Or, how to make people pay for a load of old tat $ $ Pricing Or, how to make people pay for a load of old tat

What is a Price? Signal to the buyer that the seller will trade Sometimes a price indicates: Minimum that seller will accept Starting point for negotiation Indicator of quality? (unreliable)

What is a Price (cont’d)? Revenue is R=PxS (Price x Sales) Depends on total costs = Fixed + variable costs Seller’s fixed costs (do not vary with sales) eg rent Variable costs (increase with each unit sold) eg stock Revenue should be greater than total costs TC=FC+VC (seller makes a profit) P x S > FC + VC

Methods of pricing there are many methods of pricing – this is just a simple intro…

Competitive Pricing Price based on the price of competitors Usually the same as competitors Sometimes undercutting competitors slightly Advantages: easy to set price, responsive Disadvantages: no relationship to costs possible to set competitive price lower than own costs, leading to negative profit (cost > price  loss) “Price leader” situation one dominant player sets prices, others follow eg Ebay pricing sets the base price for other online auction pricing Illegal to force others to set a price (price-fixing)

Cost-plus pricing Price: Average Cost plus a mark-up Used in: Retailing, especially large variety sales such as supermarkets Examples: Average Cost + 40% Average Cost + 10c Advantages: simple to administer, price>cost always, easy to automate Disadvantages: inflexible, not responsive to customers or competition

Penetration Pricing Significantly lower price than competitors Price aimed at rapidly building market share Goal: High sales, low profit Extreme version = Loss Leader (price below cost to recover profit elsewhere, eg CostCo) Used in: introducing a new product, repositioning an old product Advantages: Low price attracts consumers Disadvantages: temporary effect because most competitors respond with their own price-cutting low (or negative) profit margin is a risk to the seller’s profitability Possibility of (illegal) Predatory Pricing (or Destroyer Pricing) pricing intended to destroy competition, with losses recovered by price gouging later

Market Skimming or Prestige Pricing Higher price than competitors Justified by quality or an intangible benefit “snob value” Used in: high-end retail such as fashion & cosmetics; motor vehicles; real estate Advantage: Attracts an elite (wealthy) clientele  very high profit Disadvantage: Small volumes are vulnerable to changes in economic circumstances  “boom and bust” cycle likely Case study: Helena Rubinstein cosmetics during 1930s (Great Depression)