Section 26.1 Pricing Concepts Marketing Essentials n Chapter 26 Pricing Strategies Section 26.1 Pricing Concepts

Pricing Concepts SECTION 26.1 What You'll Learn 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

Pricing Concepts SECTION 26.1 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.

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

Pricing Concepts SECTION 26.1 Basic 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

Pricing Concepts SECTION 26.1 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

Pricing Concepts SECTION 26.1 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

Suburban Research Consultants SECTION 26.1 Pricing Concepts Cost-Plus Pricing Suburban Research Consultants 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? 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

Pricing Concepts SECTION 26.1 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

Pricing Concepts SECTION 26.1 Competition-Oriented Pricing 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)

Pricing Concepts SECTION 26.1 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.

Pricing Concepts SECTION 26.1 Pricing Backward from Retail Price 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? 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)

Pricing Concepts SECTION 26.1 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 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 Concepts SECTION 26.1 Pricing Policies and Product Life Cycle 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 Concepts SECTION 26.1 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

Pricing Concepts SECTION 26.1 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 Slide 1 of 3

Pricing Concepts SECTION 26.1 New Product Introduction 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. Slide 2 of 3

Pricing Concepts SECTION 26.1 New Product Introduction 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. Slide 3 of 3

Pricing Concepts SECTION 26.1 Other Product States 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.

Reviewing Key Terms and Concepts ASSESSMENT 26.1 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

Reviewing Key Terms and Concepts ASSESSMENT 26.1 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

ASSESSMENT Thinking Critically 26.1 Would you use skimming pricing or penetration pricing to introduce a new cookie called Coconut Surprise? Why?

Marketing Essentials End of Section 26.1