Pricing Strategies and Tactics Chapter Twenty Pricing Strategies and Tactics

Objectives Identify various pricing strategies Discuss differential pricing strategies Describe skimming and penetration pricing Demonstrate competition’s effect on pricing Discuss inflation’s effect on pricing Discuss product-line pricing strategies Explore psychological aspects of price Demonstrate geography’s influence on pricing Discuss varied pricing tools Overview legal restrictions on pricing Identify a major ethical issue related to price

Pricing Strategies Differential pricing strategies Competitive pricing strategies Product-line pricing strategies Psychological and image pricing strategies Distribution-based pricing strategies

Differential pricing strategies $24.95 Different buyers pay different prices $22.00 100 units for $2,000 155 Russian rubles each

Differential Pricing Strategies Types: Variable Pricing Second-Market Discounting Skimming Periodic discounting Random discounting $24.95 $22.00 100 units for $2,000 155 Russian rubles each

Price Skimming Pricing high, usually at the beginning of a product’s life Examples: personal computers CDs electronics

Competitive Pricing Strategies Types: Meeting competition Undercutting competition Price leadership Follow the leader Penetration pricing Predatory pricing Traditional Inflationary

Penetration Pricing Low introductory price to establish product quickly in market When to use: Elastic demand Economies of scale Threat of strong competition

Product-Line Pricing Strategies Captive pricing Leader and Bait pricing Price lining $45.99 $39.99 $24.99 $19.99 Price-bundling & Multi-unit

Psychological & Image Pricing Odd/Even Pricing $1.87$4.95$9.99 $175 $1000 Regular price: $45 Now Only: $25 Reference Pricing Prestige Pricing

Distribution-Based Pricing X F.O.B Delivered Zone Uniform Basing-point

Markups Manufacturer Wholesaler Retailer Cost $20.00 20% markup $ 5.00 Selling price $25.00 Wholesaler Cost $25.00 15% markup $ 4.41 Selling price $29.41 Retailer Cost $29.41 41% markup $20.59 Selling price $50.00

Establishing Exact Prices Markup on Selling Price and on Cost Cost-Plus Method Break-even Analysis Target Return Pricing Average Cost

Establishing Exact Prices Markup on Selling Price or Costs: = % markup Amount added on ------------------------ Selling price Cost-Plus Method: Cost + Amount added on = Price

Establishing Exact Prices Average-cost method: All costs ------------------------ = # Units produced Average cost of a single unit Target Return Pricing: Fixed costs + Target return -------------------------------------- = Units to be sold Price per unit

Break-Even Analysis Total Revenues Profit Cost &Revenue ($) Units produced & sold Cost &Revenue ($) Loss Profit Break- even point Total Costs Fixed Costs

Price Adjustments Cash discounts Trade discounts Quantity discounts Seasonal discounts Chain discounts Promotional allowances 36

Pricing and the Law ROBINSON-PATMAN ACT OF 1936 Discriminatory prices illegal unless…. Charged to meet competition Justified by cost savings

Pricing and the Law Fair Trade Practices Act and their repeal in 1975 States: manufacturers may fix final selling price Federal gov’t: illegal if good sold in different state

Pricing and Ethical issues Are corporate social policy and corporate profit motive compatible?

Review Identify various pricing strategies Discuss differential pricing strategies Describe skimming and penetration pricing Demonstrate competition’s effect on pricing Discuss inflation’s effect on pricing Discuss product-line pricing strategies Explore psychological aspects of price Demonstrate geography’s influence on pricing Discuss varied pricing tools Overview legal restrictions on pricing Identify a major ethical issue related to price