Pricing Strategies the price is what you pay, the value is what you receive…anonymous

3 Potent Forces Image (premium or least price) Image (premium or least price) Competition (nonprice) Competition (nonprice) Value (objective or perceived) Value (objective or perceived)

Rising Costs Communicate with customers Communicate with customers Improve efficiency in the company Improve efficiency in the company Absorb the cost increases Absorb the cost increases Emphasize the value of the product Emphasize the value of the product Anticipate rising costs/lock in prices early Anticipate rising costs/lock in prices early

Pricing Factors Product/service costs Product/service costs Market factors Market factors Sales volume Sales volume Competitors prices Competitors prices Competitive advantage Competitive advantage sensitivity sensitivity Desired image Desired image Economic conditions Economic conditions Business location Business location Seasonal fluctuations Seasonal fluctuations Psychological factors Psychological factors Credit terms/purchase discounts Credit terms/purchase discounts Customers price Customers price

Customized or Dynamic Pricing A pricing technique that sets different prices on the same products and services for different customers using the information that a company collects about its customers

Pricing Strategies and Tactics Introducing a New Product Getting the Product Accepted -revolutionary -evolutionary -me-too Getting the Product Accepted -revolutionary -evolutionary -me-too Maintaining the Market Share Maintaining the Market Share Earning a Profit Earning a Profit

Pricing Strategies and Tactics Introducing a New Product Market Penetration Market Penetration Skimming Skimming Sliding down the Demand Curve Sliding down the Demand Curve

Pricing Strategies and Tactics Pricing Established Goods and Services Odd Pricing: sets prices that end in odd numbers to create the psychological impression of low prices Price Lining: greatly simplifies the pricing function by pricing different products at different price points, depending on quality, features, and cost Leader Pricing: involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices

Strategies and Tactics (contd) Geographic Pricing: zone: involves setting different prices for different territories because of different transportation costs delivered: charges all of its customers the same price regardless of location FOB-Factory: sells merchandise to customers who then also pay for the shipping costs

Strategies and Tactics (contd) Opportunistic Pricing: involves charging customers unreasonably high prices when goods or services are in short supply Discounts: reductions from normal list prices, ex. Multiple-unit pricing: offering customers discounts if they purchase in quantity Bundling: involves grouping together several products into a package that offers extra value at a special price, ex. optional, captive, byproduct Suggested Retail Price: manufacturer suggestion

Pricing Strategies for Retailers Markup: difference between cost of a product and its selling price Dollar Markup=Retail Price – Cost % Retail Markup=Dollar Markup/Retail Price % Cost Markup=Dollar Markup/Cost Markup=Operating Expenses+Reductions+Profits Net Sales +Reductions Follow-the-Leader Below-Market Pricing

Pricing Strategies for Retailers (contd) Sale Rack Shuffle clothing company makes a dress for $50 Sells dress to retailer at $80 Retailer marks dress up to $200 If unsold after 8-12 weeks, marks down by 25% to $150 If still unsold, marks down further until it does. Clothing company and retailer agree how to share the cost of markdown.

Pricing Strategies for Manufacturers Direct Costing absorption costing: traditional method in which all manufacturing and overhead costs are absorbed into total cost variable costing: includes in the products cost only those that vary directly with the quantity produced.

Pricing Strategies for Manufacturers (contd) Full Absorption Income Statement Sales 790,000 Cost of Goods Materials 250,500 Direct Labor 190,200 Factory Overhead 120, ,900 Gross Profit 229,100 Operating Expenses General and Administrative 66,100 Selling 112,000 Other 11, ,100 Net Income 40,000

Pricing Strategies for Manufacturers (contd) Direct Cost Income Statement Sales Revenue 790,000 Variable Costs Materials 250,500 Direct Labor 190,200 Variable factory overhead 13, ,000 Contribution Margin (36.5%) 288,000 Fixed Costs Factory Overhead 107,000 Fixed selling expenses 63,900 General and Administrative 66,100 Others 11, ,000 Net Income 40,000

Pricing for Manufacturers (contd) Computing the Break-Even Selling Price Selling Price= Profit + (Variable Cost/U x Qty Produced) +Total Fixed Cost Qty Produced

Pricing Strategies for Service Firms Hourly Rate with Profit With Materials Without Materials

Impact of Credit on Pricing Credit Cards Installment Credit Trade Credit