1. 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

2. P RICING 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)

3. E STIMATED DEMAND When pricing, a company must estimate demand for the product: –Can we make a profit selling at consumers’ Expected Price? Expected price: The price that shows what customers think the product is worth. –Price MUST be within Expected Range! –Too High: Doesn’t make it to market –Too Low: Consumers won’t buy (Inverse Demand) Ex-Wife’s Leather Pocketbook

4. Retail Price: 18.00 The Bookstore Problem (Which book do you stock?) Retail Price: 7.00 VS. Retailer Cost: 13.50Retailer Cost: 4.00 Gross Margin $

5. C OST OF A PRODUCT I’ll assume that you know the difference between fixed/variable cost, etc.

6. P RICING 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.

7. P RICE 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.

8. Elastic demand (E>1) Percentage change in quantity demanded is greater than percentage change in price Price (P) Quantity (Q) Percentage change in quantity demanded is less than percentage change in price Inelastic demand (E<1) Percentage change in quantity demanded is equal to percentage change in price Unitary demand (E=1) Price elasticity of demand

9. Strategic Pricing Objectives Objectives –Goal-setting/Objective-setting –Pricing to achieve a target ROI –Pricing to stabilize price and margin –Pricing to reach a target market share –Pricing to meet or prevent competition –Pricing for profit maximization –Price as a positioning Tool –Pricing for survival

10. Pricing Strategies Market 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...

11. 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

13. Psychological Pricing

14. Price-Quality Relationship Odd-Pricing Price Bundling Multiple-Pricing The lure of the middle way “Blind-Item” Pricing –Plumbing Example:

18. Price Discrimination

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

20. 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

21. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing Easy Stuff...

22. Trade Discounts / Allowances

23. Seasonal Quantity Cash Sales Promotion Compensate the trade for functions performed: –Buying & Selling –Transportation –Storage –Financing –Risk-taking –Providing Information –Standardizing & Grading Functional Or Trade To Trade Price Discounts/Allowances

24. Discounts based on time of year. To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

25. Induce larger-quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

26. Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days 2/10, Net 30 To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

27. Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

28. Illegal Pricing Policies

29. 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

30. 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

32. Retail Pricing Math

33. Mark-up Pricing

34. 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?

35. Setting Up the Problem Retail Price = Cost + Markup

36. 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!

37. Results of Pricing Test (1)(2)(3)(4)(5) Total Cost of MarketUnits SoldTotal DemandTotal($300,000 fixedProfits Unitat PriceRevenuecost + $5 variable(col 3 - MarketPrice(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 50,000 700,000550,000 150,000 Marketing is about Maximizing Profit/Gross Margin… not increasing sales!