chapter Chapter 14: Pricing Strategies

Price  Price: The sum of all the value(s) the consumer gives up to obtain the product or service. –Money –Time –Effort –Foregoing something else you otherwise would have purchased –Brand, image, perception –Level of service, warranty, guarantee

Price  Price is determined by external market issues: –Supply versus demand (availability of substitutes) –Consumer value perceptions –Product costs –Competitor prices  Price is determined by internal strategic goals : –New product that needs to penetrate market? –High quality product that requires a high price? –Commodity or me too product requiring low price? –Trying to position the brand in a particular way? –Trying to knock /differentiate from a competitor?

Price  Prices are set at each step of the supply chain  Price is determined by the cost of the materials coming in, plus the value provided by the channel member (labor, branding, convenience, packaging quantity) ProducerWholesalerRetailer Consumer Producer purchases raw materials, makes the product, then charges a price to the Wholesaler (cost + profit) Wholesaler pays a price to the Producer, then charges a price to the Retailer(cost + profit) Retailer pays a price to the Wholesaler, then charges a price to the Consumer (cost + profit) Consumer pays a price to the Retailer based on their perceived value of the product

Price Terminology  Revenue = Price x Sales Unit –Revenue per unit = $10 x 1 = $10 –Total revenue = $10 x 150 units sold = $1500  Profit = Revenue – Costs –Profit per unit = $10 - $7 cost = $3 –Total profit = ($10 x 150) – ($7 x 150) = $ $1050 = $450

Markup  Markup: The amount the purchaser increases the price before selling the product to the next channel member. –Cost=$15.00 –Selling price=$20.00 –Differential = $5.00 Markup as % of cost = (Selling $ – Cost ) / Cost = $5/$15 = 33% Markup as % of selling price= (Selling – Cost) / Selling = $5/$20 = 25%

Margin  Margin: Percentage of profit received based on the selling price. Margin % on selling price= (Selling $ – Cost) /(Selling $) = $5/$20 = 25%

Margin and Markup Example (p. 721)  Retailer margin goal: 30%  Wholesaler margin goal: 20%  Suggested retail price: $600 –Retail price: $600 –(Less 30% margin for retailer): ($180) –Retailer’s cost/wholesaler’s price:$420 –(Less 20% margin for wholesaler):($84) –Wholesaler’s cost/manufac. price:$336

Pricing Objectives  Profit Oriented: Setting prices so that total revenue is as large as possible relative to total costs  Sales Oriented: Short-term objective to maximize sales –Ignores profits, competition, and the marketing environment –May be used to sell off excess inventory  Status Quo: Maintain existing prices, or meet competitors’ prices

Profit Oriented Pricing  Define costs for the product or service, define the targeted profit, and set price based on these components.  Price Skimming: A form of profit oriented pricing where a high price is charged when introducing a product, often due to lack of competition. Relies on high profit margins per unit and lower sales volume Best when the product has a significant competitive advantage, legal protection, inelastic demand

Profit Oriented Pricing: (Sometimes Called Cost Plus, Markup) 1) Your fixed costs 2) Your variable costs + = 3) Your profit margin +

Sales Oriented Pricing  Price is set to maximize the units sold, typically using low profit margin targets.  Penetration Pricing: A low introductory price is set to penetrate the market and generate larger sales volume. Relies on high sales volume and lower profit margins per unit. Often used when there are many competitors in the market, or the product does not have a significant competitive advantage

Sales-Oriented Pricing Competitive analysis establishes target price points for your product Analysis of initial costs establishes floor for your product

Status Quo Pricing  Goal is to maintain existing prices, or meet a competitor’s prices. –Passive pricing policy – Often used by other firms when there is a dominant product in the market (price leader) –Used for late-entering, “me-too” products

What is market share? Market Share A company’s product sales as a percentage of total sales for that industry in dollars or units.

Setting the Right Price Choose a price strategy Fine tune with pricing tactics Choose a price strategy Fine tune with pricing tactics Understand your market pressures Estimate demand, costs, and profits Establish pricing goals Results lead to the right price

Market Pressures: Stage in the Product Life CycleIntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High

UNIQUE PRICING STRATEGIES These next slides are for your reference, not to know for an exam. You may or may not need this info for your project.

Market Pressure: Selling Against a Brand  Stocking well-known branded items at high prices in order to sell another brand at discounted prices. –Viva paper towels: $1.29 –Safeway Brand: $0.99 –Increase volume on store brand

Market Pressure: Reference and Prestige Pricing Regular price: $45 Now Only: $25 Reference PricingPrestige Pricing

Market Pressure: Psychological Price Positioning  Most Attractive?  Better Value? –A = 6.8 ¢ per oz. –B = 7.7 ¢ per oz.  Psychological reason to price this way? A 32 oz. B 26 oz. $2.19 $1.99 Assume Equal Quality

Unique Pricing Strategies  Product Line Pricing  Product Mix Pricing  Segmented Pricing

Product Line Pricing  Involves setting price steps between various products in a product line based on: –Cost differences between products –Customer evaluations of different features –Competitors’ prices

Product Mix Pricing Strategies  Optional-Product –Pricing optional or accessory products sold with the main product (i.e camera bag) at a high price.  Captive-Product –Pricing products that must be used with the main product (i.e. film) at a high price.

Other Pricing Strategies  Segmented Pricing: Selling a product at different prices for reasons other than cost. –Customer segments (movie theater tickets) –Location (in-state versus out of state students) –Time (season, month, time of day (train tickets)) –Product form (soda in large and small bottles)

Pricing Restrictions  Can price products differently to different purchasers, provided the costs to sell to the purchasers are different.  Cannot price fix, or collude across competitors to set prices in the market.  Cannot require retailers to set prices at a particular level (can have a manufacturer’s suggested retail price, or MSRP)

Segmentation/Yield Management Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Yield Management Pricing