point (BEP)
Penetration Pricing
Prestige Pricing
Leader Pricing / Loss Leader
Why is Pricing Important?
Pricing decisions is important because customers have
alternatives to choose from.
In a Free-Enterprise economic system, customers are in
a position to seek good value
Value = perceived benefits
price
So, businesses can increase value and stimulate sales
by increasing benefits or reducing the price.
Price Sensitivity and Demand
When
price
increases
sales can decrease
as fewer customers feel the product is a good value
Market pricing principles state that Laws of Supply
and Demand do not set prices, businesses do.
Considerations in Setting Prices
The four factors consider in setting prices:
• The price sensitivity of consumers
• The cost of the merchandise and services
• Competition
• Legal restrictions
Elasticity
Elasticity = percent change in quantity sold
percent change in price
Pricing
Regardless of Supply or Demand, to stay in
business, the business must sell the product for
more than it costs. In other words, all products
should be “Mark-ed Up”. “Mark-downs” should
be avoided.
Markups
Selling Price = Cost + Markup
100% = 70% + 30%
Selling Price = $10.00 and markup = 30%
Selling Price = Cost + Markup
$ 10.00 = $7.00 + $ 3.00
Reasons for Taking Markdowns
• Get rid of slow-moving, obsolete, uncompetitive
priced merchandise
• Increase sales and promote merchandise
• Generate cash to buy additional merchandise
• Increase traffic flow and sale of complementary
products generate excitement through a sale
Fixed Costs
Do not change when sales volume
increases or decreases. An example of a
fixed cost is rent on a lease.
Variable Costs
Changes as unit sales increase or decrease.
An example of a variable cost is labor.
Break-even point
Understanding the Implication of Fixed and Variable Costs
Fixed Costs + Variable Costs = BEP =Total Cost
Break-even
point (BEP)
Variable Costs
Fixed Costs
Pricing strategies of:
Every Day Low Prices (Selling almost
everything in the store cheaper)
Vs. Hi / Lo Prices (Ads
featuring only some products)
Advantages of EDLP & Hi-Lo
EDLP
• Builds loyalty –
guarantees low
prices to customers
• Lower advertising
costs
• Better supply chain
management
– Fewer stock outs
– Higher inventory turns
Hi-Lo
• Higher profits – price
discrimination
• More excitement
• Build short-term
sales and generates
traffic
Variable Pricing
Change your prices for different
geographical regions or even changing
prices for senior citizens.
Leader (Loss) Pricing
• Certain items are priced lower than normal to
increase customers traffic flow and/or boost
sales of complementary products.
• Best items: Purchased frequently, primarily by
price-sensitive shoppers.
• Examples: Bread, eggs, meat or disposable
diapers.
Dennis Gray/Cole Group/Getty Images
Allan Rosenberg/Cole Group/Getty Images
Psychological Pricing
Often used in retailing, is the belief that consumer
perceptions are influenced by price. Types of
Psychological Pricing includes: Bundling,
Multiple-Unit, Prestige, Odd / Even, Price Lining
and Promotional.
Bundling / Bundle Pricing
Grouping pricing of complementary products
together sold at a lower price to benefit
consumers. An example of this is Verizon cable
and internet grouped together at a lower price.
Price Lining
• A limited number of predetermined price points.
• Ex: $59.99 (good), $89.99 (better), and 129.99 (best)
product lines.
• Business Benefits from:
–
–
–
–
Elimination of confusion of many prices.
Merchandising task is simplified.
Gives buyers flexibility.
Can get customers to “trade up.”
Odd / Even Pricing
This is a psychological price method that suggests that
customers are sensitive to ending numbers of pricing
(pennies).
Odd: 9.99 sounds cheap,
Even: $10.00 sounds expensive, but might denote quality
Multiple Unit Pricing
• Instead of saying $1.00 each
Tell the customer it’s 10 for $10.00
Or instead of saying Egg McMuffins are
$1.75 each, they are 2 for $3.50
Prestige Pricing
• Customers believe that pricing has a direct
correlation with quality.
• Surrogate of quality is price.
• When a business charges a high price and the
business claims it has quality merchandise,
customers tend to believe the claims.
BOGO Pricing
• Buy One Get One --- Price
Businesses usually double their prices
before going BOGO.
Discount Pricing
This is merely a reduction in price to encourage customers to
buy. Examples of this includes:
 Cash discounts: % reduction if cash is used
 Quantity discounts: Increase in order size equals reduction
of price
 Seasonal discounts to reduce inventory. Unseasonable
items are sold at a discount.
 Trade discounts: Given to perpetuate business to business
relationships
 Promotional discounts: Passed on from the manufacturer to
the consumer to increase volume. Example: couponing.
Promotional Pricing
Lower prices for a limited period
of time, to stimulate sales.
Example: Super Burgers are:
$1.00! This month only!
When introducing a new product…
Businesses often choose one of
two types of strategies:
1. Price Skimming
2. Penetration Pricing
Price Skimming
When the product has no competitors and the
product has an extreme uniqueness; The price
of the product can be initially high. Often
businesses introducing a product need to recoup
research and development costs or large capital
expenditures. As competitors enter the
marketplace, the price can be lowered to meet
competition.
Penetration Pricing is almost
the opposite.
The goal of penetration pricing is to saturate the
market. By giving the product away, there the
hope that consumers will like it so much that they
will later buy it, if given the chance.
This is done by couponing, sampling and just
passing it out where there might be a large % of
the target market. (Often done at county fairs,
malls, supermarkets and Costco.)
Legal and Ethical Pricing Issues
Predatory Pricing
Resale Price Maintenance
Price fixing
Bait and Switch tactics
Gouging
PhotoDisc/Getty Images
Predatory Pricing
Is illegal, violates antitrust laws . This is
often known as “Dumping”. It is similar to
penetration pricing structure, but is often
done to change an industry and not just to
produce sales.
Simply put, low prices, below cost, until
competitors are out of business.
Resale Price Maintenance
Price fixing imposed by a producer
on other intermediaries to deter
price-based competition.
Price Fixing
An illegal practice in which competing
companies agree to restrict prices.
Bait and Switch
(Illegal in California)
Retail tactic, advertising a product at a low price to
bring customers into the store; however there is
little or no inventory to support a sale of that
product. Retailers then suggest other products
instead.
Gouging
Priced at a higher price, because no other
retailer is present.