1. Pricing Objectives Pricing Methods Pricing Strategies

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

3. 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

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

5. 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

6. 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?

7. 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

8. 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)

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

10. 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)

11. 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

12. 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.

13. Pricing Strategies Psychological pricing Product line pricing
Promotional pricing
Discounting

14. 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)

15. 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

16. 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

17. 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)