Dr. Close

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Demographic Considerations  Number of potential buyers  Location of potential buyers  Position of potential buyers  Expected consumption rates of potential buyers  Economic strength of potential buyers

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Psychological Considerations  Related to pricing is concerned with consumer's perception on price changes  Types of psychological pricing strategies  Prestige pricing – High price is charged to create a signal that the product is exceptionally fine  Odd pricing or odd even pricing – Prices are set a few dollars or a few cents below a round number  Bundle pricing – Several products are sold together at a single price to suggest good value

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Price Elasticity  Price elasticity – A measure of consumers’ price sensitivity  Estimated by dividing relative changes in the quantity sold by the relative changes in price

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Supply Influences on Pricing Decisions  Pricing objectives – Should be derived from overall marketing objectives, which in turn should be derived from corporate objectives  Common objectives  Pricing to achieve a target return on investment  Stabilization of price and margin  Pricing to achieve a target market share  Pricing to meet or prevent competition

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Supply Influences on Pricing Decisions  Cost Considerations in Pricing  Markup pricing – Percentage is added to the retailer’s invoice to determine final price  Cost-plus pricing – Costs of producing a product plus desired profit are added to achieve price  Rate-of-return or target pricing – Adding desired rate of return on investment to total costs

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Retail Pricing Strategies: EDLP or High/Low?  Advantages of EDLP  Assures customers of low prices.  Reduces advertising and operating expenses.  Reduces stockouts and improves inventory management.  Advantages of High/Low pricing  Increases profits through price discrimination.  Sales create excitement.  Sells merchandise.

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Product Considerations in Pricing Perishability – Discounting the products as they approach being no longer fit for sale  Distinctiveness – Classified in terms of distinction  Branding and brand equity of products are commonly made distinctive in customers’ minds

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Product Considerations in Pricing  Life cycle – Stage of the life cycle that a product is in can have important implications  Two approaches to pricing  Skimming price policy – Seller changes a relatively high price on a new product  Penetration price policy – Seller charges a relatively low price on a new product

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Environmental Influences on Pricing Decisions  Factors to consider  Number of competitors  Market shares, growth, and profitability of competitors  Strengths and weaknesses of competitors  Likely entry of new firms into the industry  Degree of vertical integration of competitors  Number of products sold by competitors  Cost structure of competitors  Historical reaction of competitors to price changes  Going-rate pricing – Pricing at competition  Sealed-bid pricing – Pricing below competition

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Environmental Influences on Pricing Decisions  Price fixing is illegal  Deceptive pricing practices – Outlawed under Section 5 of the Federal Trade Commission Act  Price discrimination that lessens competition or is deemed injurious to it is outlawed by the Robinson- Patman Act  Promotional pricing such as cooperative advertising and price deals are not illegal

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved A General Pricing Model

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved A General Pricing Model  Set Pricing Objectives  Pricing process begins with a clear statement of the pricing objectives  Guide pricing strategy and should be designed to support overall marketing strategy  Efforts to set prices must be coordinated with other functional areas

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved A General Pricing Model  Evaluate Product – Price Relationships  Priced relatively high – Offers value in the form of high quality, special features, or prestige  Priced at about average – Offers value in the form of good quality for a reasonable price  Priced relatively low – Offers value in the form of acceptable quality at a low price  Value pricing – Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved A General Pricing Model  Analyze Profit Potential  Quantity discounts – Discounts for purchasing large number of units  Promotional allowances – Form of price reductions in exchange for the channel member performing various promotional activities  Slotting allowances – Payment to retailers to get them to stock items on their shelves

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved A General Pricing Model  Set Initial Price Structure  Considers price to various channel members, as well as the recommended price to final consumers or organizational buyers  Change Price as Needed  Channel members may bargain for greater margins  Competitors may lower their prices  Costs may increase with inflation  In the long term, price structures tend to increase for most products as production and marketing costs increase

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Eight Tips for Improving a Company’s Pricing Strategy  Base pricing strategies on sound research in order to understand relevant price factors  Continuously monitor pricing decisions because they often help define company image  Remember that consumers have trouble recognizing subtle price differences  Remember that consumers evaluate prices comparatively  They often use a sense of what they think the item should cost as a benchmark

McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Eight Tips for Improving a Company’s Pricing Strategy  Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits  Understand the importance of relative price to buyers – the relationship between a price and your competitors’ price  Understand the importance of price information and it effects on differentiating products within a product line  Recognize that price elasticity vary – it is easier to lose customers to price increases than gain them from price decreases