Chapter 26

Pricing Strategies

Pricing Concepts 26.1• After finishing this section, you will know:

– The three basic pricing concepts involving cost, demand, and competition

– The concepts of pricing forward vs. pricing backward

– The idea of one-price vs. flexible-price policy– The two polar pricing policies for introducing a

new product

Basic Pricing Strategies

• You need to find the right price for the target market

• There are three concepts to consider in determining the price of a product

Basic Pricing Strategies

1. Cost-Oriented Pricing• Calculate the costs of acquiring or

making a product and expenses of doing business

• Add projected profit margin to arrive at a price

Basic Pricing Strategies• Markup pricing- used by wholesalers and

retailer involved in acquiring goods for resale• Markup- the difference between the price of

an item and its cost expressed as a percentage

• Must be high enough to cover the expenses of running a business and include intended profit

Basic Pricing Strategies• Cost-Plus pricing- all costs and expenses are

calculated, and then the desired profit is added to arrive at a price

• Used by manufacturers and service companies

• All fixed and variable expenses are calculated separately for different goods and services

Basic Pricing Strategies

2. Demand-Oriented Pricing

• Attempt to determine what consumers are willing to pay for goods and services

• Price must be in line with the consumers’ perceived value of the goods

Basic Pricing Strategies• Effective when there are few

substitutes for a product and there is demand elasticity– Customers will higher prices because they

believe an item is different

• Sometimes prices do not reflect major differences in the good or service, but demand

Basic Pricing Strategies3. Competition-Oriented Pricing• Marketers who study their competitors in

order to set prices• Marketers have three choices after they

learn the price their competitors are charging:

– Price above the competition– Price below the competition– Price in line with the competition

Basic Pricing Strategies

• Competitive bid pricing- determines the price for a product based on bids submitted by competitors to a company or government agency

Combining Pricing Considerations• Most marketers use all three pricing

policies to determine prices

• Cost-oriented pricing helps determine the price floor for a product

• Demand-oriented pricing determines a price range for the product defined by the price floor and the ceiling price

Combining Pricing Considerations• Competition-oriented pricing is used

to assure the final price is in line with the company’s pricing policies

• Manufacturers may also consider the prices they will charge wholesalers and retailers

Combining Pricing Considerations• This can be done two ways:

– Work backward from the final retail price– Work forward from costs and expenses to

the final retail price

Pricing Policies and Product Life Cycle• Every business must make a choice

between a one-price and a flexible-price policy

One-Price vs. Flexible-Price Policy• One-price policy- all customers are

charged the same price for the goods and services offered for sale

• Price tags, signs, no deviations permitted

One-Price vs. Flexible-Price Policy• Flexible-price policy- customers pay

different prices for the same type of amount of merchandise

• Permits customers to bargain for merchandise

• Not common in retail stores• Becoming popular for e-tailing by

means of online auctions

Product Life Cycle

• Products move through four stages:

• Introduction, growth, maturity, and decline

New Product Introduction• Skimming pricing- sets a very high price for a

new product• Used when demand is greater than supply• Price has to be lowered once the market for

the product changes to more price-conscious• A disadvantage is that the initial price attracts

competition, and price set above what consumers are willing to pay

New Product Introduction• Penetration pricing- the initial price for a new

product is set very low• Encourages as many people as possible to

buy the product and penetrate the market• Most effective in the sale of price-sensitive

products• Captures a large number of customers in a

short period of time• Will not work if the product is not in high

demand

Other Product Stages

• Pricing in later stages depends on the initial method used

Skimming

• Monitor closely, when sales level off, price should be lowered

Penetration• Very little change will be made during

the growth stage• Promotions are used to keep sales high• The principal goal during the maturity

stage is to stretch the life of the product– Some companies revitalize products– Others seek new markets in the global

market place

Penetration

• Sales decrease and profit margins are reduced in the decline stage– Companies are forced to reduce prices in

order to generate sales

Assignment

• Page 473– Reviewing Key Terms and Concepts– #1-5– Thinking Critically– #6

Setting Prices 26.2

• After finishing this section, you will know:– The various pricing techniques– The steps in setting prices

Pricing Techniques

• There are two types of pricing techniques:

• Psychological

• Discount

Psychological Pricing

• Psychological pricing –techniques that create an illusion for customers or that makes shopping easier

• Appeal to particular market segments because of shared perceptions and buying habits

Psychological Pricing• There are seven psychological pricing

techniques:1. Odd-even pricing- setting prices that

end in odd or even numbers• odd numbers- convey a bargain

image• Even numbers- convey a quality

image

Psychological Pricing2. Prestige pricing- sets higher-than-average

prices to suggest status and prestige• many consumers believe that higher prices

mean higher quality

3. Multiple-unit pricing- suggest a bargain and helps increase sales volumes

• 3 for $.99

Psychological Pricing

4. Bundle pricing- including several complementary products in a package sold at a single price

• Price is lower than if all products were purchased separately

Psychological Pricing5. Promotional pricing- used with sales

promotions when prices are lower than average

• Loss-leader pricing- increases store traffic by offering popular items for low prices

• Special-event pricing- items are reduced in price for a short period of time based on an event

Psychological Pricing

6. Every day low prices (EDLP)- low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future

7. Price lining- requires a store to offer merchandise in a given category at certain prices

Discount Pricing

• Discount Pricing- sellers offering reductions from the usual price

• Granted for the buyer’s performance of certain functions

Discount Pricing

• There are five types of discount pricing techniques:

1. Cash discounts- offered to buyers to encourage them to pay their bills quickly

• 2/10 net 30

Discount Pricing

2. Quantity discounts- offered to buyers for placing large orders

• Noncumulative- offered on one order

• Cumulative- offered on all orders over a period of time

Discount Pricing3. Trade discounts- not really discounts

but rather the way manufacturers quote prices to wholesalers and retailers

• Suggested retail prices are set• Distribution channel members are

quoted discounts from the list price for performing functions

Discount Pricing4. Seasonal discounts- offered to buyers

willing to buy at a time outside the customary buying season

5. Promotional discounts and allowances- offered to wholesalers and retailers willing to advertise or promote products

• Can be in the form of percentage discounts or free merchandise

• Can be offered directly to the consumer

The Six Steps for Determining Price1. Determine pricing objectives- what is

the purpose in setting a pricea. Do you want to increase sales volume or

sales revenue?

b. Establish a prestigious image for your product and your company?

c. Increase your market share and market position?

The Six Steps for Determining Price2. Study costs- give careful consideration to

the costs involved in making or acquiring goods

a. Determine how to reduce costs without affecting the quality or image of the product

3. Estimate demand- use market researcha. Set prices at a level that consumers are willing

to pay

The Six Steps for Determining Price4. Study competition- investigate

competitor prices for similar products

5. Decide on a pricing strategy- choose a higher, lower, or in line price

6. Set price- set an initial price and be prepared to monitor and evaluate the effectiveness

Assignment

• Page 480– Reviewing Key Terms and Concepts– #1-5– Thinking Critically– #6