Chapter 26

1. Chapter 26 Pricing Strategies

2. Pricing Concepts 26.1 • After finishing this section, you will know: • The three basic pricing concepts involving cost, demand, and competition • The concepts of pricing forward vs. pricing backward • The idea of one-price vs. flexible-price policy • The two polar pricing policies for introducing a new product

3. Basic Pricing Strategies • You need to find the right price for the target market • There are three concepts to consider in determining the price of a product

4. Basic Pricing Strategies • Cost-Oriented Pricing • Calculate the costs of acquiring or making a product and expenses of doing business • Add projected profit margin to arrive at a price

5. Basic Pricing Strategies • Markup pricing- used by wholesalers and retailers involved in acquiring goods for resale • Markup- the difference between the price of an item and its cost expressed as a percentage • Must be high enough to cover the expenses of running a business and include intended profit

6. Basic Pricing Strategies • Cost-Plus pricing- all costs and expenses are calculated, and then the desired profit is added to arrive at a price • Used by manufacturers and service companies • All fixed and variable expenses are calculated separately for different goods and services

7. Basic Pricing Strategies • Demand-Oriented Pricing • Attempt to determine what consumers are willing to pay for goods and services • Price must be in line with the consumers’ perceived value of the goods

8. Basic Pricing Strategies • Effective when there are few substitutes for a product and there is demand elasticity • Customers will pay higher prices because they believe an item is different • Sometimes prices do not reflect major differences in the good or service, but demand

9. Basic Pricing Strategies • Competition-Oriented Pricing • Marketers who study their competitors in order to set prices • Marketers have three choices after they learn the price their competitors are charging: • Price above the competition • Price below the competition • Price in line with the competition

10. Basic Pricing Strategies • Competitive bid pricing- determines the price for a product based on bids submitted by competitors to a company or government agency

11. Combining Pricing Considerations • Most marketers use all three pricing policies to determine prices • Cost-oriented pricing helps determine the price floor for a product • Demand-oriented pricing determines a price range for the product defined by the price floor and the ceiling price

12. Combining Pricing Considerations • Competition-oriented pricing is used to assure the final price is in line with the company’s pricing policies • Manufacturers may also consider the prices they will charge wholesalers and retailers

13. Combining Pricing Considerations • This can be done two ways: • Work backward from the final retail price • Work forward from costs and expenses to the final retail price

14. Pricing Policies and Product Life Cycle • Every business must make a choice between a one-price and a flexible-price policy

15. One-Price vs. Flexible-Price Policy • One-price policy- all customers are charged the same price for the goods and services offered for sale • Price tags, signs, no deviations permitted

16. One-Price vs. Flexible-Price Policy • Flexible-price policy- customers pay different prices for the same type of amount of merchandise • Permits customers to bargain for merchandise • Not common in retail stores • Becoming popular for e-tailing by means of online auctions

17. Product Life Cycle • Products move through four stages: • Introduction, growth, maturity, and decline

18. New Product Introduction • Skimming pricing- sets a very high price for a new product • Used when demand is greater than supply • Price has to be lowered once the market for the product changes to more price-conscious • A disadvantage is that the initial price attracts competition, and price set above what consumers are willing to pay

19. New Product Introduction • Penetration pricing- the initial price for a new product is set very low • Encourages as many people as possible to buy the product and penetrate the market • Most effective in the sale of price-sensitive products • Captures a large number of customers in a short period of time • Will not work if the product is not in high demand

20. Other Product Stages • Pricing in later stages depends on the initial method used

21. Skimming • Monitor closely, when sales level off, price should be lowered

22. Penetration • Very little change will be made during the growth stage • Promotions are used to keep sales high • The principal goal during the maturity stage is to stretch the life of the product • Some companies revitalize products • Others seek new markets in the global market place

23. Penetration • Sales decrease and profit margins are reduced in the decline stage • Companies are forced to reduce prices in order to generate sales

24. Assignment • Page 473 • Reviewing Key Terms and Concepts • #1-5 • Thinking Critically • #6

25. Setting Prices 26.2 • After finishing this section, you will know: • The various pricing techniques • The steps in setting prices

26. Pricing Techniques • There are two types of pricing techniques: • Psychological • Discount

27. Psychological Pricing • Psychological pricing –techniques that create an illusion for customers or that makes shopping easier • Appeal to particular market segments because of shared perceptions and buying habits

28. Psychological Pricing • There are seven psychological pricing techniques: • Odd-even pricing- setting prices that end in odd or even numbers • odd numbers- convey a bargain image • Even numbers- convey a quality image

29. Psychological Pricing • Prestige pricing- sets higher-than-average prices to suggest status and prestige • many consumers believe that higher prices mean higher quality • Multiple-unit pricing- suggest a bargain and helps increase sales volumes • 3 for $.99

30. Psychological Pricing • Bundle pricing- including several complementary products in a package sold at a single price • Price is lower than if all products were purchased separately

31. Psychological Pricing • Promotional pricing- used with sales promotions when prices are lower than average • Loss-leader pricing- increases store traffic by offering popular items for low prices • Special-event pricing- items are reduced in price for a short period of time based on an event

32. Psychological Pricing • Every day 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- requires a store to offer merchandise in a given category at certain prices

33. Discount Pricing • Discount Pricing- sellers offering reductions from the usual price • Granted for the buyer’s performance of certain functions

34. Discount Pricing • There are five types of discount pricing techniques: • Cash discounts- offered to buyers to encourage them to pay their bills quickly • 2/10 net 30

35. Discount Pricing • Quantity discounts- offered to buyers for placing large orders • Noncumulative- offered on one order • Cumulative- offered on all orders over a period of time

36. Discount Pricing • Trade discounts- not really discounts but rather the way manufacturers quote prices to wholesalers and retailers • Suggested retail prices are set • Distribution channel members are quoted discounts from the list price for performing functions

37. Discount Pricing • Seasonal discounts- offered to buyers willing to buy at a time outside the customary buying season • Promotional discounts and allowances- offered to wholesalers and retailers willing to advertise or promote products • Can be in the form of percentage discounts or free merchandise • Can be offered directly to the consumer

38. The Six Steps for Determining Price • Determine pricing objectives- what is the purpose in setting a price • Do you want to increase sales volume or sales revenue? • Establish a prestigious image for your product and your company? • Increase your market share and market position?

39. The Six Steps for Determining Price • Study costs- give careful consideration to the costs involved in making or acquiring goods • Determine how to reduce costs without affecting the quality or image of the product • Estimate demand- use market research • Set prices at a level that consumers are willing to pay

40. The Six Steps for Determining Price • Study competition- investigate competitor prices for similar products • Decide on a pricing strategy- choose a higher, lower, or in line price • Set price- set an initial price and be prepared to monitor and evaluate the effectiveness

41. Assignment • Page 480 • Reviewing Key Terms and Concepts • #1-5 • Thinking Critically • #6