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Pricing Strategies Chapter 26.1

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1 Pricing Strategies Chapter 26.1

2 Ch 26.1 – Strategies in the Pricing Process
What you’ll learn The various pricing techniques The steps in setting prices The use of technology in the pricing function

3 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

4 Cost-Oriented Pricing
Marketers first calculate the costs making a product and their expenses of doing business Then add their projected profit margin to these figures to arrive at a price. Two common methods are: markup pricing cost-plus pricing

5 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) The mark-up varies from product to product: Groceries % Clothes shops %

6 Suburban Research Consultants
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 $3,500 Printing Postage Labor (40 hours at $30) 1,200 Refreshments Expenses Profit Final Price to customer $6,500

7 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

8 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)

9 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.

10 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.

11 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

12 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

13 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.

14 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.

15 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

16 Activity Pricing Case Study
Read the case about priceline.com and answer the following questions Be prepared to discuss with the class

17 Chapter 26.2: What You’ll Learn
The various pricing techniques The steps in setting prices

18 Psychological Pricing
Psychological 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 The first technique is called “psychological pricing.”. What does this name imply? Share responses. Think for a moment about the relationship of price and quality in a consumers mind. Many people believe that the higher the price, the better the quality of an item. Marketers will price goods and services high to attract customers who have that perception. A very good quality product at a low price may not sell as well as it would at a high price. Psychological Pricing techniques are techniques that create an image or illusion in the consumer’s minds based on price. Businesses use this not to trick or misrepresent themselves. On the contrary they use it to reinforce what their image is to the consumer. Let’s look at some of the psychological pricing methods used.

19 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) Can anyone guess what this method of psychological pricing might involve? Share responses. Show 1st bullet. As the name implies, prices are determined to either end in an odd number (show 2nd bullet), which is used when a business wants to give an image of being a bargain. (Note: It doesn’t matter whether the ending of the price is .79, .59 or .88 (which is an even number). The point is that it is not a whole dollar amount. Show next bullet. Even or whole-dollar prices give an image of quality, rather than value. The next time you are Dillard’s or Macy’s, check out the upscale designer departments as well as the moderate sportswear. You will probably notice a difference in pricing methods. Now let’s look at another method that uses price to convey a quality image.

20 Prestige Pricing Setting higher-than-average prices to suggest status and prestige Examples: Perrier Water Nike – Air Jordan’s Lexus Prestige pricing. What do you think this implies? Share responses. Show 1st bullets. Here the prices are actually set higher in order to give their customers an image of quality – better than the competition. Obviously this would not work if their target market was value-conscious, so it is used with products that are targeted toward consumers who equate high price with quality, and for this reason, are willing to pay more. They are NOT value conscious. They want the best! Show next bullets. What are some other clothing stores or manufacturers that use prestige pricing? Share responses

21 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. Can anyone tell me what they think this is? Share responses. Multiple pricing is used to instill a value-orientation for the products. Show 1st bullet. What do you think might be an example of multiple pricing? Share responses. Show next bullet. This is an example. How does this give a representation of value? Share responses. Give the perception that you are saving money when they market or actually got you to buy more product $.99 ea. OR 3 for $2.50

22 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)

23 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. Promotional Pricing is the 4th type of psychological pricing. Show next bullet. Used with sales promotions, promotional pricing is a temporary reduction in price. Can anyone give me an example of having seen promotional pricing? Share responses. Show graphic. What do you think is the purpose of promotional pricing? Share responses. Show next bullet. Yes – it is used to increase store traffic. Can anyone recall what a loss-leader is? Share responses. Show next bullet. Remember, a loss leader is a product that is priced temporarily below cost in order to attract customers. This is one type of promotional pricing that is often used around special events or holidays. Show next bullet.

24 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.

25 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 Can anyone recall what a product line is? Share responses. Remember that a product line is a group of related products such as shirts, pants, shoes, necklaces, scarves, etc. Therefore, what do you think price lining is? Share responses. Show 1st bullets. Instead of marking individual items down or giving them a special price, the retailer will price an entire line of products. This is typical in department stores. Why? (They have large product width – many product lines – that allows them to retain profit from those lines not marked down. Also they are hoping that the price lining will encourage purchase of other items not priced down. E.g. if a customer buys a blouse that is price-lined they may want to buy a skirt or pants that are not necessarily on sale.) Let’s look at some other advantages: Show next bulletsPrice lining makes shopping easier for the customer and more efficient for the sales person. . Price lining helps customers determine value better. Without having to sift through racks and racks of various clothing they can look at one type of clothing and know what it’s priced at. This gives the customer a better shopping experience, encouraging more sales. When the customer has an easier time shopping, their decisions are easier. For the retailer, they can target multiple markets. With our example of blouses, they are able to target those who are value-conscious at the same time they are targeting those who are willing to pay more for quality. Price lining makes it easier for the sales person because they can easily identify products at various prices, depending on if the customer is looking for something for less money or more “quality”. Advantages Customers differentiate between value Helps customers make decisions Allows store to target multiple markets Allows salespersons to “up sell” or “down sell” more easily

26 Activity Psychological Pricing

27 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 The pricing techniques used in business-to-business sales usually involves some kind of discounting. Reductions in the prices are given as the products move along the channels of distribution, and are usually based on the purchasing behavior of the buyer. Let’s look at some of the techniques that are used. Show next slide.

28 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 30 If paid by the 10th, receive 2% discount, OR full amount due by the 30th of the month Have any of you ever worked at a company in which you have had access to billing – perhaps your parents’ business? Share responses. Cash discounts are commonly used in business-to-business selling. Show 1st bullet. The main purchase of cash discounts is to encourage quick payment of the bill. It’s used as an incentive to the purchasing by giving them a discount if the bill is paid by a certain time. Let’s look at an example. Show next bullets. Can anyone tell me what this means? Share responses. OK. Let’s look at another discount pricing technique that is used in business-to-business sales: quantity discounts. What do you think this refers to? Share responses. Show 1st bullet. As the name implies, the more quantity you buy the more you save. Is there a pricing technique used in the consumer market that is similar? Share responses. (show next bullet: multiple pricing -- 3 for $10.00). What do you think is the main purpose for businesses offering quantity discounts? Share responses. Show next bullet. Rather than to encourage early payment, like with discount pricing, quantity discounts are used to encourage larger orders. There are 2 methods that businesses use: Show next bullet: This is when the purchases accumulate over a period of time in order to qualify for the discount Show next bullet: This is when the discount applies only to one purchase. So, we have learned that discounts are offered for early payment and to encourage larger orders. Let’s look at a technique used to encourage purchasing based on time. Show next slide.

29 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. What do you think this refers to? Share responses. Show first bullet and graphics. Seasonal discounts are used to encourage purchasing of products prior to the usual buying period. When do you think bathing suits are normally purchased by retailers from the manufacturers or wholesalers? Share responses. If a retailers customarily purchase bathing suits in August that will be for sale in February, a manufacturer may offer a discount if the retailer orders in June. Show next bullet. These are sometimes called “early bird orders” Why do you think Halloween and Christmas stuff gets up so early What do you think these might include? Share responses. Show first bullet. One type of promotional discount is when the manufacturer gives something to the retailer for promoting its products, either in advertisements or in the store. Show next bullet. Sometimes the price is discounted, but there are other ways that the manufacturer can “reward” the retailer for promoting its products. Can anyone tell me other ways they can think of? Share responses. Show next bullet. One was is through allowances. This is when the manufacturer gives the retailer (or wholesaler) free merchandise for promoting their products. For example, Liz Claiborne may give the retailer free scarves for promoting their new line of wool suits in their next newspaper advertisement. Usually the free merchandise is related to the products being promoted. Show next bullet. Another type of promotional discount is cooperative advertising. This is when the manufacturer and the retailer actually share in the promotion of the manufacturer’s products. Using our previous example, rather than giving free scarves to the retailer, Liz Claiborne may pay half the cost of the newspaper advertisement.

30 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.

31 Activity Market Price


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