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Chapter Seventeen

Chapter Seventeen. Pricing Strategies and Tactics. Objectives. Identify various pricing strategies Discuss differential pricing strategies Describe skimming and penetration pricing Demonstrate competition’s effect on pricing Discuss inflation’s effect on pricing

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Chapter Seventeen

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  1. Chapter Seventeen Pricing Strategies and Tactics

  2. Objectives • Identify various pricing strategies • Discuss differential pricing strategies • Describe skimming and penetration pricing • Demonstrate competition’s effect on pricing • Discuss inflation’s effect on pricing • Discuss product-line pricing strategies • Explore psychological aspects of price • Demonstrate geography’s influence on pricing • Discuss varied pricing tools • Overview legal restrictions on pricing • Identify a major ethical issue related to price

  3. Pricing Strategies • Differential pricing strategies • Competitive pricing strategies • Product-line pricing strategies • Psychological and image pricing strategies • Distribution-based pricing strategies

  4. Differential pricing strategies $24.95 • Different buyers pay different prices $22.00 100 units for $2,000 155 Russian rubles each

  5. $24.95 $22.00 100 units for $2,000 155 Russian rubles each Differential Pricing Strategies Types: • Variable Pricing • Second-Market Discounting • Skimming • Periodic discounting • Random discounting

  6. Pricing high, usually at the beginning of a product’s life Examples: personal computers CDs electronics Price Skimming

  7. Competitive Pricing Strategies • Meeting competition • Undercutting competition Types: • Price leadership • Follow the leader • Penetration pricing • Predatory pricing • Traditional • Inflationary

  8. Penetration Pricing • Low introductory price to establish product quickly in market • When to use: • Elastic demand • Economies of scale • Threat of strong competition • Mass market

  9. Captive pricing Leader and Bait pricing Price lining Price-bundling & Multi-unit $45.99 $39.99 $19.99 $24.99 Product-Line PricingStrategies

  10. $1.87$4.95$9.99 Reference Pricing Prestige Pricing Regular price: $45 Now Only: $25 $175 $1000 Odd/Even Pricing Psychological & Image Pricing

  11. Distribution-Based Pricing • F.O.B • Delivered • Zone • Uniform • Basing-point X X

  12. Manufacturer Cost $20.00 20% markup $ 5.00 Selling price $25.00 Wholesaler Cost $25.00 15% markup $ 4.41 Selling price $29.41 Retailer Cost $29.41 41% markup $20.59 Selling price $50.00 Markups

  13. Markup on Selling Price and on Cost Cost-Plus Method Break-even Analysis Target Return Pricing Average Cost Establishing Exact Prices

  14. Amount added on ------------------------ Selling price = % markup Establishing Exact Prices Markup on Selling Price or Costs: Cost-Plus Method: Cost + Amount added on = Price

  15. Fixed costs + Target return -------------------------------------- = Units to be sold All costs ------------------------ = # Units produced Average cost of a single unit Price per unit Establishing Exact Prices Average-cost method: Target Return Pricing:

  16. Total Revenues Profit Profit Total Costs Loss Cost &Revenue ($) Break- even point Fixed Costs Loss Units produced & sold Break-Even Analysis

  17. Price Adjustments • Cash discounts • Trade discounts • Quantity discounts • Seasonal discounts • Chain discounts • Promotional allowances

  18. Pricing and the Law ROBINSON-PATMAN ACT OF 1936 Discriminatory prices illegal unless…. • Charged to meet competition • Justified by cost savings

  19. Pricing and the Law Fair Trade Practices Act and their repeal in 1975 • States: manufacturers may fix final selling price • Federal gov’t: illegal if good sold in different state

  20. Pricing and Ethical issues Are corporate social policy and corporate profit motive compatible?

  21. Review • Identify various pricing strategies • Discuss differential pricing strategies • Describe skimming and penetration pricing • Demonstrate competition’s effect on pricing • Discuss inflation’s effect on pricing • Discuss product-line pricing strategies • Explore psychological aspects of price • Demonstrate geography’s influence on pricing • Discuss varied pricing tools • Overview legal restrictions on pricing • Identify a major ethical issue related to price

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