Pricing Policies and Strategies

Steps in Setting Price 1.Determine pricing objectives: Consider your purpose in setting a price for your products. Knowing whether you want to establish an image for the business (product), increase your market share, maintain your market share, or increase sales will affect price. 2.Study costs: Carefully examine all of the costs associated with carrying a product and selling it to consumers. Price planning must include a comprehensive look at business costs and how to keep them to a minimum. 3.Estimate demand: Research industry data and study past sales to estimate demand. If this is a completely new venture, it may be necessary to find a willing advisor who has a similar business in a nearby city or community.

Steps in Setting Price 4.Study the competition: While new or small businesses often have a difficult time competing solely on the basis of price, it is important to know what competitors are charging for products. Determine how you will respond to competitors’ prices. 5.Decide on a pricing strategy: Select the strategy that offers the business the greatest potential for profit then monitor sales and related factors to determine when changes are necessary. 6.Set your price: Once again, continue to monitor sales, customer reactions, competitor reactions, and company goals to determine when changes are needed.

Specific Pricing Strategies  Cost Oriented Pricing  Demand Oriented Pricing  Competition Oriented Pricing

Cost Oriented Pricing  Implemented by carefully examining all of the costs associated with carrying a product and selling it to consumers then adding the desired profit to arrive at a selling price.  Mark-up pricing Used primarily by wholesalers & retailers (organizations that buy for resale) Adds a predetermined percentage to cost of products This percentage is usually applied to all products carried by the business

Cost Oriented Pricing  Implemented by carefully examining all of the costs associated with carrying a product and selling it to consumers then adding the desired profit to arrive at a selling price.  Cost-plus pricing Used by manufacturers & service organizations Examines costs for individual products or services then adds standard markup This strategy is more complicated than markup pricing due to the fact that products and services are considered individually rather than a predetermined percentage being added across the board to the cost of all products and services.

Demand Oriented Pricing  Most effective when selling products with inelastic demand  Requires price planners to estimate the value customers place on products and set prices accordingly  When selling products with elastic demand, an inaccurate estimation can undermine the success of a business. Wonder how much people will pay for gas?

Competition Oriented Pricing  Used by all planners to some degree  Does not consider costs and expenses or profit goals in the pricing process  Bases prices on what the competition is charging. My competitor is selling Pepsis for $1.00. I will sell mine for $.95.

Specific Pricing Techniques  Promotional Pricing  Fixed Pricing  Variable Pricing  Price Lining  Unit Pricing  Psychological Pricing  Pricing for New Products

Specific Pricing Techniques  Fixed pricing (One-Price Policy): The pricing technique in which the organization charges the same prices to all customers regardless of the quantity of the purchase.  Promotional pricing: Involves selling a product at a temporarily lower price to attract customers. Loss leaders: Selling a product below cost in an effort to increase customer traffic. Special event pricing: Sales events designed to attract customers and encourage them to buy. Example: Back-to-School Sale

Specific Pricing Techniques  Variable pricing (Flexible-Price Policy): This technique encourages customers to bargain with sellers in an effort to obtain the best price for products and services. Used when selling cars, furniture, jewelry, and other similar products.  Price lining: Establishing price points between products in a product line; used to communicate differences in quality and/or service to consumers. For example, car manufacturers set price points for economy, standard, and luxury models and use quality and features to justify the difference in price among the models in their line.

Specific Pricing Techniques  Unit pricing: Stating the price of a product per unit of standard measure. For example: per ounce, pound or serving  Psychological pricing: Used by organizations that believe that customers base their perceptions of products on price and that these perceptions affect customer buying decisions. Example: Customers may pay for a name brand not considering quality.

Specific Pricing Techniques Odd/even cent pricing: Based on the principle that prices ending in odd numbers ($5.99) communicate a bargain and prices ending in even numbers ($6.00) communicate quality. This technique is widely used by retailers. Prestige pricing: Believing that customers equate high price with high quality, this technique sets a higher-than- average price for products in order to communicate quality and status.

Specific Pricing Techniques  Pricing for new products: When introducing a product to the market, price planning is a vital step in ensuring product success. Skimming pricing: Setting a high price to capitalize on demand when introducing a product that has little competition and will appeal to customers who like to be the first to have the latest products. Penetration pricing: Setting a low price to motivate customers to purchase when introducing a product into a competitive market and attempting to gain customer trial.