Pricing Process Strategies Chapter 26.2

Objectives 1. Describe pricing strategies that adjust the base price 2. List the steps involved in determining a price 3. Explain the use of technology in the pricing function

The Main Idea Price adjustments allow businesses to stay competitive. The right Pricing strategy can help increase sales and profitability. Price adjustments allow businesses to stay competitive. The right Pricing strategy can help increase sales and profitability.

Vocabulary Product Mix Pricing Strategies Involves adjusting prices to maximize the profitability for a group of products rather than for just one item. One product may have a small profit margin, while another may be high to balance the effect of the lower priced one. Price Lining A pricing technique that sets a limited number of prices for specific groups or lines of merchandise. Bundle Pricing A company offers several complementary, or corresponding, products in a package that is sold at a single price

Vocabulary Geographical Pricing Refers to price adjustments required because of different shipping arrangements Segmented Pricing Strategy Uses two or more different prices for a product, though there is no difference in the item’s cost. Buyer Identification Recognizing a buyer’s sensitivity to price (demand elasticity) is one way to identify a customer segment.

Vocabulary Product Design Manufacturers may also create different prices for different product styles that do not reflect the cost of making the item, instead, the demand for a given style is the cause of difference. Purchase Location Pricing according to where a product is sold and the location of the good or service. Time of Purchase Some types of businesses experience highs and lows in sales activity. During peak times, they are able to charge more because of increased demand.

Vocabulary Psychological Pricing Strategies Strategies are pricing techniques that help create an illusion for customers. Odd-Even Pricing involves setting prices that end in either odd or even numbers. Odd numbers convey a bargain image; even numbers convey quality. Prestige Pricing involves setting higher-than-average prices to suggest status and prestige. Multiple-unit Pricing involves pricing items in multiples to suggest a bargain and increase sales volume.

Vocabulary Everyday Low Price (EDLP) are low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future Loss Leader Pricing provides items at cost to attract customers.. Special Event prices are reduced for a short period of time, such as a holiday sale. Rebates and Coupons Partial refunds provided by the manufacturer to consumers.

Product Mix Strategies Product mix pricing strategies  Involves adjusting prices to maximize the profitability for a group of products rather than for just one item.  One product may have a small profit margin, while another may be high to balance the effect of the lower-priced ones.  These strategies include price lining, optional product pricing, captive product pricing, by-product pricing, and bundle pricing.

Product Mix Strategies  Price lining  Price lining is a pricing technique that sets a limited number of prices for specific groups or lines of merchandise.  A store might price all its blouses at $25, $35, and $50. Marketers must be careful to make the price differences great enough to represent low, middle, and high-quality items. Price lines of $25, $26, $27 and $28, for example would confuse customers because they would have difficulty figuring out their basis.

Product Mix Strategies  An advantage of a price lining is that the target market is fully aware of the price range of products in a given store.  In addition, price lining makes merchandising and selling easier for sales people who can readily draw comparisons between floor and ceiling prices.

Product Mix Strategies  Optional Product  Optional Product pricing involves setting prices for accessories or options sold with the main product. Example, cars – options changes the price  Captive Product  Captive Product pricing sets the price for one product low but makes up for it by pricing the supplies needed to use that product high, ink-jet printers are low in price, but the ink cartridge required for the printers have high markups.

Product Mix Strategies  By-Product  By-Product pricing helps businesses get rid of excess materials used in making a product by using low prices. Wood chips that are residual by-products from making furniture may be sold at a very low price to other manufacturing companies that use wood chips in making their products.

Product Mix Strategies  Bundle Pricing,  Bundle Pricing, a company offers several complementary, or corresponding, products in a package that is sold at a single price. The one price for all the complementary products that go with the main item is lower than if a customer purchased each item separately. An example of bundle pricing is when computer companies include software in the sale price of a computer.  Bundling helps businesses sell items that they many not have sold otherwise.  Bundling increases a company’s sales and revenue.

Geographical Pricing  Geographical Pricing  Geographical Pricing refers to price adjustments required because of different shipping agreements.  The FOB (Free On Board) origin or point-of-production shipping arrangement would not require a price adjustment because the customer pays the shipping charges.

International Pricing  International Pricing  International Pricing – When doing business internationally, marketers need to set prices that take into consideration costs, consumers, competition, laws, regulations, economic conditions, and the monetary exchange rate. Costs may include shipping, tariffs, or other charges.

Segmented Pricing Strategies A Segmented Pricing Strategy uses two or more different prices for a product, though there is no difference in the item’s cost. Four factors can help marketers use segmented pricing strategy 1.Buyer Identification 2.Product Design 3.Purchase Location 4.Time of Purchase

Segmented Pricing Strategies Recognizing buyer’s sensitivity to price (demand elasticity) Example, senior citizens and student discounts, customer loyalty cards Buyer Identification Different prices for different product styles that do not reflect the cost Example, a black washer and dryer is usually higher than a white set. Product Design Involves pricing according to where a product is sold and the location for the good or service. Example, Tickets for a Broadway show in NYC will be priced higher than those for the same show when it goes on the road. Purchase Location Some types of businesses experience highs and lows in sales activity Example, during peak times, cell phone and telephone companies can charge more Time of Purchase

Psychological Pricing Strategies Psychological Pricing strategies are pricing techniques that help create an illusion for customers. They are often based on a buyer’s motivation for making a purchase and purchasing habits Some common psychological pricing techniques are odd-even pricing, prestige pricing, multiple-unit pricing and everyday low prices (EDLPs)

Odd-Even Pricing A technique that involves setting price figures that end in either odd or even numbers. Based on the psychological principle that odd numbers ($0.79, $9.95, $699, $1.99) convey a bargain image Even numbers ($10, $50, $100) convey a quality image.

Prestige Pricing Prestige Pricing sets higher than average prices to suggest status and high quality to the consumer. Many customers assume that higher prices mean better quality. Examples:

Multiple-Unit Pricing Some businesses have found that pricing items in multiples, such as three for $1.00, is better than selling the sale items at $.34 each. Multiple-unit pricing suggests a bargain and helps to increase sales volume.

Everyday Low Price Everyday Low Prices (EDLP) are low prices set on a consistent basis with no intention of raising them or offering discounts in the future. EDLP are not as deeply discounted as promotional prices, which creates sales stability.

Promotional Pricing Promotional Pricing is generally used in conjunction with sales promotions wherein prices are reduced for a short period of time. Common types of promotion pricing are loss leader pricing, special event pricing and rebates and coupons.

Promotional Pricing Loss Leader Pricing Used to increase store traffic by offering very popular items for sale at below-cost prices. Special Event Items are reduced in price for a short period of time, based on a specific event. Presidents Day, back-to-school sales Rebates and coupons Partial refunds provided by the manufacturer to consumers. To receive the rebate, a customer buys the product, and then sends in a rebate form along with the products proof of purchase and store receipt.

Discount and Allowances Discount pricing involves the seller offering reductions from the usual price. Such reductions are generally granted in exchange for the buyer performing certain actions. These include –cash discounts, –quantity discounts, –trade discounts, –seasonal discounts, and –special allowances.

Discount and Allowances Trade Discounts Cash discounts are offered to buyers to encourage them to pay their bills quickly. Terms are generally written on the invoice. Quantity Discounts Quantity discounts are offered to buyers for placing large orders. Sellers benefit from large orders through the lower selling costs involved in one transaction, as opposed to several small transactions. Two types of quantity discounts Noncumulative - discounts offered on one order Cumulative – discounts offered on all items purchased over a specific period of time. Trade Discounts Trade discounts are not really discounts at all but, rather the way manufacturers quote prices to wholesalers and retailers. Many manufacturers establish suggested retail prices, or list prices, for their items. They grant discounts from the list price to members of the channel of distribution.

Discount and Allowances Seasonal Discounts Discounts offered to buyers who are willing to buy outside the customary buying season. Example, buying a swimsuit during winter months. Allowances Trade in allowances go directly to the buyer. Customers are offered a price reduction if they sell back an old model of the product they are purchasing

The Pricing Process Determining Prices  There are 6 steps used to determine prices: 1.Establish pricing objectives 2.Determine costs 3.Estimate demand 4.Study competition 5.Decide on a pricing strategy 6.Set prices

Determining Prices Step 1 – Establish Pricing Objectives Objectives must conform to the company’s overall goals; making profit, improving market share, and meeting the competition. Pricing objectives should be specific, time sensitive, realistic, and measurable. Step 2 – Determine Costs For wholesalers and retailers, money owed to vendors plus freight charges equals the cost of an item. Service providers must consider the cost of supplies plus the cost of performing the service.

Determining Prices Step 3 – Estimate Demand Marketers study the size of the market to determine the total number of possible customers for a given product. From their basic research, marketers estimate the percentage of potential customers who might buy that new product. Step 4 – Study Competition You need to investigate what prices your competitors are charging for similar goods and services.

Determining Prices Step 4 – Decide on a Pricing Strategy You need to revisit the pricing objectives and decide on a pricing strategy or strategies that will help you accomplish your objectives. Step 4 – Set Prices Setting the published price that you see on price tickets, Web sites, price sheets, catalogs, and promotional materials is the final step. It is important that all the above steps are carefully considered.

Pricing Technology Technology applications for pricing are evident in the data that are now made available to marketers when making pricing decisions. Smart Pricing Allows marketers to make intelligent pricing decisions based on enormous amounts of data. Web-based pricing technology crunches this data into timely, usable information. Software that combines sales data with inventory data results in pricing recommendations, which the pricing team can accept, revise, or reject.

Pricing Technology Communicating Prices to Customers Electronic gadgets provide customers with real-time pricing information. Retailers that invest in electronic shelves and digital price labels can change prices quickly and easily. RFID Technology Advanced technology that may revolutionize pricing and inventory control is called “radio frequency identification,” or RFID. RFID is wireless technology that involves tiny chips embedded in products. A chip has an antenna, a battery, and a memory chip filled with a description of the item for sale.

Reviewing Key Terms and Concepts 1.How are odd-even, prestige, multiple-unit, and bundle pricing related? Different? 2.What is the main difference between promotional pricing and everyday low prices? 3.Identify the key factor in deciding price lines 4.Explain why bundling discourages comparison shopping