Pricing StrategiesChapter 26.1

Ch 26.1 – Strategies in the Pricing Process

• The various pricing techniques

• The steps in setting prices

• The use of technology in the pricing function

What you’ll learn

Basic Pricing Concepts

Three basic pricing concepts to consider when determining the price for any given product:

cost-oriented pricing

demand-oriented pricing

competition-oriented pricing

Cost-Oriented Pricing

1. Marketers first calculate the costs making a product and their expenses of doing business

2. Then add their projected profit margin to these figures to arrive at a price. Two common methods are:

markup pricing

cost-plus pricing

The mark-up varies from product to product:

Groceries + 25%

Clothes shops + 100%

Markup Pricing

used primarily by wholesalers and retailers who are involved in acquiring goods for resale

The markup must cover the business’s expenses

Price = cost + markup (as percentage)

Cost-Plus Pricing

used by manufacturers and service companies Price = all costs + all expenses (fixed and

variable) + desired profit

Cost-plus pricing breaks a price down into its component parts.

Suburban Research Consultants

Questionnaire Design and $3,500Printing

Postage 400

Labor (40 hours at $30) 1,200

Refreshments 100

Expenses 350

Profit 950

Final Price to customer $6,500

Demand-Oriented Pricing

Marketers who use demand-oriented pricing attempt to determine what consumers are willing to pay for given goods and services.

Demand-oriented pricing is effective when:

there are few substitutes for an item

there is demand inelasticity

Competition-Oriented Pricing

When marketers study their competitors to determine the prices of their products

These marketers may elect to take one of three actions:

price above the competition

price below the competition

price in line with the competition (going-rate pricing)

Combining Pricing Considerations

Most marketers use all three pricing policies to determine prices.

Cost-oriented pricing helps determine the price floor (lowest selling price) for a product.

Demand-oriented pricing helps determine a price range for the product.

Competition-oriented pricing ensures that the final price is in line with the company’s pricing policies.

Pricing Policies

A basic pricing decision every business must make is to choose between a one-price policy and a flexible-price policy.

A one-price policy is one in which all customers are charged the same price for the goods and services offered for sale.

A flexible-price policy permits customers to bargain for merchandise.

Product Life Cycle

Pricing plays an important role in the product life cycle. In this sequence of events, products move through four stages:

introduction

growth

maturity

decline

New Product Introduction

A business may elect to price a new product above, in-line, or below its competitors. When a going-rate strategy is not used, two polar methods may be used:

skimming pricing

penetration pricing

Skimming Pricing

A pricing policy that sets a very high price for a new product to capitalize on the initial high demand for a new product.

Advantages: High profit margin; may cover research and development costs.

Disadvantages: Cost must eventually be lowered; attracts competition; if price is too high no one buys.

Penetration Pricing

Sets the initial price for a product very low to encourage as many people as possible to buy the product.

Advantages: Quick market penetration; can capture a large market; blocks competition.

Disadvantages: Low demand leads to big losses.

Other Product Stages

Growth Stage: Very little price changes will be made

Maturity Stage: The goal is to stretch the life of a product•Add new features•Seek new markets in other nations

Decline Stage: Companies are forced to reduce prices to generate sales

•Cut back on advertising and other promotional activities

Activity

Pricing Case Study

1.Read the case about priceline.com and answer the following questions

2.Be prepared to discuss with the class

Chapter 26.2: What You’ll Learn

The various pricing techniques

The steps in setting prices

Psychological PricingPsychological pricing refers to techniques that create an illusion for customers or that make shopping easier for them. Common psychological pricing techniques are:

odd-even pricing prestige pricing multiple-unit pricing bundle pricing promotional pricing everyday low prices (EDLP) price lining

Odd-Even Pricing

Setting prices that end in either odd or even numbers

Odd numbers convey a bargain image ($19.99)

Even numbers convey quality ($100.00)

Prestige Pricing

Setting higher-than-average prices to suggest status and prestige

Examples:–Perrier Water–Nike – Air Jordan’s –Lexus

Multiple-Unit Pricing

Pricing items in multiples to suggest a bargain and increase sales volume (3 for .99)

Suggests a bargain and helps increase sales volume.

Better than selling the same items at $.33 each.

$.99 ea.OR

3 for $2.50

Bundle Pricing

Including several complementary products in a package and pricing them lower as a group than if they were bought separately

Examples:

Fast food

Basic Cable

Computer packages

(Package deals)

Promotional Pricing

Promotional pricing is generally used in conjunction with sales promotions when prices are lower than average.

Loss-leader pricing provides items at cost to attract customers.

In special-event pricing, prices are reduced for a short period of time, such as a holiday sale (Back to School, Veteran’s Day.

Everyday Low Prices (EDLP)

Low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future.

Price Lining

Offering all merchandise in a given category at certain prices, such as $25, $35, and $50

Upper tier is better quality premium brand

Middle tier is for average priced brands

Lower tier for price-conscious customers

Activity

• Psychological Pricing

Discount Pricing

Discount pricing involves the seller's offering reductions from the usual price. They include:

cash

quantity

trade

seasonal discounts

promotional discounts and allowances

Discount Pricing

Cash discounts are offered to buyers to encourage them to pay their bills quickly.

Quantity discounts are offered to buyers for placing large orders.

Noncumulative quantity discounts are offered on one order.

Cumulative quantity discounts are offered on all orders over a specified period of time.

2/10 net 30If paid by the 10th, receive 2% discount,

OR full amount due by the 30th of the month

Discount Pricing

Seasonal discounts are offered to buyers willing to buy at a time outside the customary buying season.

Promotional discounts are offered to wholesalers and retailers willing to advertise or promote a manufacturer's products.

Allowances are granted to customers for selling back an old model.

Steps in Setting Prices

These are the six steps in determining a price for an item:

1. Determine pricing objectives.

2. Study costs.

3. Estimate demand.

4. Study competition.

5. Decide on a pricing strategy.

6. Set price.

Activity

Market Price