Lesson 1 - Pricing VIRTUAL BUSINESS - RETAILING

What is Pricing? The method followed by a business to determine the selling price for its product or service. One of the 4 P’s of Marketing.

Pricing a product usually involves: Developing a marketing strategy Studying and estimating the demand for a product Calculating fixed and variable costs related to a product Predicting competitor strategies Analyzing the target market

Pricing vs. Costing Before a price can be determined, a business should understand the costs that go into that product. If prices do not exceed costs in the long run, the business will fail.

Pricing vs. Costing Costs could include: Property and equipment leases Interest on loans Inventory - materials Utilities Salaries, wages and commissions Damaged products

Pricing vs Costing When you know how much it costs to produce your product, then you can use that as a basis to determine your price. Keeping in mind that the difference between cost and price is the profit you keep.

Cupcakes Determine price for a dozen cupcakes. Set up spreadsheet. Costs: Materials – flour, sugar, baking powder, flavoring, icing, fun stuff Labor – how much labor to bake 144 cupcakes Overhead – rent, insurance, utilities, advertising

Pricing Objectives Setting a price is not as simple as charging more than it costs. A business’s pricing strategy should depend on the company’s objectives.

Common Pricing Objectives Increasing sales Sell the maximum number of product units to decrease long-term costs and increase market share Increasing profit By increasing revenue and decreasing costs Consider competitor’s price Price is based on what competitors are charging

Common Pricing Objectives Maintaining Quality Leadership Price is used to create a perception that the product is a quality leader Recovering Partial Cost Other revenue sources are used to subsidize the price of a product – to increase market share Lower the price below cost to get people to switch to your product, then slowly increase the price when brand loyalty has been established. Maintaining Stability Avoid price wars and achieve price stabilization to maintain profit at a steady level

Cupcakes Now that you know the costs – what price for a dozen? Use the following pricing strategies

Pricing Strategies in Sales Promotions  Skim Pricing Attempt to sell the product at a high price Can be used when: Product is new to the market and there is little competition Demand is fixed and customers are not too price-sensitive High volumes do not assure cost savings Example New innovative suitcase with electronic features

Pricing Strategies in Sales Promotions  Penetration Pricing Maximize the quantity sold and increase market share by lower the price Can be used when Customers are price sensitive and sales will increase as price declines Higher volumes guarantee cost savings Product can gain mass appeal rapidly Competition is intense Example Applebee’s discounted steak dinners

Pricing Strategies in Sales Promotions  Leader Pricing A product or group of products is offered at a lower price to attract customers with the expectation that they will by premium products Products sold at lower price are called Loss Leaders Examples Giving an app for free but charging fees for upgrades

Pricing Strategies in Sales Promotions  Premium Pricing Product is priced at high end of possible price range to create a sense of perceived quality, which will attract status-conscious customers. May work if consumer believe that: High price guarantees quality Buying a premium product indicates they are members of an exclusive group Examples Luxury cars

Pricing Strategies in Sales Promotions  Differentiated Pricing Pricing differently for different customers and different markets 1 st Degree Price Differentiation Product is sold to each customer at a different price. i.e. car dealers 2 nd Degree Price Differentiation Price differs depending on the quantity sold – selling large quantities at a lower unit price Bulk buyers enjoy higher discounts. i.e. restaurant chain ordering for all restaurants 3 rd Degree Price Differentiation Market is divided into segments and the same price is charged to ever consumer in that segment – i.e. giving discounts to students or senior citizens

Pricing Strategies in Sales Promotions  Psychological Pricing Displaying prices which are a few cents less than the next whole amount. Consumer will not round up Will consider the price to be significantly lower, when it’s only slightly lower

Pricing Strategies in Sales Promotions  Discounts and Sales Many people only buy if the item is on sale Discounts Quantity discount – offered to bulk buyers Seasonal discount – based on the time of year that the purchase is made Cash discount – offered if customers pay cash instead of using plastic Trade discount – offered to on-account customers who pay their invoice within a certain number of days.

Pricing Models  Cost-Based Pricing Cost of the product is determined first Then a mark-up is added based on factors such as: Expected profit Sales objectives Customer expectations

Pricing Models  Cost-Based Pricing - Pros Easy way to set a price Reduces decision making in uncertain markets Less risky than other methods Can justify price increase based on cost increases

Pricing Models  Cost-Based Pricing - Cons Ignores role of consumer in determining price No guarantee your customer will pay this price Ignores role of competitors Their prices may be much higher or lower Creates little incentive for cutting costs

Pricing Models  Customer Based Pricing Customer is evaluated to determine what he or she is willing to pay Price is based on that information Used by car salesmen

Pricing Models  Customer Based Pricing - Pros Flexibility to charge different prices to different customers Can maximize profit margins Provides an incentive to offer a quality product and customer service and to keep costs down

Pricing Models  Customer Based Pricing - Cons Can alienate customers to pay more than those who can bargain better Customers can become aggressive bargainers May be difficult to implement in a market where consumers have a lot of options Must still ensure that cost are being covered in the long run

Pricing Models  Competition Based Pricing Prices are fixed using the fair price of the competitors’ products

Pricing Models  Competition Based Pricing - Pros Easy to use – extensive marketing research and statistical analysis are not required Just figure out what your closest couple competitors are pricing

Pricing Models  Competition Based Pricing - Cons Sometimes difficult to know what your competition is pricing Business has less control of their pricing Price may not cover costs enough May be difficult to find a competitor with a product that is similar enough