Chapter 17/18 Pricing / Pricing Strategies

• Describe typical company pricing objectives• Discuss Market Share vs. Sales• Review Break-Even Analysis• Skimming vs. Penetration• Illegal Pricing

PRICING OBJECTIVES

• Management should decide on its pricing objective before determining the price itself.

• Profit-oriented objectives:– Achieve a target return — pricing product to achieve a specified

percentage return on sales or investment.– Maximize profits — followed by the most companies.

• Sales oriented goals:– Increase sales volume.– Maintain or increase market share.

• Status quo goals:– Stabilize prices.– Meet competition. (Typically commodity products)

Retail Price: 18.00

The Bookstore Problem(Which book do you stock?)

Retail Price: 7.00

VS.

Retailer Cost: 13.50 Retailer Cost: 4.00

Gross Margin $ Gross Margin $

COST OF A PRODUCT

• I’ll assume that you know the difference between fixed/variable cost, etc.

PRICING OF MIDDLEMEN

• Different types of sellers require different percentage markups because of the nature of the products handled and the services offered:

– Low-turnover products (jewelry) need much larger markups than high-turnover products (groceries).

– Sellers that offer many services require larger markups than those that offer few.

PRICE VS. NONPRICE COMPETITION

• In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services.

• In price competition, sellers attempts to move up or down their individual demand curves by changing prices.

• In nonprice competition, a seller maintains stable prices and attempts to improve their market positions by emphasizing other aspects of marketing.

• In nonprice competition, sellers attempt to shift their demand curves to the right using other marketing techniques and strategies.

Elastic demand (E>1)

Percentage change in quantity demandedis greater than percentage change in price

Pri

ce (

P)

Quantity (Q)

Percentage change in quantity demandedis less than percentage change in price

Inelastic demand (E<1)

Percentage change in quantity demandedis equal to percentage change in price

Unitary demand (E=1)

Price elasticity of demandPrice elasticity of demand

Pricing StrategiesMarket Skimming:• Setting a high initial price with

the expectation of lowering price as demand picks up

When to use:• Demand highly Inelastic• High Entry Barriers• Status Product / New, Highly

desirable• Production Concerns...

Pricing Strategies

Market Penetration:• Setting a low initial price to reach the mass-market

immediately

When to use:• Demand is Highly Elastic• Economies of Scale possible/available• Many established competitors

PsychologicalPricing

Psychological Pricing

• Price-Quality Relationship

• Odd-Pricing

• Price Bundling

• Multiple-Pricing

• The lure of the middle way

• “Blind-Item” Pricing– Plumbing Example:

PriceDiscrimination

Price Discrimination

• Charge different prices to different people/organizations depending upon any number of factors:

Other Forms of Price Discrimination

• Pricing for different segments– Geographic segments

• Different prices in different zones

– Usage segments• Different prices for high volume users

– Demographic segments• Different prices for students, children, etc.

– Time segments• On- and off-season rates

Illegal Pricing Policies

• Price Discrimination– Violation of Robinson-Patman Act– Illegal only when business to business

• Exception for cost justification

• Exception for competitor price matching

• Exception for no apparent harm to competition

• Resale Price Maintenance– When a manufacturer and retailer agree on a

minimum price to be charged to consumers at retail• Manufacturers can set suggested prices (MSRP)

• Legal to stop selling to retailers who ignore MSRP

• Exaggerated Comparative Price Advertising– Using comparison prices of dubious validity– Product introduced at artificially high prices for

a short time then dropped to a new low long-term price

• Predatory Pricing– Aggressive pricing to drive out newer, smaller

rivals– After removal of rival, prices are raised again

RetailPricing Math

Sample Income Statement Showing Gross Margin

Net Sales $ 120,000

- Cost of goods sold 58,000

= Maintained markup 62,000

- Alteration costs + cash discounts 3,000

= Gross margin $ 59,000

Mark-up Pricing

Initial and Maintained Markups

• Initial markup = retail selling price initially placed on the merchandise - cost of goods sold

• Maintained markup = Actual sales that you get for the merchandise - cost of goods sold

• What’s going to be larger, initial markup, or maintained markup?

Setting Up the Problem

Retail Price = Cost + Markup

Determining the Initial Retail Price Under Cost-Oriented Pricing (Con.)

A third method of solution is:

Retail = Cost (1-markup)

This is the EASY way to calculate Cost-Based Mark-ups!

Results of Pricing Test

(1) (2) (3) (4) (5)Total Cost of

Market Units Sold TotalDemand Total ($300,000 fixed Profits

Unit at Price Revenue cost + $5 variable (col 3 -Market Price (in units) (col 1 x col 2) cost) col 4)

1 $8 200,000 $1,600,000 $1,300,000 $300,000

2 10 150,000 1,500,000 1,050,000 450,000

3 12 100,000 1,200,000 800,000 400,000

4 14 50,000 700,000 550,000 150,000

Marketing is about Maximizing Profit/Gross Margin… not increasing sales!