Pricing Objectives Pricing Methods Pricing Strategies

Can Firms Control Their Prices? Supply and demand Price and non-price competition Buyer’s perception of price

Pricing Objectives Survival Profit Maximization Target Return on Investment (ROI) Market Share Goals Status Quo Pricing Survival – cannot be pursued on a long-term basis Profit maximization – difficult to measure. Better to express as dollar or percentage increase over previous profits ROI – the amount earned as a result of investment Market Share – AOL reduced price to 9.95 per month Status Quo – especially true in industries that rely on price stability

Pricing Methods Cost-based pricing Demand-based pricing Competition-based pricing

Cost-Based Pricing Markup – price is determined by adding an amount to the wholesale price Markdown – subtracting an amount from the retail price Seller determines the cost of producing or purchasing one unit, then adds an amount to cover overhead and profit Markup – the amount added to the unit cost Cost of product + markup = selling price

Markup & Markdown Giant Eagle buys artichoke hearts for $1.77 a can and wants to add 40% to the wholesale cost, what would the retail price be? Giant Eagle sells olive oil for $10.50 a bottle and wants to mark down the price 20%, what would the markdown price be?

Advantages & Disadvantages of Cost-Based Pricing Easy to apply Commonly used by retailers and wholesalers Disadvantages: Difficult to determine an effective markup percentage Separates pricing from other business functions

Breakeven Analysis Answers the question, “What is the lowest level of production and sales at which a company can break even on a particular product?” Breakeven quantity – the number of units that must be sold for the total revenue to equal the total cost (for all units sold)

Breakeven Analysis Fixed costs – $40,000 Variable costs – $60 per unit Selling price – $120 per unit What is the breakeven quantity? 667 units

Demand-Based Pricing that is determined by how much customers are willing to pay for a product or service This method results in a high price when demand is strong and a low price when demand is weak May be differentiated based on considerations such as time of purchase, type of customer or distribution channel Differentiated – Amazon.com changing prices based on site usage (new customers get discounts)

Advantages and Disadvantages of Demand-Based Pricing Potential for higher profits Disadvantage: Management must be able to estimate demand at different price levels, which may be difficult to do accurately Segments must be separate enough so that those that buy at lower prices can’t sell to those who buy at higher prices

Competition-Based Pricing that is determined by considering what competitors charge for the same good. Once you find out what your competition is charging, you must determine whether to charge the same, slightly more, or slightly less.

Pricing Strategies Psychological pricing Product line pricing Promotional pricing Discounting

Psychological Pricing Odd-number pricing Multiple-unit pricing Reference pricing Bundle pricing Everyday low price (EDLP) Customary pricing Odd number – setting prices using odd numbers that are slightly below whole dollar amounts. 9 & 5 most popular Multiple-unit – $6 each, 2 for $10 Reference pricing – pricing at moderate level and positioning it next to a more expensive model in the hope that the customer will use the higher price as a reference price. I.e. buying a VCR at Sears Bundle pricing – Packaging together two or more complementary products and selling them for a single price. Can stimulate sales and increase revenue by bundling slow-moving products with high-moving products. EDLP – eliminate short-term price reductions. Procter & Gamble Customary Pricing – priced based on tradition (candy bars, chewing gum)

Product Line Pricing Establishing and adjusting the prices of multiple products within a product line Captive pricing – basic product low, but items required to operate or enhance it can be at a high level Premium pricing – highest quality or most versatile version is given the highest price Price lining – setting a limited number of prices for selected groups or lines of merchandise Captive – video games and cartridges, phones and accessories Premium – camera Price lining – ties $22 and $37

Promotional Pricing Price leaders Special event pricing Comparison discounting Price leaders – special low prices on a few items to attract customers (grocery stores & restaurants) Special event – advertised sales or price cutting linked to a holiday, season, or event Comparison discounting – setting a price as a specified level and comparing it with a higher price (previous price, price of competing brand, price at another outlet, MSRP

Discounting Trade discounts Quantity discounts Cash discounts Seasonal discount Allowance Trade discount – offered to marketing intermediaries Quantity discount – offered to customers who buy in large quantities Cash discount – offered for prompt payment ( 2/10, net 30) Seasonal discount – reduction to buyers who purchase off-season (car rentals in winter) Allowance – reduction to achieve a desired goad (trade-in allowance, promotional allowance)