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Warm-up What factors should be considered when determining the price of a product? Do you have a calculator with you? If you need one, take from bag on my desk

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PART OF THE MARKETING MIX (PRODUCT, PRICE, PLACE, PROMOTION) Pricing Strategies

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Pricing Objectives Meeting a return on investment or profit Building Traffic Achieving market share Increasing sales Creating an image Social objectives

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Pricing Strategies Three major factors used when determining a price for a product Demand Competition Cost

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Commonly used by wholesalers & retailers Expressed as a percentage Selling Price = Cost x (1 + mark-up percent) Example: Costs store $7 Store seeks a 25 percent markup What will the selling price be? 7 x 1.25 = 8.75 Markup Pricing Cost-Oriented Pricing Producers calculate the COST of making a product, then add preferred profit

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Example 2 Store buys for $12 Sells for $20 What is the mark-up? 20 – 12 = 8 8/12 = 66%

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Cost-Plus Pricing Commonly used by manufacturers & service businesses Expressed as a $ amount Example Job costs $200 to perform Add $100 as profit Charge $300 to the client = 300 Cost-Oriented Pricing Producers calculate the COST of making a product, then add preferred profit

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Demand Oriented Pricing (Target Pricing) What are consumers willing to spend on a product or service? Price is set in relation to Demand & Supply of the product/service Limited Supply High Demand HIGH PRICE Plenty Supply Low Demand LOW PRICE

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Product Line Pricing Pricing a product at various price levels in order to appeal to different segments of the market Example Appliance manufacturer creates a dishwasher Sells in different versions (basic, midline, and premium) Different prices for each version to appeal to different segments of buyers Targeted at consumers for whom price is important in choosing the model of a product

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Psychological Pricing Based on the theory that certain prices have a psychological impact Retail prices expressed as "odd prices or a little less than a round number Examples $7.99 vs. $8.00 $19.99 vs. $20.00 $199 vs. $200

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Remember these Pricing Strategies Three major factors used when determining a price for a product Demand Competition Cost Law of Demand Price Lining Psychological Pricing Markup Pricing Cost-Plus Pricing

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Competition-Oriented Pricing Three Possible Actions Price above competition Price below competition Price in line with competition (going-rate)

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Pricing Policies & Product Life Cycle Introducing a new product Sets a HIGH price Used when competition is low Lower price after introduction Skimming Sets a LOW price Used to build market share Price raised later Penetration

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Other Price Strategies Everyday Low Pricing (EDLP) Setting prices lower than competitors and never having sales. High-Low Strategy Set prices higher than EDLP stores but have many sales.

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Other Price Strategies Loss Leader Setting very low prices on certain items in order to build store traffic. Prestige Pricing Setting a very high price to create an image of high quality.

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Non-Price Competition Quality Service Relationship

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Pricing Strategies Summary Three major factors used when determining a price for a product Demand Competition Cost Law of Demand Price Lining Psychological Pricing Markup Pricing Cost-Plus Pricing Skimming Penetration Going rate/in-line with competition Non-price competition Quality Service Relationships

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Break-Even Analysis Process used to determine profitability at various levels of sales. Total Fixed Cost (FC) Unit Price one unit (P) – Variable cost one unit(VC) Break-even point = Fixed Cost = Expenses that remain the same no matter how many units are sold. Variable Cost = Costs that change according to the level of production. Breakeven Point = Point at which sales equal all costs.

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Determine the Break-Even Point Selling Price = $5 Variable Cost = $3 Fixed Cost = $50,000

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