PRICE STRATEGY

1. Dr. Close PRICE STRATEGY

2. Demographic Considerations • Number of potential buyers • Location of potential buyers • Position of potential buyers • Expected consumption rates of potential buyers • Economic strength of potential buyers

3. Psychological Considerations • Related to pricing is concerned with consumer's perception on price changes • Types of psychological pricing strategies • Prestige pricing – High price is charged to create a signal that the product is exceptionally fine • Odd pricing or odd even pricing – Prices are set a few dollars or a few cents below a round number • Bundle pricing – Several products are sold together at a single price to suggest good value

4. Price Elasticity • Price elasticity – A measure of consumers’ price sensitivity • Estimated by dividing relative changes in the quantity sold by the relative changes in price

5. Supply Influences on Pricing Decisions • Pricing objectives – Should be derived from overall marketing objectives, which in turn should be derived from corporate objectives • Common objectives • Pricing to achieve a target return on investment • Stabilization of price and margin • Pricing to achieve a target market share • Pricing to meet or prevent competition

6. Supply Influences on Pricing Decisions • Cost Considerations in Pricing • Markup pricing – Percentage is added to the retailer’s invoice to determine final price • Cost-plus pricing – Costs of producing a product plus desired profit are added to achieve price • Rate-of-return or target pricing – Adding desired rate of return on investment to total costs

7. Retail Pricing Strategies: EDLP or High/Low? • Advantages of EDLP • Assures customers of low prices. • Reduces advertising and operating expenses. • Reduces stockouts and improves inventory management. • Advantages of High/Low pricing • Increases profits through price discrimination. • Sales create excitement. • Sells merchandise.

8. Product Considerations in Pricing Perishability – Discounting the products as they approach being no longer fit for sale • Distinctiveness – Classified in terms of distinction • Branding and brand equity of products are commonly made distinctive in customers’ minds

9. Product Considerations in Pricing • Life cycle – Stage of the life cycle that a product is in can have important implications • Two approaches to pricing • Skimming price policy – Seller changes a relatively high price on a new product • Penetration price policy – Seller charges a relatively low price on a new product

10. Environmental Influences onPricing Decisions • Factors to consider • Number of competitors • Market shares, growth, and profitability of competitors • Strengths and weaknesses of competitors • Likely entry of new firms into the industry • Degree of vertical integration of competitors • Number of products sold by competitors • Cost structure of competitors • Historical reaction of competitors to price changes • Going-rate pricing – Pricing at competition • Sealed-bid pricing – Pricing below competition

11. Environmental Influences on Pricing Decisions • Price fixing is illegal • Deceptive pricing practices – Outlawed under Section 5 of the Federal Trade Commission Act • Price discrimination that lessens competition or is deemed injurious to it is outlawed by the Robinson-Patman Act • Promotional pricing such as cooperative advertising and price deals are not illegal

12. A General Pricing Model

13. A General Pricing Model • Set Pricing Objectives • Pricing process begins with a clear statement of the pricing objectives • Guide pricing strategy and should be designed to support overall marketing strategy • Efforts to set prices must be coordinated with other functional areas

14. A General Pricing Model • Evaluate Product – Price Relationships • Priced relatively high – Offers value in the form of high quality, special features, or prestige • Priced at about average – Offers value in the form of good quality for a reasonable price • Priced relatively low – Offers value in the form of acceptable quality at a low price • Value pricing – Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings

15. A General Pricing Model • Analyze Profit Potential • Quantity discounts – Discounts for purchasing large number of units • Promotional allowances – Form of price reductions in exchange for the channel member performing various promotional activities • Slotting allowances – Payment to retailers to get them to stock items on their shelves

16. A General Pricing Model • Set Initial Price Structure • Considers price to various channel members, as well as the recommended price to final consumers or organizational buyers • Change Price as Needed • Channel members may bargain for greater margins • Competitors may lower their prices • Costs may increase with inflation • In the long term, price structures tend to increase for most products as production and marketing costs increase

17. Eight Tips for Improving a Company’s Pricing Strategy • Base pricing strategies on sound research in order to understand relevant price factors • Continuously monitor pricing decisions because they often help define company image • Remember that consumers have trouble recognizing subtle price differences • Remember that consumers evaluate prices comparatively • They often use a sense of what they think the item should cost as a benchmark

18. Eight Tips for Improving a Company’s Pricing Strategy • Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits • Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price • Understand the importance of price information and it effects on differentiating products within a product line • Recognize that price elasticity vary – it is easier to lose customers to price increases than gain them from price decreases