Pricing Policies BMI3C

Pricing Policies Ways of setting the price of products (or services) in order to maximize revenues –Obviously you want to set a price that is high enough that you earn an acceptable profit, while also being low enough to appeal to customers –However, these pricing policies are not quite as simple as finding the “middle ground”

Psychological Pricing Instead of charging $10, charge $9.99 Influences buyers’ perception of the price – the product seems like more of a bargain

Leader Pricing Selling some items at a heavily discounted price (perhaps even below cost) to attract more customers –most often in supermarkets and department stores Once the customer is in the store to get the discounted item, they will make other purchase at full price, offsetting the loss on the loss leader

Price Lining Grouping products into different categories and then setting the same price for all items in each category The result is only a few different levels of price – for example t-shirts for sale at $15, $25, and $35 A store’s margins may be slightly different for each specific item within a category

Combo Pricing AKA “Bundling” Grouping items together and selling them for less than if each item were purchased separately This results in the customer spending more than they normally would While the store’s margins will be slightly lower, they are still earning a profit

Everyday Low Prices Guaranteeing that the price of a product is always the lowest possible –Similar to price matching The retailer must be large enough to have significant economies of scale in order to be able to remain profitable with extremely low margins

Interest-free pricing Offering financing for a product for “free” –Normally financing a purchase (buying the item today but paying for it over time) results in interest being charged Ex: Financing a $600 TV (paid back over 12 5% interest) would end up costing you $630 in total With interest-free financing, the store charges 0% interest –However, if you offer to pay cash up front, you will find that the store offers a significant discount –The stated purchase price basically has the interest charge built in

Super Sizing Offering to upgrade a purchase for a nominal fee –Ex: a large soft drink (500 ml) is $1.50, and an extra large (1 L) is only $1.75 Seems like a good deal to the customer, and the actual cost of the soft drink to the store is negligible (pennies or less) so while the margin on the super sized product is less, they are still making a substantial profit and are increasing their revenues

Negotiated Pricing The stated price is up for negotiation – the customer may offer to pay something less and the employees have some leeway in reducing the price

Volume Discount Offering a discount for buying more of an item –Ex: product costs $10, but you can buy 5 for $45 Same principle as Combo Pricing or Super-Sizing… retailer’s margin is slightly reduced, but they are increasing their revenue

Early Payment Discount Most often used for whole industrial goods or wholesale goods The products are shipped with an invoice stating the price of the items If the buyer pays within 30 days, for example, then the overall cost is reduced by 5% Encourages faster repayment