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Understanding Pricing Strategies to Maximize Returns

Explore the nature of pricing and its significance in business success. Learn about various pricing strategies and factors influencing pricing decisions. Dive deep into pricing calculations and the importance of adapting to technological trends.

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Understanding Pricing Strategies to Maximize Returns

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  1. Unit 8Pricing

  2. Why don’t businesses charge customers the price they pay for the goods they sell? Pricing

  3. Unit 8 Vocabulary • Penetration Pricing • Prestige Pricing • Price • Price Discrimination • Price Fixing • Price Lining • Product Mix Pricing Strategies • Promotional Pricing • Psychological Pricing • Seasonal Discounts • Segmented Pricing Strategy • Skimming Pricing • Trade Discounts • Unit Pricing • Break-even Point • Bundle Pricing • Cost-plus Pricing • Everyday Low Prices (EDLP) • Flexible-price Policy • Geographical Pricing • Law of Diminishing Marginal Utility • Loss Leader • Market Share • Market Position • Markup Pricing • Return on Investment • One-price Policy

  4. Unit 8 EssentialQuestion • What are the various pricing strategies utilized to maximize return and meet customer’s perception of value?

  5. Essential Question 1 Pricing • What is nature and scope of the pricing function?

  6. How does price relate to value? • What products would you be willing to buy even if it meant not being able to buy other products? • What is the maximum you would be willing to pay for the product? Pricing

  7. Price Planning • What is Price? • Priceis the value of money (or its equivalent) placed on a good or service.

  8. Relationship of Price to Product Value • Value is a matter of anticipated satisfaction. • The seller’s objective is to set price high enough to make a profit and yet not so high that it exceeds the value potential customers place on it.

  9. Importance of Price • It is a major factor in the success or failure of a business. • It helps establish and maintain a firm’s image, competitive edge, and profits.

  10. Essential Question 2 Pricing • What is the difference between market share and market position as it relates to price?

  11. Market Share: A firms percentage of the total sales volume generated by all competitors in a given market. • Market Position: A firms rank, based on sales volume, compared to all competitors in a given market. Market Share v. Position

  12. Essential Question 3 Pricing • How does markup, markdown, sales price, discount dollars and discount percentage compare and contrast?

  13. Cost:The total amount a firm pays for a product. • Retail Price: The amount a firm sells its products for. • Markup:The dollar amount added to the cost to reach the retail price. Price Calculations

  14. Margin: The percent of markup. One margin point is equal to one percent markup. • Sales Price: Temporary price of a product below the retail price. Price Calculations

  15. Markdown:The amount subtracted from the retail price to reach the sales price. • Discount Dollars: The dollar amount marked down from the retail price to the sales price. • Discount percentage: The percentage marked down from the retail price to the sales price. Price Calculations

  16. Wanda’s Manufacturing purchases widgets from Marketing Parts Wholesalers for $100 and resells them for $150. • What is the cost of widgets? • What is the retail price of widgets? • What is the markup of widgets? • What is the margin of widgets? • How much profit is made on the sale of each widget? Price Calculations

  17. Wanda’s Manufacturing has a surplus of widgets and is offering an incentive by selling widgets at $112.50. • What is the retail price of widgets? • What is the sales price of widgets? • What is the dollar markdown of widgets? • What is the percent markdown of widgets? Price Calculations

  18. Essential Question 4 Pricing • What are the factors that affect price?

  19. Costs and Expenses Break-even Point: The point at which the money from product sales equals the costs of making and distributing the product. (Number of Units) = Supply and Demand Elasticity depends on: Availability of substitutes. Price relative to income. Luxury versus necessity. Unit Sales Price - Variable Expenses Factors Affecting Prices ______________ Fixed Expenses

  20. Factors Affecting Prices • Consumer Perceptions • Consumers tend to equate high prices with quality, status, prestige, and exclusiveness. • Competition • Price Competition - Competition based on assumption that customers will purchase lower price. • Nonprice Competition - Competition based on other marketing factors.

  21. Factors Affecting Prices • Government Regulations • Price Fixing: • Where competitors agree on certain price ranges within which they set their own price. • Price fixing (collusion) is illegal because it eliminates competition. • Price Discrimination: • Occurs when a firm charges different prices to similar customers in similar circumstances. • Price Discrimination is illegal.

  22. Factors Affecting Prices • Technological Trends • The major technology trend affecting business today is the internet. • Business that adapt to technological changes can create a competitive edge. • Business that do not adapt to technological change could become obsolete.

  23. Essential Question 5 Pricing • What are the key price mix strategies?

  24. The Pricing Concept • The combination of pricing strategies, pricing policies, and pricing techniques in combination with the business’s pricing goal.

  25. Gain Market Share A firm’s percentage of the total sales volume generated by all competitors in a given market. Goals of Pricing • Return on Investment: • Used to determine the relative profitability of a product. • Is calculated by profit divided by investment.

  26. Meet the Competition Some companies simply price their product the same as the competition. The price is either same as the industry leader or the average price of the industry. Goals of Pricing

  27. Basic Price Strategies • Cost-Based Pricing: - Cost of product plus the cost of doing business plus your projected profit margin (markup). • Demand-Based Pricing - Determine what customers are willing to pay and set the price accordingly. • Demand must be inelastic. • Customers must believe the product is different or of greater value. • Competition-Based Pricing - You determine whether to price above, below, or in line with the competition.

  28. Pricing Policies • Flexible-Price Policy: • Allows customers to haggle over price. • Takes into account changing market conditions such as shifts in demand and prices of competitors. • One-Price Policy: • Tells customers they are treated equally. • Strongly recommended for service businesses.

  29. Pricing Techniques • Psychological Pricing: Based on the belief that customers base perceptions of a product on price. • Prestige Pricing: Uses higher than average prices to suggest exclusiveness, status, and prestige. • Odd/Even Pricing: • Uses odd prices ($19.99) to suggest bargains. • Uses even prices ($20.00) to suggest higher quality. • Price Lining: Prices items according to category. • Promotional Pricing: Offers lower prices for a limited period to generate sales.

  30. Pricing Techniques • Discount Pricing: Offers reductions from the regular price to customers. • Cash Discounts: Normally given to customer for prompt payment. • 2/10, n/30 • Quantity Discounts:Encourages buyers to order large amounts. • Trade Discounts: Given to distribution-channel members who provide marketing services for the manufacturer. • Promotional Discounts: Manufacturers pay wholesalers or retailers for carrying out promotional activities for the manufacturer. • Seasonal Discounts: Used for products which have a heavy seasonal demand.

  31. Essential Question 6 Pricing • What is the impact of product life cycles on marketing decisions?

  32. Pricing • If you were to classify the human life cycle into 4 phases, what would they be? • How would you equate the human life cycle to the product life cycle?

  33. Product Life Cycle • All products move through a four stage life cycle. • Introduction • Skimming Pricing: Charging a high price to recover costs then dropping the price when the product is no longer unique. • Penetration Pricing: Charge a low price to build customer base and discourage competition.

  34. Product Life Cycle • Growth • Sales increase and unit costs decrease. • If you skimmed you will need to lower price to expand customer base. • If you were penetrating, little to no change is necessary.

  35. Product Life Cycle • Maturity • Need to look for new markets and possible product improvements to hold prices. • Decline • Cut prices to stimulate sales and clear inventory.

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