copyright © 2011 pearson education chapter 10. copyright © 2011 pearson education is governed...

Copyright © 2011 Pearson Education

CHAPTER CHAPTER 1010


Is governed both by art and science. Requires balancing a multitude of complex

forces. Influences every aspect of a small

company. Is an important signal of a product’s or

service’s value to customers. Involves both math and psychology.

Ch. 10: Pricing Strategies

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Price sends important signals to customers: Quality, prestige, uniqueness, and others.

Common small business mistake: Charging prices that are too low and failing to recognize extra value, service, quality, and other benefits they offer.

Study: Only 15 to 35% of customers consider price to be the chief criterion when making a purchase.


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Must take into account competitors’ prices, but it is not always necessary to match or beat them.

Key is to differentiate a company’s products and services.

Price wars often eradicate companies’ profits and scar an industry for years.

Best strategy: Stay out of a price war!

Ch. 10: Pricing Strategies10 - 4


The “right” price for a product or service depends on the value it provides for a customer.

Two aspects of price:

◦Objective value

◦Perceived value – determines the price customers are willing to pay.

Value is not synonymous with low price.



Pass along rising costs Explain the reasons behind price increases Focus on improving efficiency Consider absorbing cost increases Modify the product or

service to lower its cost Diversify your product line Anticipate rising costs and try to lock in prices of

raw materials early Emphasize the value of your company’s product or

service to customers


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Copyright © 2011 Pearson EducationCh. 10: Pricing Strategies

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What Determines Price?What Determines Price?

Price CeilingPrice Ceiling - - What will the market bear?What will the market bear?

Price FloorPrice Floor - - What are the company's costs?What are the company's costs?

AcceptableAcceptablePricePrice

RangeRange

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Final PriceFinal Price - -What is the company's What is the company's

desired "image?"desired "image?"

Final PriceFinal Price - -What is the company's What is the company's

desired "image?"desired "image?"

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FIGURE 10.1

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A pricing technique in which a company sets different prices on the same products and services for different customers using the information that it collects about its customers.



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Three Goals:Three Goals:

1.1. Getting the product acceptedGetting the product accepted Revolutionary productsRevolutionary products Evolutionary productsEvolutionary products Me-too productsMe-too products

2.2. Maintaining market share as Maintaining market share as competition growscompetition grows

3.3. Earning a profitEarning a profit


3 Basic Strategies: Market penetration: a firm introduces the

product with a low price for gaining competitors' customers

Skimming: in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time

Sliding-down-the-demand-curve: introduces a product at a high price. Then, technological advancements enable the firm to lower its costs quickly and to reduce the product's price sooner than its competition



Odd pricing 1.99 instead of 2.0 Price lining: price ranges, or price lines. 99, 199, 299 Leader pricing: Marks down of a popular item in an attempt

to attract more customers. Geographical pricing: region, area, zone….. Opportunistic pricing: When products or services are in short

supply, customers are willing to pay more for products they need

Discounts: price reduction designed to encourage shoppers to purchase merchandise prior to an upcoming season

Bundling: The practice of offering two or more products or services for sale at one price.

Optional-product pricing; Pricing optional or accessory products

Captive product pricing: Pricing products that must be used with the main product

Byproduct pricing: Pricing low value by product to get rid of them

Suggested retail prices: print suggested retail prices on their products or include them on invoices or in wholesale catalogs



Dollar Markup = $25 - $14 = $11


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Dollar Markup = Retail Price - Cost of MerchandiseDollar Markup = Retail Price - Cost of Merchandise

Percentage (of Retail Price) Markup = Percentage (of Retail Price) Markup = Dollar MarkupDollar Markup

Retail PriceRetail Price

Percentage (of Cost) Markup = Percentage (of Cost) Markup = Dollar MarkupDollar MarkupCost of UnitCost of Unit

Example:Example:

Percentage (of Retail Price) Markup = Percentage (of Retail Price) Markup = $11$11

$25$25 = 40.0%= 40.0%

Percentage (of Cost) Markup = Percentage (of Cost) Markup = $10$10

$14$14= 78.6%= 78.6%


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Direct costing and pricingDirect costing and pricing Absorption costingAbsorption costing Variable or direct costingVariable or direct costing

BreakevenBreakeven


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BreakeveBreakeven n

SellingSelling

Price Price

QuantitQuantityy

ExamplExample:e:

= ProfiProfitt

Variable Variable cost per cost per unitunit

produceproducedd

Total Total fixed fixed costscosts++

{{ xx

}} ++

Quantity Quantity producedproduced

Breakeven Breakeven

SellingSelling

Price Price = $0$0 6.98/6.98/

unitunit50,000 50,000

unitunit

$110,00$110,0000

+ { xx }+

50,000 50,000 unitsunits

= = $9.18 per unit$9.18 per unit


Price per Hour = Total cost per x 1


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productive hour (1 - net profit targetproductive hour (1 - net profit target as a % of as a % of

sales)sales)Example: Ned’s TV Repair ShopExample: Ned’s TV Repair Shop

Price per Hour = $18.59 per hour x Price per Hour = $18.59 per hour x 1 1 (1 - .18)(1 - .18)

= $22.68 per hour= $22.68 per hour


Credit cards – typical consumer has 4 credit cards.◦ Research: Customers who use credit cards make

purchases that are 12% higher than if they had used cash.

◦ On a typical $100 credit card purchase, cost to business = $2.29


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Credit cards – typical consumer has 4 credit cards.◦ Research: Customers who use credit cards make

purchases that are 12% higher than if they had used cash.

◦ On a typical $100 credit card purchase, cost to business = $2.29


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Installment creditInstallment credit Trade creditTrade credit


About 2 percent of online credit card transactions are fraudulent.

Steps:◦ Use an address verification system◦ Require a CVV2 number◦ Check customers IP addresses◦ Monitor Web site activity with analytics◦ Verify large orders◦ Post notices on Web site that your company

uses anti-fraud technologyCh. 10: Pricing Strategies

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copyright © 2011 pearson education chapter 10. copyright © 2011 pearson education is governed...

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