Chapter 17/18 Pricing / Pricing Strategies

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Chapter 17/18 Pricing / Pricing Strategies

• Describe typical company pricing objectives
• Discuss Market Share vs. Sales
• Review Break-Even Analysis
• Skimming vs. Penetration
• Illegal Pricing

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PRICING OBJECTIVES

• Management should decide on its pricing objective
  before determining the price itself.
• Profit-oriented objectives
• Achieve a target return pricing product to
  achieve a specified percentage return on sales or
  investment.
• Maximize profits followed by the most
  companies.
• Sales oriented goals
• Increase sales volume.
• Maintain or increase market share.
• Status quo goals
• Stabilize prices.
• Meet competition. (Typically commodity products)

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ESTIMATED DEMAND

• When pricing, a company must estimate demand for
  the product
• Can we make a profit selling at consumers
  Expected Price?
• Expected price The price that shows what
  customers think the product is worth.
• Price MUST be within Expected Range!
• Too High Doesnt make it to market
• Too Low Consumers wont buy (Inverse Demand)
• Ex-Wifes Leather Pocketbook

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The Bookstore Problem(Which book do you stock?)
VS.
Retail Price 18.00
Retail Price 7.00
Retailer Cost 13.50
Retailer Cost 4.00
Gross Margin
Gross Margin
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COST OF A PRODUCT

• Ill assume that you know the difference between
  fixed/variable cost, etc.

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PRICING OF MIDDLEMEN

• Different types of sellers require different
  percentage markups because of the nature of the
  products handled and the services offered
• Low-turnover products (jewelry) need much larger
  markups than high-turnover products (groceries).
• Sellers that offer many services require larger
  markups than those that offer few.

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PRICE VS. NONPRICE COMPETITION

• In price competition, a seller regularly offers
  products priced as low as possible and
  accompanied by a minimum of services.
• In price competition, sellers attempts to move up
  or down their individual demand curves by
  changing prices.
• In nonprice competition, a seller maintains
  stable prices and attempts to improve their
  market positions by emphasizing other aspects of
  marketing.
• In nonprice competition, sellers attempt to shift
  their demand curves to the right using other
  marketing techniques and strategies.

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Price elasticity of demand
Elastic demand (Egt1) Percentage change in
quantity demandedis greater than percentage
change in price
Unitary demand (E1)
Percentage change in quantity demanded is equal
to percentage change in price
Price (P)
Inelastic demand (Elt1)
Percentage change in quantity demanded is less
than percentage change in price
Quantity (Q)
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Strategic Pricing Objectives

• Objectives
• Goal-setting/Objective-setting
• Pricing to achieve a target ROI
• Pricing to stabilize price and margin
• Pricing to reach a target market share
• Pricing to meet or prevent competition
• Pricing for profit maximization
• Price as a positioning Tool
• Pricing for survival

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Pricing Strategies

• Market Skimming
• Setting a high initial price with the expectation
  of lowering price as demand picks up
• When to use
• Demand highly Inelastic
• High Entry Barriers
• Status Product / New, Highly desirable
• Production Concerns...

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Pricing Strategies

• Market Penetration
• Setting a low initial price to reach the
  mass-market immediately
• When to use
• Demand is Highly Elastic
• Economies of Scale possible/available
• Many established competitors

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PsychologicalPricing
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Psychological Pricing

• Price-Quality Relationship
• Odd-Pricing
• Price Bundling
• Multiple-Pricing
• The lure of the middle way
• Blind-Item Pricing
• Plumbing Example

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PriceDiscrimination
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Price Discrimination

• Charge different prices to different
  people/organizations depending upon any number of
  factors

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Other Forms of Price Discrimination

• Pricing for different segments
• Geographic segments
• Different prices in different zones
• Usage segments
• Different prices for high volume users
• Demographic segments
• Different prices for students, children, etc.
• Time segments
• On- and off-season rates

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Geographic Pricing Policies
FOB Pricing
Uniform Delivered Pricing
Zone Pricing
Basing-Point Pricing
Easy Stuff...
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TradeDiscounts /Allowances
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Price Discounts/Allowances
To Trade

• Compensate the trade for functions performed
• Buying Selling
• Transportation
• Storage
• Financing
• Risk-taking
• Providing Information
• Standardizing Grading

Functional Or Trade
Seasonal
Quantity
Cash
Sales Promotion
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Price Flexing Discounts/Allowances
To Trade
Functional Or Trade

• Discounts based on time of year.

Seasonal
Quantity
Cash
Sales Promotion
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Price Flexing Discounts/Allowances
To Trade
Functional Or Trade

• Induce larger-quantity purchases and to reward
  customers for making fewer purchases but
  purchasing in larger quantities

Seasonal
Quantity
Cash
Sales Promotion
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Price Flexing Discounts/Allowances
To Trade
Functional Or Trade

• Two percent off the total invoice price if paid
  within 10 days of the invoice date. Otherwise
  the total invoice price is due in 30 days

Seasonal
Quantity
Cash
Sales Promotion
2/10, Net 30
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Price Flexing Discounts/Allowances
To Trade
Functional Or Trade

• Used by producers to encourage greater purchases
  or used to induce retailers to provide shelf or
  display space

Seasonal
Quantity
Cash
Sales Promotion
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Illegal Pricing Policies
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• Price Discrimination
• Violation of Robinson-Patman Act
• Illegal only when business to business
• Exception for cost justification
• Exception for competitor price matching
• Exception for no apparent harm to competition

• Resale Price Maintenance
• When a manufacturer and retailer agree on a
  minimum price to be charged to consumers at
  retail
• Manufacturers can set suggested prices (MSRP)
• Legal to stop selling to retailers who ignore MSRP

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• Exaggerated Comparative Price Advertising
• Using comparison prices of dubious validity
• Product introduced at artificially high prices
  for a short time then dropped to a new low
  long-term price

• Predatory Pricing
• Aggressive pricing to drive out newer, smaller
  rivals
• After removal of rival, prices are raised again

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RetailPricing Math
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Mark-up Pricing
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Initial and Maintained Markups

• Initial markup retail selling price initially
  placed on the merchandise - cost of goods sold
• Maintained markup Actual sales that you get for
  the merchandise - cost of goods sold
• Whats going to be larger, initial markup, or
  maintained markup?

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Setting Up the Problem
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Determining the Initial Retail Price Under
Cost-Oriented Pricing (Con.)

• A third method of solution is
• Retail Cost ? (1-markup)

This is the EASY way to calculate Cost-Based
Mark-ups!
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Results of Pricing Test
Marketing is about Maximizing Profit/Gross
Margin not increasing sales!