2 Can Firms Control Their Prices? Supply and demandPrice and non-price competitionBuyer’s perception of price
3 Pricing Objectives Survival Profit Maximization Target Return on Investment (ROI)Market Share GoalsStatus Quo PricingSurvival – cannot be pursued on a long-term basisProfit maximization – difficult to measure. Better to express as dollar or percentage increase over previous profitsROI – the amount earned as a result of investmentMarket Share – AOL reduced price to 9.95 per monthStatus Quo – especially true in industries that rely on price stability
5 Cost-Based PricingMarkup – price is determined by adding an amount to the wholesale priceMarkdown – subtracting an amount from the retail priceSeller determines the cost of producing or purchasing one unit, then adds an amount to cover overhead and profitMarkup – the amount added to the unit costCost of product + markup = selling price
6 Markup & MarkdownGiant Eagle buys artichoke hearts for $1.77 a can and wants to add 40% to the wholesale cost, what would the retail price be?Giant Eagle sells olive oil for $10.50 a bottle and wants to mark down the price 20%, what would the markdown price be?
7 Advantages & Disadvantages of Cost-Based Pricing Easy to applyCommonly used by retailers and wholesalersDisadvantages:Difficult to determine an effective markup percentageSeparates pricing from other business functions
8 Breakeven AnalysisAnswers the question, “What is the lowest level of production and sales at which a company can break even on a particular product?”Breakeven quantity – the number of units that must be sold for the total revenue to equal the total cost (for all units sold)
9 Breakeven Analysis Fixed costs – $40,000 Variable costs – $60 per unit Selling price – $120 per unitWhat is the breakeven quantity?667 units
10 Demand-BasedPricing that is determined by how much customers are willing to pay for a product or serviceThis method results in a high price when demand is strong and a low price when demand is weakMay be differentiated based on considerations such as time of purchase, type of customer or distribution channelDifferentiated – Amazon.com changing prices based on site usage (new customers get discounts)
11 Advantages and Disadvantages of Demand-Based Pricing Potential for higher profitsDisadvantage:Management must be able to estimate demand at different price levels, which may be difficult to do accuratelySegments must be separate enough so that those that buy at lower prices can’t sell to those who buy at higher prices
12 Competition-BasedPricing that is determined by considering what competitors charge for the same good. Once you find out what your competition is charging, you must determine whether to charge the same, slightly more, or slightly less.
13 Pricing Strategies Psychological pricing Product line pricing Promotional pricingDiscounting
14 Psychological Pricing Odd-number pricingMultiple-unit pricingReference pricingBundle pricingEveryday low price (EDLP)Customary pricingOdd number – setting prices using odd numbers that are slightly below whole dollar amounts. 9 & 5 most popularMultiple-unit – $6 each, 2 for $10Reference pricing – pricing at moderate level and positioning it next to a more expensive model in the hope that the customer will use the higher price as a reference price. I.e. buying a VCR at SearsBundle pricing – Packaging together two or more complementary products and selling them for a single price. Can stimulate sales and increase revenue by bundling slow-moving products with high-moving products.EDLP – eliminate short-term price reductions. Procter & GambleCustomary Pricing – priced based on tradition (candy bars, chewing gum)
15 Product Line PricingEstablishing and adjusting the prices of multiple products within a product lineCaptive pricing – basic product low, but items required to operate or enhance it can be at a high levelPremium pricing – highest quality or most versatile version is given the highest pricePrice lining – setting a limited number of prices for selected groups or lines of merchandiseCaptive – video games and cartridges, phones and accessoriesPremium – cameraPrice lining – ties $22 and $37
16 Promotional Pricing Price leaders Special event pricing Comparison discountingPrice leaders – special low prices on a few items to attract customers (grocery stores & restaurants)Special event – advertised sales or price cutting linked to a holiday, season, or eventComparison discounting – setting a price as a specified level and comparing it with a higher price (previous price, price of competing brand, price at another outlet, MSRP
17 Discounting Trade discounts Quantity discounts Cash discounts Seasonal discountAllowanceTrade discount – offered to marketing intermediariesQuantity discount – offered to customers who buy in large quantitiesCash discount – offered for prompt payment ( 2/10, net 30)Seasonal discount – reduction to buyers who purchase off-season (car rentals in winter)Allowance – reduction to achieve a desired goad (trade-in allowance, promotional allowance)