Chapter 26 Pricing Strategies1 Marketing Essentials Pricing Concepts

Chapter 26 Pricing Strategies2 SECTION 26.1 What You'll Learn Pricing Concepts  The three basic pricing concepts involving cost, demand, and competition  The concepts of pricing forward vs. pricing backward  The idea of one-price policy vs. a flexible- price policy  The two polar pricing policies for introducing a new product

Chapter 26 Pricing Strategies3 SECTION 26.1 Pricing Concepts Why It's Important After deciding on pricing goals, marketers must establish pricing strategies that are compatible with the rest of the marketing mix. Understanding the various options helps businesses effectively execute the difficult task of pricing products.

Chapter 26 Pricing Strategies4 SECTION 26.1 Pricing Concepts Key Terms  markup  cost-plus pricing  one-price policy  flexible-price policy  skimming pricing  penetration pricing

Chapter 26 Pricing Strategies5 SECTION 26.1 Pricing Concepts There are three basic pricing concepts that you will want to consider in determining the price for any given product:  cost-oriented pricing  demand-oriented pricing  competition-oriented pricing Basic Pricing Concepts

Chapter 26 Pricing Strategies6 SECTION 26.1 Pricing Concepts Cost-Oriented Pricing In cost-oriented pricing, marketers first calculate the costs of acquiring or making a product and their expenses of doing business; then they add their projected profit margin to these figures to arrive at a price. Two common methods are:  markup pricing  cost-plus pricing Slide 1 of 2

Chapter 26 Pricing Strategies7 SECTION 26.1 Pricing Concepts Cost-Oriented Pricing Markup pricing is 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) Cost-plus pricing is used by manufacturers and service companies. Price = all costs + all expenses (fixed and variable) + desired profit Slide 2 of 2

Chapter 26 Pricing Strategies8 SECTION 26.1 Pricing Concepts Cost-plus pricing breaks a price down into its component parts. How might you relabel these entries shown here to show the similarity between markup pricing and cost-plus pricing? Suburban Research Consultants Cost-Plus Pricing Questionnaire Design and $3,500 Printing Postage 400 Labor (40 hours at $30) 1,200 Refreshments 100 Expenses 350 Profit 950 Final Price to customer$6,500

Chapter 26 Pricing Strategies9 SECTION 26.1 Pricing Concepts 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 Demand-Oriented Pricing

Chapter 26 Pricing Strategies10 SECTION 26.1 Pricing Concepts Marketers who study their competitors to determine the prices of their products are using competition-oriented pricing. 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) Competition-Oriented Pricing

Chapter 26 Pricing Strategies11 SECTION 26.1 Pricing Concepts 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. Combining Pricing Considerations

Chapter 26 Pricing Strategies12 SECTION 26.1 Pricing Concepts To arrive at a wholesale price, a manufacturer can subtract all markups for channel members from the suggested retail price. What problem would the above manufacturer have if its costs and expenses totaled $22? What might the manufacturer have to do? Pricing Backward from Retail Price Estimated retail price $50 Retailer's markup (40% of retail) - $20 Wholesaler's price to retailer $30 Wholesaler's markup (30% of wholesale) - $9 Manufacturer's price to wholesaler $21 (must cover costs, expenses, and profit)

Chapter 26 Pricing Strategies13 SECTION 26.1 Pricing Concepts Adding markups to cost is another way manufacturers can price their goods. Suppose in the example given here market research had shown that consumers would pay as much as $60 for the item. What would the manufacturer's options be? Pricing Forward from Manufacturer’s Cost Cost of producing item$15.75 Manufacturer's expenses and profit (25% of cost) + $5.25 Manufacturer's price to wholesaler$21.00 Wholesaler's markup (42.9% of cost) + $9.00 Wholesaler's price to retailer$30.00 Retailer's markup (66.67% of cost) +$20.00 Retailer's price to consumer$50.00

Chapter 26 Pricing Strategies14 SECTION 26.1 Pricing Concepts 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. Pricing Policies and Product Life Cycle

Chapter 26 Pricing Strategies15 SECTION 26.1 Pricing Concepts Pricing plays an important role in the product life cycle. In this sequence of events, products move through four stages:  introduction  growth  maturity  decline Product Life Cycle

Chapter 26 Pricing Strategies16 SECTION 26.1 Pricing Concepts 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 New Product Introduction Slide 1 of 3

Chapter 26 Pricing Strategies17 SECTION 26.1 Pricing Concepts Skimming pricing is 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. New Product Introduction Slide 2 of 3

Chapter 26 Pricing Strategies18 SECTION 26.1 Pricing Concepts 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. New Product Introduction Slide 3 of 3

Chapter 26 Pricing Strategies19 SECTION 26.1 Pricing Concepts Pricing during subsequent periods in a product's life cycle will be determined by which pricing method was originally used— skimming or penetration. At each phase of the life cycle, pricing strategies will work to extend the product's life cycle. Other Product Stages

Chapter 26 Pricing Strategies A SSESSMENT Reviewing Key Terms and Concepts 1. Name the two most common methods of cost-oriented pricing. 2. Explain how cost-oriented, demand- oriented, and competition-oriented pricing concepts can be combined to determine price. 3. What two methods may manufacturers use when considering the price to charge wholesalers and retailers? How do they differ? Slide 1 of 2

Chapter 26 Pricing Strategies A SSESSMENT Reviewing Key Terms and Concepts 4. What is the difference between a one- price policy and a flexible-price policy? 5. Name and explain two polar pricing methods that may be used when a new product is introduced into the market. Slide 2 of 2

Chapter 26 Pricing Strategies A SSESSMENT Thinking Critically Would you use skimming pricing or penetration pricing to introduce a new cookie called Coconut Surprise? Why?

Chapter 26 Pricing Strategies23 Marketing Essentials Setting Prices

Chapter 26 Pricing Strategies24 SECTION 26.2 What You'll Learn Setting Prices  The various pricing techniques  The steps in setting prices

Chapter 26 Pricing Strategies25 SECTION 26.2 Setting Prices Why It's Important Now that you have studied pricing concepts and policies, it is time to look at the special pricing techniques that help companies achieve their business goals. Then you will put all of that information into a single process: the steps for determining price.

Chapter 26 Pricing Strategies26 SECTION 26.2 Setting Prices Key Terms  psychological pricing  odd-even pricing  prestige pricing  multiple-unit pricing  bundle pricing  promotional pricing  everyday low prices (EDLP)  price lining  discount pricing  trade discounts  seasonal discounts

Chapter 26 Pricing Strategies27 SECTION 26.2 Setting Prices Two common pricing techniques marketers use are:  psychological pricing  discount pricing Pricing Techniques

Chapter 26 Pricing Strategies28 SECTION 26.2 Setting Prices 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 Slide 1 of 5

Chapter 26 Pricing Strategies29 SECTION 26.2 Setting Prices Psychological Pricing Odd-even pricing involves setting prices that end in either odd or even numbers. Odd numbers convey a bargain image; even numbers convey quality. Prestige pricing involves setting higher-than-average prices to suggest status and prestige. Slide 2 of 5

Chapter 26 Pricing Strategies30 SECTION 26.2 Setting Prices Psychological Pricing Multiple-unit pricing involves pricing items in multiples to suggest a bargain and increase sales volume. Bundle pricing involves including several complementary products in a package and pricing them lower as a group than if they were bought separately. Slide 3 of 5

Chapter 26 Pricing Strategies31 SECTION 26.2 Setting Prices 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. Psychological Pricing Slide 4 of 5

Chapter 26 Pricing Strategies32 SECTION 26.2 Setting Prices Everyday low prices (EDLP) are low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future. Price lining involves offering all merchandise in a given category at certain prices, such as $25, $35, and $50. Psychological Pricing Slide 5 of 5

Chapter 26 Pricing Strategies33 SECTION 26.2 Setting Prices Discount pricing involves the seller's offering reductions from the usual price. They include:  cash  quantity  trade  seasonal discounts  promotional discounts and allowances Discount Pricing Slide 1 of 4

Chapter 26 Pricing Strategies34 SECTION 26.2 Setting Prices 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. Discount Pricing Slide 2 of 4

Chapter 26 Pricing Strategies35 SECTION 26.2 Setting Prices Trade discounts are the way manufacturers quote prices to wholesalers and retailers. Manufacturers establish suggested retail prices for their items, then grant members of the channel of distribution discounts from the list prices for performing their respective functions. Discount Pricing Slide 3 of 4

Chapter 26 Pricing Strategies36 SECTION 26.2 Setting Prices 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. Discount Pricing Slide 4 of 4

Chapter 26 Pricing Strategies37 SECTION 26.2 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. Steps in Setting Prices

Chapter 26 Pricing Strategies38 SECTION 26.2 Setting Prices What is your purpose in setting a price? Do you want to increase sales volume or sales revenue? Establish a prestigious image? Increase your market share and market position? Answering these questions will help you keep your prices in line with other marketing decisions. Step 1—Determining Pricing Objectives

Chapter 26 Pricing Strategies39 SECTION 26.2 Setting Prices Since the main reason for being in business is to make a profit, give careful consideration to the costs involved in making or acquiring the goods or services you will offer for sale. Determine whether and how you can reduce costs without affecting the quality or image of your product. Step 2—Study Costs

Chapter 26 Pricing Strategies40 SECTION 26.2 Setting Prices Employ market research techniques to estimate consumer demand. The key to pricing goods and services is to set prices at the level consumers expect to pay. In many cases, those prices are directly related to demand. Step 3—Estimate Demand

Chapter 26 Pricing Strategies41 SECTION 26.2 Setting Prices Investigate your competitors to see what prices they are charging for similar goods and services. Study the market leader. What is the range of prices from the ceiling price to the price floor? Will you price your goods lower than, equal to, or higher than your competitors'? Step 4—Study Competition

Chapter 26 Pricing Strategies42 SECTION 26.2 Setting Prices You may decide to price your product higher than the competition's because you believe your product is superior. You may decide to set a lower price with the understanding that you will raise it once the product is accepted in the marketplace. Step 5—Decide on a Pricing Strategy

Chapter 26 Pricing Strategies43 SECTION 26.2 Setting Prices After you have evaluated all the foregoing factors, apply the pricing techniques that match your strategy and set an initial price. Be prepared to monitor that price and evaluate its effectiveness as conditions in the market change. Step 6—Set Price

Chapter 26 Pricing Strategies A SSESSMENT Reviewing Key Terms and Concepts 1. How are odd-even, prestige, multiple-unit, and bundle pricing related? Different? 2. What is the main difference between promotional pricing and everyday low prices? 3. What is the key factor in deciding on price lines? 4. Name five types of discount pricing techniques. 5. List the six steps in setting prices.

Chapter 26 Pricing Strategies A SSESSMENT Thinking Critically Johnson & Johnson promoted its baby shampoo to adult male athletes by touting the product's gentleness, even when used every day. At what stage in the shampoo's life cycle do you think this promotion took place? What do you think Johnson & Johnson was trying to accomplish by promoting its baby shampoo to adult males?

Chapter 26 Pricing Strategies Graphic Organizer Types of Psychological Pricing Everyday Low Prices (EDLP) Everyday Low Prices (EDLP) Promotional Pricing Promotional Pricing Bundle Pricing Bundle Pricing Multiple- Unit Pricing Multiple- Unit Pricing Odd- Even Pricing Odd- Even Pricing Price Lining Price Lining Prestige Pricing PsychologicalPricingPsychologicalPricing