5 Things I Wish I Knew Before Opening an Ecommerce BusinessJuly 18, 2013 • Armando Roggio

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You might be prepared to open an online retail business. You have the funding, cash flow planned, inventory managed, and even a marketing campaign ready to launch. But there are some other things you’ll want to know before you start doing business.

U.S. ecommerce sales grew 13 percent last year to some $289 billion, including travel, according to trend tracking firm comScore. In the first quarter of this year, online spending in the U.S. had already exceeded $78 billion, again according to comScore, making ecommerce the fastest growing retail segment.

While it is certainly true that a significant amount of that growth came from large retailers like Amazon and Walmart, many small retailers selling items on marketplaces like Etsy or via nearly turnkey ecommerce solutions like Shopify or Volusion have also had an impact. These small ecommerce entrepreneurs can and do — in many cases — enjoy success and life-changing profitability. All of these small businesses need to have a handle, if you will, on the business of being in business, including accounting, operations, and marketing. But these are areas that many new business owners are prepared to oversee, and business surprises come from other quarters.

1. The Customer Is Always Right, But Not Always Nice

Ecommerce is a service business. The goal is to help shoppers find good products and deliver those products in a convenient way. Many new ecommerce businesses seek to provide exceptional customer experiences — in keeping with companies like Zappos — going beyond what some shoppers expect.

As an example, there is a retailer in the Pacific Northwest that recently received a customer request. A laboratory in Southern California wanted to grow algae as part of an alternative fuel project. The lab required large water troughs, similar to what you might use in livestock operations, only made of transparent plastic so that sunlight could easily penetrate. Local brick-and-mortar stores told the lab that no such product existed. Water troughs, they said, are specifically made not to grow algae. But the online retailer contacted a manufacturer and arranged for a special run of clear water troughs. The lab was very pleased and the retailer made a large sale. Unfortunately, this is not how every customer contact will go.

There will be plenty of times when you will put customers first, trying to please them, and they will be mean and nasty to you.

I’m aware of a retailer that recently started processing an order for a closeout item, only to discover that the product was damaged and not worthy to be shipped to the customer. Although the item has sold for less than the retailer’s cost because it was discontinued, a store representative contacted the manufacturer, which was no longer making the item, and even tried to find one at competitors’ online stores, only to learn that there simply were not any more to be had. The retailer contacted the customer, explained what had happened, and offered a $50 gift card for her trouble. The customer — in response — yelled profanities over the telephone and placed a visceral message on the retailer’s Facebook page. At one point, she even asked the retailer for $1,000.

2. Carriers Eat Packages

FedEx, UPS, and the U.S. Postal Service generally provide good shipping services, but these carriers also lose packages, and often they lose them when it matters the most.

Nearly a decade ago, I opened a specialty online toy store in early February. That month is a generally slow time in retailing, and I wanted to ensure that all departments, including order fulfillment, were working well. By July, shipping was running smoothly, items flowing out and being delivered right on time. All of the carriers — the retailer used FedEx, UPS, and the Postal Service — seemed like they could do no wrong.

But in November and December of that first year, carriers lost something like 11 percent of my packages. The carriers seemed to eat them. One post office in New York State lost ten out of ten packages that it processed from for the company —if memory serves — including a second and third attempt to get products to one particular customer.

That same holiday season, UPS returned two large boxes to us — each had contained a Radio Flyer Rock and Bounce pony — that had been crushed. One had the clear imprint of a large work boot on it.

Annually, new and established online sellers will see dozens or even hundreds of packages that fail to arrive — lost or damaged in the conveyor belts and trucks meant to carry them to customers. Be prepared to manage both the cost of lost items and the problem of disappointed customers.

3. Fraud Is Everywhere

Earlier this month, a retailer I know had a large order for more than $5,000. The sale included a gas-powered generator that was to be sent across the country via second day shipping. PayPal and American Express had authorized the sale. But something didn’t seem right. The generator was not uncommon. It could be purchased almost anywhere. So why would you pay, in this case, $1,600 for express shipping?

The retailer researched the order. The phone number on the order rang to a mobile phone with a full voice mailbox and a generic message. The billing address didn’t match what American Express had on file. So the retailer canceled the order. This is a smart move when you consider that online fraud cost ecommerce retailers an estimated $3.5 billion in 2012, according to CyberSource, which provides payment and risk management solutions and is part of the Visa family of companies.

Don’t assume that your company, however small, is immune to fraud. In some cases, criminals assume that small retailers are less sophisticated and, therefore, easier targets.

4. Be Explicit; No One Reads

One of the most surprising things you find about running an ecommerce business is that you need to be amazingly explicit when you describe products, offers, and policies. Many, if not all of your customers, will skim over this material and misunderstand what you meant or intended.

Take the case of a recent online contest that a retailer used to promote a particular brand of jeans. Entrants could win a $100 shopping spree for submitting a photo of themselves in a pair of jeans. All of the promotional material associated with the contest clearly stated, “You will need to upload a picture of yourself in a pair of jeans.” A number of Facebook posts also informed the would-be entrants that they would need to upload a picture of themselves in a pair of jeans. An email included the statement.

The web form used to enter the contest also said, “You will need to upload a picture of yourself in a pair of jeans.” And yet, of the many entries received, not a single user actually uploaded a jean picture. Some uploaded family pictures of folks in shorts, others included pictures of dogs.

Ultimately, many of those who entered the contest were angry, arguing that the instructions had not been clear.

5. You’ll Never Run Out of Opportunities

The last thing to know about ecommerce is that it never seems to run out of opportunities. You will have your share of problems with inventory management, accounting, website design, and upset customers. But this is a great industry with the potential to help you achieve your goals.

Shrinkage (accounting)From Wikipedia, the free encyclopedia

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This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (April 2010)

Items lost to shrinkage

In financial accounting the term inventory shrinkage (sometimes truncated to shrink) is the loss of products between point of manufacture or purchase from supplier and point of sale. The term shrink relates to the difference in the amount of margin or profit a retailer can obtain. If the amount of shrink is large, then profits go down which results in increased costs to the consumer to meet the needs of the retailer. The total shrink percentage of the retail industry in the United States was 1.52% of sales in 2008 according to the University of Florida's, National Retail Security Survey.[1] In Europe shrinkage was about 1.27% of sales and the same figure for Asia Pacific was 1.20% according to the Global Retail Theft Barometer 2008.[2]

Contents 1 Causes

o 1.1 Loss at the POS terminal 2 See also 3 References

CausesAn estimated 44% of shrinkage in 2008 was due to employee theft, totaling over $15.9 billion. Another 35% was due to shoplifting, totaling over $12.7 billion.[1] The prevention of this type of

shrinkage is one reason for security guards, cameras and security tags. Other causes of shrinkage include:

Administrative errors such as shipping errors, warehouse discrepancies, and misplaced goods. Cashier or price-check errors in the customer's favour. Damage in transit or in the store. Paperwork errors. Perishable goods not sold within their shelf life. Vendor fraud.

Loss at the POS terminal

Shrinkage in retail that is caused by employee actions typically occurs at the point of sale (POS) terminal. There are different ways to manipulate a POS system, such as a cashier giving customers unauthorized discounts, creating fraudulent returns, manually entering values in the system or making a no-sale, which means that the cashier opens the cash counter without registering a sale. These transactions that differ from normal transactions are called POS exceptions. Traditionally POS fraud is fought by surveillance staff monitoring a POS terminal or by manually searching in surveillance video recordings. Modern POS systems can have automatic alerts when specific exceptions are detected. Also exception reports and listings based on employees, refunds, terminals etc. are possible to detect with modern systems. Modern networked based POS systems can also include network video to POS exception listings, giving quick access to detailed information of what has happened.

In the United States, the National Retail Security Survey is published annually as part of the Security Research Project at the University of Florida. The Security Research Project endeavors to study various elements of workplace related crime and deviance with a special emphasis on the retail industry. Since theft is hidden, no study can be completely accurate. Employees are easier to monitor than customers, which may artificially inflate the percentage attributed to employee theft.

Retailers may choose to implement an inventory management solution offered by a third party vendor. These systems often allow for better control over inventory and will alert companies of the source of the inventory shrinkage. A more accurate account of inventory provides significant cost savings. With successful analysis, costs associated with stock-outs or excess inventory can be reduced.

Calculating shrinkage figures can be accomplished through the following formulas:

Beginning Inventory + Purchases - (Sales + Adjustments) = Booked (Invoiced) Inventory Booked Inventory - Physical Counted Inventory = Shrinkage Shrinkage/Total Sales x 100 = Shrinkage Percent

See also Loss prevention

Surplus value , alternative interpretation of value and products Acceptable loss

References1. ^ Jump up to: a b National Retail Security Survey (2009) University of Florida2. Jump up ̂ Global Retail Theft Barometer 2008

Markup (business)From Wikipedia, the free encyclopedia

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For the US legislative term, see Markup (legislation). For other uses, see Markup.

Markup is the difference between the cost of a good or service and its selling price.[1] A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product.[2] Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.[1] Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Contents 1 Price determination

o 1.1 Fixed markup o 1.2 Percentage markup o 1.3 Aggregate supply framework

2 See also 3 References 4 External links

Price determination

Fixed markup

Assume: Sale price is $2500, Product cost is $2000

Markup = Sale price − Cost$500 = $2500 − $2000

Percentage markup

Cost x (1 + Markup) = Sale price

or solved for Markup = (Sale price / Cost) − 1or solved for Markup = (Sale price − Cost) / Cost

Assume the sale price is $1.99 and the cost is $1.40

Markup = ($1.99 / 1.40) − 1 = 42%or Markup = ($1.99 − $1.40) / $1.40 = 42%

To convert from markup to profit margin:

Sale price − Cost = Sale price x Profit margintherefore Profit Margin = (Sale price - Cost) / Sale price

Margin = 1 − (1 / (Markup + 1))

or Margin = Markup/(Markup + 1)

Margin = 1 − (1 / (1 + 0.42)) = 29.5%

or Margin = ($1.99 − $1.40) / $1.99 = 29.6%

Aggregate supply framework

P = (1+μ) W. Where μ is the markup over costs. This is the pricing equation.

W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.

Sub the wage setting into the price setting to get the aggregate supply curve.

P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

See also Cost-plus pricing Marketing Markup rule

Pricing

References1. ^ a b Ingels, Jack (2009). Ornamental Horticulture: Science, Operations, & Management. Cengage

Learning. p. 601. ISBN 978-1-4354-9816-7.2. ̂ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill. ISBN 978-0-07-062020-9.

External links Markup Calculator - a simple web application which calculates markup.

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Pricing Marketing

Cost-plus pricingFrom Wikipedia, the free encyclopedia

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Cost-plus pricing is a pricing method used by companies to maximize their rate of returns.

The firms accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve. However, in practice, most firms use cost-plus pricing, also known as markup pricing. There are several varieties, but the common thread is that one first calculates the cost of the product, then adds a proportion of it as markup. Basically, this approach sets prices that cover the cost of production and provide enough profit margin to the firm to earn its target rate of return.[1]It is a way for companies to calculate how much profit they will make. Cost-plus pricing is often used on government contracts (cost-plus contracts), and has been criticized as promoting wasteful expenditures in the form of direct costs, indirect costs, and fixed costs whether related to the production and sale of the product or service or not. These costs are converted to per unit costs for the product and then a predetermined percentage of these costs is added to provide a profit margin.

Cost-plus pricing is used primarily because it is easy to calculate and requires little information. Information on demand and costs is not easily available, managers have limited knowledge as far as demand and costs are concerned. This additional information is necessary to generate accurate

estimates of marginal costs and revenues. However, the process of obtaining this additional information is expensive. Therefore, cost-plus pricing is often considered the most rational approach in maximizing profits. This approach relies on arbitrary costs and arbitrary markups.

Contents 1 Mechanics of cost-plus pricing 2 Reasons for wide use 3 Usefulness 4 Disadvantages 5 Cost-plus pricing and economic theory 6 See also 7 References

Mechanics of cost-plus pricingThere are two steps which form this approach. The first step involves calculation of the cost of production, and the second step is to determine the markup over costs.

1. Calculation of cost of production

The total cost has two components: Total Variable cost and Total fixed Cost.In either case,costs are computed on an average basis. That is

AC = AVC + AFC

Where

AVC = TVC /Q AFC = TFC /Q AC = average cost AVC = Average variable cost AFC = Average fixed cost TVC = Total variable cost TFC = Total fixed cost Q = Quantity (the number of units produced)

In this approach, the quantity is assumed.In cost-plus pricing we use quantity to calculate price but price is the determinant of quantity.To avoid this problem, the quantity is assumed.This rate of output is based on some percentage of the firm's capacity.[1]

2. Determining the markup over costs

The objective of this approach is to set prices in a manner that a firm earns its targeted rate of return. Now, if that return is Rs.X (Rs.= Ratio of the respective share) of total profit then the

markup over costs on each unit of output will be X/Q and then the price will be: P = AVC + AFC + X /Q[1]

Reasons for wide useFirms vary greatly in size, product range, product characteristics etc. Firms also face different degrees of competition in markets for their products. So, a clear explanation cannot be given for the widespread use of cost-plus pricing. However the following points explain as to why this approach is widely used:[2]

Even if a firm handles many products, this approach provides the means by which fair prices can be found easily

This approach involves calculation of full cost. Prices based on full cost look factual and precise and may be more defensible on moral grounds than prices established by other means

This approach reduces the cost of decision-making. Firms which prefer stability use cost-plus pricing as a guide to price products in an uncertain market where knowledge is incomplete

Firms are never too sure about the shape of their demand curve neither are they very sure about the probable response to any price change. So, it becomes risky for a firm to move away from cost-plus pricing

Unknown reaction of rivals to the set price is a major uncertainty. When products and production processes are similar competitive stability is achieved by usage of cost-plus pricing. This competitive stability is achieved by setting a price that is likely to yield acceptable returns to other members of the industry

Management tends to know more about product costs than any other factors which can be used to price a product

Insures seller against unpredictable, or unexpected later costs Ethical advantages (see just price) Simplicity Ready availability Price increases can be justified in terms of cost increases

UsefulnessCost-plus pricing is specially useful in the following cases:

Public-utility Pricing Finding out the design of the product when the selling price is predetermined i.e. product

tailoring. By working back from this price,the product and the permissible cost is decided upon. This means that market realities are taken into account as this approach considers the viewpoint of the buyer in terms of what he wants and what he will pay

Pricing products that are designed to the specification of a single buyer-the basis of pricing is the estimated cost plus gross margin that the firm could have got by using facilities otherwise

Cost-plus pricing is useful in cases like 'Monopsony Buying' - here, the buyers have enough knowledge about suppliers' costs. Thus, they may make the product themselves if they do not comply with the offered prices. So, relevant cost would be the cost which a buying company would incur if it made the product itself

Disadvantages Provides incentive for inefficiency Tends to ignore the role of consumers Tends to ignore the role of competitors Uses historical rather than replacement value Uses “normal” or “standard” output level to allocate fixed costs Includes sunk costs rather than just using incremental costs Ignores opportunity cost

Cost-plus pricing and economic theoryCost-plus pricing might appear to be inconsistent with the economic theory of profit maximization. Analysis based on marginal cost equals marginal revenue decision rule may appear to have become irrelevant due to the wide use of cost-plus pricing.However, this conflict is more apparent than real. A comparison of the two approaches to pricing starts with a consideration of costs. Cost-plus pricing is based on average costs and not marginal costs.However, in economic theory long-run marginal and average costs are not very different. Thus, it can be said safely that usage of average costs for pricing may be considered a reasonable approximation of marginal cost decision making.[3]

Second step in comparison involves the target rate of return and the resulting markup. Determination of the target rate of return depends on certain factors. Basically, the decision involves management's perception of demand elasticity and competitive conditions. This can be explained with an example,consider grocery stores.Profits are held down to the intense competition that exists among these firms. Due to this intense competition the markup for most food items is only about 12 percent over cost. If the markup over cost is based on demand conditions,cost-plus pricing may not be inconsistent with profit maximization. This can be shown mathematically.[1]

Marginal revenue is the derivative of total revenue with respect to quantity. Thus

MR = d (TR)/ dQ = d (PQ)/ dQ = P + dP*Q /dQ

(P + dP *Q /dQ) can also be written as P (1 + dPQ /dQP) .Here, (dP /dQ) (Q /P) is 1/EP, where EP is price elasticity of demand. Thus

MR = P (1 + 1/EP ) (equation 1)

In order to maximize profit MR should be equal to MC.To simplify the assumption let MC=AC. Thus the profit maximizing price is the solution to

P (1 + 1/EP) = AC

which can be written as

P (EP + 1 /EP) = AC

Solving for P yields

P = AC (EP /EP + 1) (equation 2)

Equation 2 can be interpreted as a cost-plus pricing or markup pricing scheme.That is the price of the product is based on markup over average costs. (EP + 1 /EP) which is the markup is a function of the price elasticity of demand. From the equation we can see that the markup and the price elasticity of demand are inversely related, as the demand becomes more elastic the markup becomes smaller.[1]

See also Cost engineering Cost-plus contract

References1. ^ Jump up to: a b c d e Jain, Sudhir (2009). Managerial Economics. Pearson Education. ISBN 978-

81-7758-386-1.2. Jump up ̂ Maheshwari, K.L (2005). Managerial Economics. Sultan Chand &Sons. ISBN 978-81-

8054-540-5.3. Jump up ̂ Marks, Stephen. Managerial Economics. Wiley India. ISBN 978-81-265-1772-5.

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Pricing

Markup ruleFrom Wikipedia, the free encyclopedia

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The Markup rule is used in economics to explain firm pricing decisions. It states that the price a firm with market power will charge is equal to a markup over the firm's marginal cost, equal to one over one minus the inverse of the price elasticity of demand.[1]

A profit maximizing firm chooses the quantity of output to sell which equalizes its marginal revenue (the change in revenue from one extra unit sold) to its marginal cost (the change in total cost due to one extra unit produced). This results in the markup rule which captures the fact that the firm's ability to price its good over cost depends on the extent of its market power. This in turn depends on the price elasticity of demand faced by the firm.

Derivation of the markup ruleProfit of a firm is given by total revenue (price times quantity sold) minus total cost:

where P(Q) is the inverse demand function, Q is quantity and C(Q) is the total cost function. This implies that the firm chooses quantity so that

where P' is the partial derivative of the inverse demand function with respect to Q. Factoring out the price on the left hand side of the equation gives

By definition inverse of price elasticity of demand . Hence

This gives the markup rule:

or, letting be the inverse of the price elasticity of demand

Since for a price setting firm this means that a firm with market power will charge a price above marginal cost. On the other hand, a competitive firm by definition faces a perfectly elastic demand, hence it believes which means that it sets price equal to marginal cost.

The rule also implies that, absent menu costs, a monopolistic firm will never choose a point on the inelastic portion of its demand curve. Furthermore for an equilibrium to exist in a monopoly or an oligopoly market, the price elasticity of demand must be greater than one ( )(Mas-Colell).

References

PricingFrom Wikipedia, the free encyclopedia

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This article may require cleanup to meet Wikipedia's quality standards. No cleanup reason has been specified. Please help improve this article if you can. (December 2008)

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (February 2009)

A price tag for a product on sale.

Marketing

Key concepts

Product marketing

Pricing Distribution

Service

Retail

Brand management

Account-based marketing

Ethics

Effectiveness

Research

Segmentation

Strategy

Activation

Management

Dominance

Marketing operations

Social marketing

Identity

Promotional contents

Advertising

Branding

Underwriting spot

Direct marketing

Personal sales

Product placement

Publicity

Sales promotion

Sex in advertising

Loyalty marketing

Mobile marketing

Premiums

Prizes

Corporate anniversary

On Hold Messaging

Promotional media

Printing

Publication

Broadcasting

Out-of-home advertising

Internet

Point of sale

Merchandise

Digital marketing

In-game advertising

Product demonstration

Word-of-mouth

Brand ambassador

Drip marketing

Visual merchandising

v t e

Wikibooks has a book on the topic of: Marketing

Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. (The other three aspects are product, promotion, and place.) Price is the only revenue generating element amongst the four Ps, the rest being cost centers.

Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus pricing is very important in marketing.

Contents 1 Considerations involved in pricing: Elements of pricing 2 What a price should do 3 Terminology

o 3.1 Line pricing o 3.2 Loss leader o 3.3 Price/quality relationship o 3.4 Premium pricing o 3.5 Demand-based pricing o 3.6 Multidimensional pricing

4 Nine laws of price sensitivity and consumer psychology 5 Approaches 6 Pricing tactics 7 Pricing mistakes 8 Methods 9 References 10 External links and further reading

Considerations involved in pricing: Elements of pricing

Pricing involves asking many questions like:

How much to charge for a product or service? This question is a typical starting point for discussions about pricing, however, a better question for a vendor to ask is - How much do customers value the products, services, and other intangibles that the vendor provides.

What are the pricing objectives? Do we use profit maximization pricing? How to set the price?: (fixed pricing, cost-plus pricing, demand-based or value-based pricing,

rate of return pricing, or competitor indexing) Should there be a single price or multiple pricing? Should prices change in various geographical areas, referred to as zone pricing? Should there be quantity discounts? What prices are competitors charging? Do you use a price skimming strategy or a penetration pricing strategy? What image do you want the price to convey? Do you use psychological pricing? How important are customer price sensitivity (e.g. "sticker shock") and elasticity issues? Can real-time pricing be used? Is price discrimination or yield management appropriate? Are there legal restrictions on retail price maintenance, price collusion, or price discrimination? Do price points already exist for the product category? How flexible can we be in pricing?: The more competitive the industry, the less flexibility we

have. o The price floor is determined by production factors like costs (often only variable costs

are taken into account), economies of scale, marginal cost, and degree of operating leverage

o The price ceiling is determined by demand factors like price elasticity and price points Are there transfer pricing considerations? What is the chance of getting involved in a price war? How visible should the price be? - Should the price be neutral? (i.e.: not an important

differentiating factor), should it be highly visible? (to help promote a low priced economy product, or to reinforce the prestige image of a quality product), or should it be hidden? (so as to allow marketers to generate interest in the product unhindered by price considerations).

Are there joint product pricing considerations? What are the non-monetary costs of purchasing the product? (e.g. travel time to the store, wait

time in the store, disagreeable elements associated with the product purchase - dentist -> pain, fishmarket -> smells)

What sort of payments should be accepted? (cash, check, credit card, barter)

What a price should doA well chosen price should do three things:

achieve the financial goals of the company (i.e. profitability) fit the realities of the marketplace (Will customers buy at that price?) support a product's positioning and be consistent with the other variables in the marketing mix

o price is influenced by the type of distribution channel used, the type of promotions used, and the quality of the product

price will usually need to be relatively high if manufacturing is expensive, distribution is exclusive, and the product is supported by extensive advertising and promotional campaigns

a low cost price can be a viable substitute for product quality, effective promotions, or an energetic selling effort by distributors

From the marketer's point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would be the one which could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no-demand situation).

TerminologyThis section possibly contains original research. Please improve it by verifying the claims made and adding inline citations. Statements consisting only of original research may be removed. (July 2012)

There are numerous terms and strategies specific to pricing:

Line pricing

Line pricing is the use of a limited number of prices for all product offerings of a vendor. This is a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices.

Loss leader

A loss leader is a product that has a price set below the operating margin. This results in a loss to the enterprise on that particular item in the hope that it will draw customers into the store and that some of those customers will buy other, higher margin items.

Price/quality relationship

The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex products that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the greater premium they are prepared to pay. The classic example is the pricing of Twinkies, a snack cake which was viewed as low quality after the price was lowered. Excessive reliance on the price/quality relationship by consumers may lead to an

increase in prices on all products and services, even those of low quality, which causes the price/quality relationship to no longer apply.[citation needed]

Premium pricing

Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. The high pricing of premium product is used to enhance and reinforce a product's luxury image. Examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley. As well as brand, product attributes such as eco-labelling and provenance (e.g. 'certified organic' and 'product of Australia') may add value for consumers[1] and attract premium pricing. A component of such premiums may reflect the increased cost of production. People will buy a premium priced product because:

1. They believe the high price is an indication of good quality;2. They believe it to be a sign of self-worth - "They are worth it;" it authenticates the buyer's

success and status; it is a signal to others that the owner is a member of an exclusive group;3. They require flawless performance in this application - The cost of product malfunction is too

high to buy anything but the best - example : heart pacemaker.

Demand-based pricing

Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element. These include price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing.

Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.

Multidimensional pricing

Multidimensional pricing is the pricing of a product or service using multiple numbers. In this practice, price no longer consists of a single monetary amount (e.g., sticker price of a car), but rather consists of various dimensions (e.g., monthly payments, number of payments, and a downpayment). Research has shown that this practice can significantly influence consumers' ability to understand and process price information. [2]

Nine laws of price sensitivity and consumer psychologyIn their book, The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden outline nine laws or factors that influence how a consumer perceives a given price and how price-sensitive s/he is likely to be with respect to different purchase decisions: [3][4]

1. Reference price effect: Buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.

2. Difficult comparison effect Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives.

3. Switching costs effect: The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.

4. Price-quality effect: Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.

5. Expenditure effect: Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget.

6. End-benefit effect: The effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts:

Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit.Price proportion cost: The price proportion cost refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component's price.

7. Shared-cost effect: The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.

8. Fairness effect: Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.

9. Framing effect: Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is paid separately rather than as part of a bundle.

ApproachesPricing is the most effective profit lever.[5] Pricing can be approached at three levels.The industry, market, and transaction level.

Pricing at the industry level focuses on the overall economics of the industry, including supplier price changes and customer demand changes.

Pricing at the market level focuses on the competitive position of the price in comparison to the value differential of the product to that of comparative competing products.

Pricing at the transaction level focuses on managing the implementation of discounts away from the reference, or list price, which occur both on and off the invoice or receipt.

Pricing tactics

Micromarketing is the practice of tailoring products, brands (microbrands), and promotions to meet the needs and wants of microsegments within a market. It is a type of market customization that deals with pricing of customer/product combinations at the store or individual level.

Pricing mistakesMany companies make common pricing mistakes. Bernstein's article "Use Suppliers Pricing Mistakes"[6][7] outlines several which include:

Weak controls on discounting Inadequate systems for tracking competitor selling prices and market share Cost-plus pricing Price increases poorly executed Worldwide price inconsistencies Paying sales representatives on dollar volume vs. addition of profitability measures

Methods

Look up pricing in Wiktionary, the free dictionary.

Cost the limit of price Group buy Options pricing Pay what you want Price elasticity of demand Price system Price umbrella Product life cycle management Product sabotage Psychological pricing Purchasing power Suggested retail price Target pricing Time-based pricing Value pricing

References1. ̂ Paull, John, 2009, The Value of Eco-Labelling, VDM Verlag, ISBN 3-639-15495-92. ̂ Estelami, H: "Consumer Perceptions of Multi-Dimensional Prices", Advances in Consumer

Research, 1997.3. ̂ Nagle, Thomas and Holden, Reed. The Strategy and Tactics of Pricing. Prentice Hall, 2002.

Pages 84-104.

4. ̂ Mind of Marketing, "How your pricing and marketing strategy should be influenced by your customer's reference point"

5. ̂ Dolan, Robert J. and Simon, Hermann (1996). Power Pricing. The Free Press. ISBN 0-684-83443-X.

6. ̂ Bernstein, Jerold: "Use Suppliers Pricing Mistakes", Control, 2009.7. ̂ Control Global