Pricing

1
Pricing

• Pricing Concepts

2
Topics to Cover

• Concepts and Strategies
• Policies
• Life cycle
• Techniques

3
Cost-Oriented Pricing

• Calculate costs and expenses of making a product,
  then add profit margin
• Mark-up price
• Used by retailers
• Difference between cost and price
• Expressed as a percentage
• Must be high enough to cover operating costs

4
Cost-Oriented Pricing

• Cost-Plus Pricing
• Used primarily by service providers
• Add desired profit to costs expenses
• Slightly more sophisticated than mark-up
• Better able to take into account difference
  situations for different customers

5
Demand-Oriented Pricing

• Pricing based on consumers not company
• Must meet perceived value
• Most effective when demand is inelastic
• Price can be adjusted to reflect different demand
  for the same, or similar product
• Sporting events, theater, cell phone minutes
• Differing styles of the same good

6
Competition-Oriented Pricing

• Price based on competition
• Little or no consideration given to demand or
  production costs
• Competitive-Bid pricing
• Companies submit price proposals for jobs
• Used often with government contracts
• Companies will often give a very low bid to win
  the bid and keep employees working

7
Pricing Combinations

• All three can work together to develop a price
  range
• Cost-Oriented
• Establish price floor lowest price to make a
  profit
• Demand-Oriented
• Determine price ceiling highest price consumer
  is willing to pay
• Competition-Oriented
• Maintain adherence to company policy

8
Pricing Policy

• One-Price Policy
• sets a single price for all customers
• Price is displayed and no haggling is allowed
• Popular with retail stores
• Allows for consistency and reliability
• Retailers can count on profit
• Customers can count on price

9
Pricing Policy

• Flexible-Price Policy
• Allows for bargaining
• Retailers tend to avoid due to legal problems
• Popular with antiques and used cars
• Gives customer greater control and allows seller
  to react to demand
• Gaining popularity thanks to internet
• Auctions and virtual flea markets

10
Product Life Cycle

• Introduction
• Growth
• Maturity
• Decline

11
Introduction

• Depending on company philosophy new products may
  be priced higher, lower, or at market value
• If the going-rate is not used, a marketer has two
  options
• Skimming Pricing
• Penetration Pricing

12
Skimming Pricing

• Sets product at a high initial cost
• Helps company to benefit from high demand on new
  product
• Technology items are typically priced in this
  fashion
• These items rely on innovators and early adopters
  for sales and trends

13
Skimming Pricing

• Helps to recoup a large portion of early expenses
• High profit margin will attract competition
• Prices must eventually be lowered
• Easier to lower price than to raise it
• Also run risk of exceeding perceived value

14
Penetration Pricing

• Initial price set very low
• Goal is to grab a large market share very quickly
• Most effective for items with elastic demand
• First Playstation was introduced with this
  strategy
• Built brand loyalty for release of PS2 (skimming)

15
Penetration Pricing

• Must have large production runs, wide
  distribution effective promotion schemes
• Saves money with production costs and volume of
  sales
• Benefits include discouraged competition and
  items are often seen as affordable alternatives
• Low price can hurt the marketer if strategy is
  unsuccessful

16
Other Stages

• During growth stage, sales increase rapidly
• Each method has a different path
• Penetration strategy faces increased profits as
  rising volume lowers costs
• Will not need to lower prices for some time
• Skimming strategy needs to be monitored closely,
  as sales tail off, price must be lowered
• Lower prices will appeal to different segments

17
Other Stages

• As sales level off, marketers look to target new
  segments
• At this point longevity becomes a concern
• Improvements, new features, and even overseas
  markets are considered
• As product declines further, price will be cut to
  generate sales
• Eventually non-profitable product will be dropped

18
Pricing Techniques

• Psychological Pricing
• Create illusions or make shopping easier for
  customers
• Appeals to specific segments because of similar
  habits
• Odd/Even pricing
• Odd numbers convey a bargain
• Even portray quality
• May or may not be true, but the image is the
  illusion

19
Psychological Pricing

• Prestige Pricing
• High price to allude to status
• Multiple Unit
• Suggests a bargain and increases sales volume
• 3 for .99, instead of .33 each
• Everyday low prices
• Set consistently low prices with no intention of
  raising

20
Psychological Pricing

• Bundle Pricing
• Including several complementary items in a
  package
• Packaged price is lower than the sum of the
  individual items
• Helps to sell items that may not otherwise have
  been purchased

21
Psychological Pricing

• Promotional Pricing
• Enacted when sales are down
• Loss-leader
• Special-event
• Reduced due to some event, holiday, or special
  circumstance
• Different from promotional discount because of
  specific time limit or promotion

22
Psychological Pricing

• Price Lining
• Offer all merchandise in a given category at
  certain prices
• Must be careful to create clear distinction in
  levels of price
• Shirts selling for 25, 35, and 50, instead of
  26, 27, and 29
• Portrays clear difference in quality

23
Pricing Techniques

• Discount pricing
• Lower prices based on the customer fulfilling or
  performing certain requirements
• Cash Discount
• Offered to get customers to pay quickly
• 2/10 net 30 2 discount if paid within ten
  days, otherwise, full amount due in 30 days

24
Discount Pricing

• Quantity discounts
• Non-cumulative discounts
• Offered on one order only
• Cumulative discounts
• Can be acquired over time, i.e. free coffee after
  12 purchases

25
Discount Pricing

• Trade Discounts
• Given to wholesalers retailers from
  manufacturers
• Manufacturers set a List Price, then give a
  Series Discount to retailers and wholesalers in
  turn
• Seasonal Discounts
• Attempt to get customers outside of typical
  season
• After Christmas discounts are more profitable
  than warehousing for a year

26
Discount Pricing

• Promotional Discounts Allowances
• Manufacturers give discounts to retailers that
  promote their items
• Rebates are discounts offered to consumers
• Partial refund of money
• Trade-in allowances are reductions for the return
  of older or outdated models