PRICING STRATEGIES CHAPTER 26

BASIC PRICING CONCEPTS  COST-ORIENTED PRICING  DEMAND-ORIENTED PRICING  COMPETITION-ORIENTED PRICING

COST-ORIENTED PRICING - CALCULATE THE COST OF BUSINESS THEN ADD ON DESIRED PROFIT  Cost-Plus Pricing – all costs and expenses are calculated then the profit is added to the cost for the customer. Generally used by Service Businesses and Contracting.  Markup Pricing – expressed as a %  The difference between the price of an item and its cost. Generally used by wholesalers and retailers.

DEMAND-ORIENTED PRICING - PRICE MUST BE SET BASED UPON THE CONSUMER’S PERCEIVED VALUE OF PRODUCT  Marketers determine the product value to customer. What they are willing to pay  Few substitutes usually available  Demand inelasticity (The higher the demand, the more a business can charge for a given good or service even though the good or service and its costs do not change)  Try to achieve brand loyalty - Cardinals  Differentiate features (seat location at stadium, usage during peak hours)

COMPETITION-ORIENTED PRICING - MARKETERS STUDY COMPETITORS TO SET PRICES  Price above the competition  Price below the competition  Price in line w/competition (going-rate)  Competitive Bid Pricing – used by government agencies to request bids for specific requests.

PRICING POLICIES  ONE-PRICE – All customers are charged the same prices. Prices offered in this manner offer consistency and reliability. No deviations are allowed.  FLEXIBLE-PRICE- Customers pay different prices for the same type or amount of merchandise. Bargaining is allowed. Cars, artwork, real estate offer this policy.

PRODUCT LIFE CYCLE  INTRODUCTION-PRICING METHOD IS DETERMINED  SKIMMING PRICING METHOD – HIGH PRICE FOR PRODUCT WHEN DEMAND IS HIGHER THAN SUPPLY. MAKE A HIGH PROFIT WHILE PRODUCT IS POPULAR  PENETRATION PRICING METHOD – PRICE IS SET LOW TO TRY TO SATURATE THE MARKET AS QUICKLY AS POSSIBLE BEFORE THE COMPETITION DOES.  GROWTH-LITTLE PRICE CHANGE; SALES LEVEL OFF - LOOK FOR NEW MARKETS FOR PRODUCTS  MATURITY-ADD NEW FEATURES TO PRODUCTS TO TRY TO EXTEND LIFE OF PRODUCT  DECLINE-SALES AND PROFITS DECREASE, REDUCE MANUFACTURING COSTS; POSSIBLY DROP PRODUCT.

Strategies in the Pricing Process 26.2

Product Mix Pricing Strategies  Involve adjusting prices to maximize profitability for a group of products rather than just one item.  With this method, one product may have a small profit margin while another may be high to balance the effect of the lower one.

Price Lining  Is a special technique that sets a limited number of prices for specific groups or lines of merchandise.  Low, middle, high $25, $35, & $50  Advantage of price lining is that customers know the price range in a given store and salespeople can easily draw comparisons between the items

Optional Product  Involves setting prices for accessories or options sold with the main product  Example - options for cars

Captive Product  Sets the price for one product low but compensates for that low price by pricing the supplies for the product high.  Example ink-jet printers are low in price but ink is high.

Bundle Pricing  A company offers several complementary products in a package that is sold at a single price.  The one bundle price is lower than if the customer purchased all of the items separately.

Geographical Pricing  Refers to price adjustments required because of the location of the customer for delivery of products.  Example : seafood, gas

Segmented Pricing Strategy  Uses two or more different prices for a product, though there is no difference in the item’s cost.  This strategy helps businesses optimize profits and compete effectively.

Four Factors of Segmented Pricing  Buyer Identification – to attract people on a fixed income. Offering discounts such as first class travel.  Product Design – demand for the style  Purchase Location – Stadium  Time of purchase – cell phone plans, restaurants kids meals.

Psychological Pricing  Based on a buyer’s motivation for making a purchase and purchasing habits.  Create an illusion for customers.

Psychological Pricing examples page : 554  ODD-EVEN PRICING  PRESTIGE PRICING  MULTIPLE UNIT PRICING  EVERY DAY LOW PRICES

Promotional Pricing  Is generally used in conjunction with sales promotions where prices are reduced for a short period of time.

Promotional Pricing Examples – Page  LOSS LEADER  SPECIAL EVENT  REBATES AND COUPONS

Discounts and Allowances  Cash discounts are offered to buyers to encourage them to pay their bills quickly. Terms are written on the invoice as  2/10 net 30 which means that a 2% discount is granted if the bill is paid in 10 days

Other Discounts & Allowances  Quantity discounts – placing large orders  Trade discounts – manufacturer’s price quote to wholesalers and retailers.  Seasonal discounts – buy a pool in Winter  Trade In Allowance – cars & appliances

SIX STEPS FOR DETERMINING PRICE 1. Establish Pricing Objectives 2. Determining Costs 3. Estimate Demand 4. Study Competition 5. Decide on Pricing Strategy 6. Set Price