Chapter 1718 Pricing Pricing Strategies Describe typical company

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

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)

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: Doesn’t make it to market – Too Low: Consumers won’t buy (Inverse Demand) • Ex-Wife’s Leather Pocketbook

The Bookstore Problem (Which book do you stock? ) VS. Retail Price: 18. 00 Retailer Cost: 13. 50 Retail Price: 7. 00 Retailer Cost: 4. 00 Gross Margin $

COST OF A PRODUCT • I’ll assume that you know the difference between fixed/variable cost, etc.

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.

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.

Price elasticity of demand Elastic demand (E>1) Percentage change in quantity demanded is greater than percentage change in price Price (P) Unitary demand (E=1) Percentage change in quantity demanded is equal to percentage change in price Inelastic demand (E<1) Percentage change in quantity demanded is less than percentage change in price Quantity (Q)

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

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. . .

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

Psychological Pricing

Psychological Pricing • • • Price-Quality Relationship Odd-Pricing Price Bundling Multiple-Pricing The lure of the middle way “Blind-Item” Pricing – Plumbing Example:

Price Discrimination

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

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

Geographic Pricing Policies FOB Uniform Delivered Pricing Zone Basing-Point Pricing Easy Stuff. . .

Trade Discounts / Allowances

Price Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Cash Sales Promotion • Compensate the trade for functions performed: – – – – Buying & Selling Transportation Storage Financing Risk-taking Providing Information Standardizing & Grading

Price Flexing Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Cash Sales Promotion • Discounts based on time of year.

Price Flexing Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Cash Sales Promotion • Induce larger-quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities

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

Price Flexing Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Cash Sales Promotion • Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space

Illegal Pricing Policies

• 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

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

Retail Pricing Math

Mark-up Pricing

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 • What’s going to be larger, initial markup, or maintained markup?

Setting Up the Problem Retail Price = Cost + Markup

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!

Results of Pricing Test (5) Unit Price Market Demand at Price (in units) (4) Total Cost of Units Sold Total ($300, 000 fixed Revenue cost + $5 variable (col 1 x col 2) cost) 1 $8 200, 000 $1, 600, 000 $1, 300, 000 $300, 000 2 10 150, 000 1, 500, 000 1, 050, 000 450, 000 3 12 100, 000 1, 200, 000 800, 000 4 14 50, 000 700, 000 550, 000 150, 000 Market (1) (2) (3) Total Profits (col 3 col 4) Marketing is about Maximizing Profit/Gross Margin… not increasing sales!