Pricing Strategies

Build, hold, harvest, reposition Strategic Objectives Build, hold, harvest, reposition

Marketing-oriented Pricing Pricing based on product elasticity or the market

Price Elasticity

Supply and Demand Remember: Demand tends to go up when price goes down, and down when price goes up. The degree to which demand for a product is affected by its price is called demand elasticity. Products can had either elastic demand or inelastic demand

Elastic Demand Refers to situations in which a change in price creates a change in demand

Law of Diminishing Marginal Utility The increases in demand would not continue indefinitely At some point consumers will have as much as they want of the product and not buy more Example: You buy 5 bottles of laundry detergent on sale. A week later it is on sale again. Would you buy more?

Inelastic Demand Refers to situations in which a change in price has very little effect on demand for a product.

Factors of Demand Elasticity Brand Loyalty Price Relative to Income Availability of Substitutes Luxury vs. Necessity Urgency of Purchase

Cost-oriented Pricing When businesses first calculate the cost of producing the product and expense of doing business to determine the price

Competitor-oriented pricing When a business creates their price based on their competitors whether is higher, similar, or lower

Skimming/Penetration Strategy Skimming Pricing is a pricing policy that sets a very high price for a new product This is used when demand is greater than supply The business realizes this pricing can only be temporary Example: Nintendo NES Classic Edition Penetration pricing is the opposite of skimming pricing: the price for a new product is set very low. The purpose is to encourage as many people as possible to buy the product, and thus penetrate the market This strategy is used for price- sensitive or elastic demand items This strategy may be used to block competition

One Price/Flexible-Price Policy When all customers pay the same price Prices are quoted on items with price tags and signs Most retail in North America It is consistent and reliable Allows business to estimate sales easier When customers pay different prices for the same type or amount of merchandise This permits customers to negotiate a price Common for vehicles, artwork, antiques Doesn’t offer consistent profits

Product Mix Strategies Price lining: sets a limited number of prices for specific groups or lines of merchandise. For example a store prices their dress shirts at $25, $35, or $50 Optional product: having pricing for different options involved for a single product. For example cars having a upgrade option packages Captive product: price of the product is low, but supplies needed to use it are high. For example printers tend to be priced low, but the ink is expensive By-product: pricing leftovers at a low price to get rid of them. For example selling wood scraps as kindling or wood chips by a furniture company Bundle pricing: selling complementary, or corresponding products in a package. For example a computer coming with preinstalled software

Location Pricing Geographical pricing refers to price adjustments required because of different shipping agreements. Free on Board (FOB) origin or point-of-production shipping arrangements are when the customer pays the shipping and there is no price adjustment, but rather a shipping charge. FOB destination pricing the seller pays shipping and assumes responsibility for shipping until it reaches the buyer. The price usually includes an adjustment prior to sale to cover the shipping. International prices have to consider differences in costs, consumers, competition, laws, regulations, economic conditions, and monetary exchange rates Costs to consider: shipping, tariffs, or other charges

Segmented Pricing Strategy Uses two or more different prices for a product, though there is no difference in the item’s cost Helps optimize profits and compete effectively Four factors Buyer identification Product design Purchase location Time of purchase

Segmented Pricing Strategy Factors Buyer Identification Product Design Recognizing a buyer’s sensitivity to price is one way to identify a customer segment For example offering senior and student pricing First class tickets Loyalty pricing Different prices for different product styles that do not reflect the cost of making the item, but rather the demand For example A coloured washer and dry set priced higher than a white set

Segmented Pricing Strategies Purchase Location Time of Purchase the price is dictated by the location where the good or service is sold For example The cost of a ticket for a Broadway show compared to the ticket for the same show on the road Some businesses experience highs and lows in sales activity During peak times in demand the business can charge a higher price For example Phone companies charging more for long distance during business hours Hotel room charges being higher during peak season for the area

Psychological Pricing Strategies Odd-even Pricing: involves setting price figures that end in either odd or even numbers. Odd pricing ($0.79, $9.95) convey an everyday low price. Even pricing ($10, $50, $100) convey a quality image. Prestige Pricing: higher than average price to convey status and quality Multiple-unit Pricing: selling in multiples suggests a bargain and helps increase sales volume. Selling three items for $1.00 instead of $0.34 each Everyday Low Prices (EDLP): Price is set low with no intention of raising or offering discounts in the future (Walmart) Are pricing techniques that help create an illusion for customers

Promotional Pricing Loss Leader: luring customers in with items priced below cost in hopes they will buy other items at regular price to make up the difference Special-Event: items are reduced in price for a short period of time (Black Friday, Back to School, Boxing Day, etc) Rebates: partial refunds provided by the manufacturer, you will have to submit a rebate form with proof of purchase to manufacturer Coupons: allow customers to take a discount at the time of purchase Generally used in conjunction with sales promotions wherein prices are reduced for a short period of time

Discounts and Allowances Cash Discounts: a discount for paying bills quickly. Invoices will list terms such 2/10, net 30 which means you save 2% if you pay within the first ten days Quantity Discounts: when a buyer receives a money off for purchasing a large quantity of an order. A noncumulative discount would mean you receive the discount only at the time of purchase. A cumulative discount would mean you receive a discount on all orders within a specific time frame. Trade Discounts: not a discount but rather a pricing difference that manufacturers offer to wholesalers versus retailers Seasonal Discounts: buying seasonal items before or after the season they are intended for usually results in discounts to increase sales early or clear stock Trade in Allowances: when you trade in an older item for a discount on a newer version

Steps for Determining Price Establish your pricing objectives Determine your costs Estimate demand Study the competition Decide on a pricing strategy Set your prices

How Technology Helps Pricing Businesses: using web-based data and programs used to match this data with current inventory and recommend pricing in a timely, and convenient method Point-of-sale systems which track inventory from the date of arrival, movement from storage to the store, and sale RFID technology takes a point-of-sale system to another level where all items have a time chip embedded in the product or packaging to place items within the store and trigger security alarms if not deactivated before leaving store Customers: Websites, and applications which provide them with real-time pricing information

Activity: Price it Right! Use the provided magazines to choose a product which you will price for sale in your store. (In groups of 4-5) You must choose a strategy which directly relates to the price you have individually picked The aim of this game is that if you price the product too low you will lose (customers won’t buy your product) and if you price too high you will lose as well The strategy must be right! A winner will be chosen while your group shares. You each have a slip to tear off at the end of this note to complete the activity