Pricing, Ch#11 Strategies

Terms Ch#11 Fixed Odd / Even Pricing Variable Price Lining Gouging Promotional Pricing Bait and Switch Multiple Unit Pricing Predatory Bundle Pricing Resale Price Maintenance Elasticity Discount Pricing Break-Even Point (BEP) Price Skimming Penetration Pricing Mark-up Prestige Pricing Mark-down Leader Pricing / Loss Leader

Why is Pricing Important? Pricing decisions is important because customers have alternatives to choose from. In a Free-Enterprise economic system, customers are in a position to seek good value Value = perceived benefits price So, businesses can increase value and stimulate sales by increasing benefits or reducing the price.

Price Sensitivity and Demand When increases can decrease as fewer customers feel the product is a good value Market pricing principles state that Laws of Supply and Demand do not set prices, businesses do. price sales

Considerations in Setting Prices The four factors consider in setting prices: The price sensitivity of consumers The cost of the merchandise and services Competition Legal restrictions

Elasticity Elasticity = percent change in quantity sold percent change in price

Pricing Regardless of Supply or Demand, to stay in business, the business must sell the product for more than it costs. In other words, all products should be “Mark-ed Up”. “Mark-downs” should be avoided.

Markups Selling Price = Cost + Markup 100% = 70% + 30% Selling Price = $10.00 and markup = 30% Selling Price = Cost + Markup $ = $ $ 3.00

Reasons for Taking Markdowns Get rid of slow-moving, obsolete, uncompetitive priced merchandise Increase sales and promote merchandise Generate cash to buy additional merchandise Increase traffic flow and sale of complementary products generate excitement through a sale

Fixed Costs Do not change when sales volume increases or decreases. An example of a fixed cost is rent on a lease.

Variable Costs Changes as unit sales increase or decrease. An example of a variable cost is labor.

Break-even point Understanding the Implication of Fixed and Variable Costs Fixed Costs + Variable Costs = BEP =Total Cost Break-even point (BEP) Variable Costs Fixed Costs

Pricing strategies of: Every Day Low Prices (Selling almost everything in the store cheaper) Vs. Hi / Lo Prices (Ads featuring only some products)

Advantages of EDLP & Hi-Lo EDLP Builds loyalty – guarantees low prices to customers Lower advertising costs Better supply chain management –Fewer stock outs –Higher inventory turns Hi-Lo Higher profits – price discrimination More excitement Build short-term sales and generates traffic

Variable Pricing Change your prices for different geographical regions or even changing prices for senior citizens.

Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products. Best items: Purchased frequently, primarily by price-sensitive shoppers. Examples: Bread, eggs, meat or disposable diapers. Leader (Loss) Pricing Allan Rosenberg/Cole Group/Getty ImagesDennis Gray/Cole Group/Getty Images

Psychological Pricing Often used in retailing, is the belief that consumer perceptions are influenced by price. Types of Psychological Pricing includes: Bundling, Multiple-Unit, Prestige, Odd / Even, Price Lining and Promotional.

Bundling / Bundle Pricing Grouping pricing of complementary products together sold at a lower price to benefit consumers. An example of this is Verizon cable and internet grouped together at a lower price.

Price Lining A limited number of predetermined price points. Ex: $59.99 (good), $89.99 (better), and (best) product lines. Business Benefits from: –Elimination of confusion of many prices. –Merchandising task is simplified. –Gives buyers flexibility. –Can get customers to “trade up.”

Odd / Even Pricing This is a psychological price method that suggests that customers are sensitive to ending numbers of pricing (pennies). Odd: 9.99 sounds cheap, Even: $10.00 sounds expensive, but might denote quality

Multiple Unit Pricing Instead of saying $1.00 each Tell the customer it’s 10 for $10.00 Or instead of saying Egg McMuffins are $1.75 each, they are 2 for $3.50

Prestige Pricing Customers believe that pricing has a direct correlation with quality. Surrogate of quality is price. When a business charges a high price and the business claims it has quality merchandise, customers tend to believe the claims.

BOGO Pricing Buy One Get One --- Price Businesses usually double their prices before going BOGO.

Discount Pricing This is merely a reduction in price to encourage customers to buy. Examples of this includes:  Cash discounts: % reduction if cash is used  Quantity discounts: Increase in order size equals reduction of price  Seasonal discounts to reduce inventory. Unseasonable items are sold at a discount.  Trade discounts: Given to perpetuate business to business relationships  Promotional discounts: Passed on from the manufacturer to the consumer to increase volume. Example: couponing.

Promotional Pricing Lower prices for a limited period of time, to stimulate sales. Example: Super Burgers are: $1.00! This month only!

When introducing a new product… Businesses often choose one of two types of strategies: 1.Price Skimming 2.Penetration Pricing

Price Skimming When the product has no competitors and the product has an extreme uniqueness; The price of the product can be initially high. Often businesses introducing a product need to recoup research and development costs or large capital expenditures. As competitors enter the marketplace, the price can be lowered to meet competition.

Penetration Pricing is almost the opposite. The goal of penetration pricing is to saturate the market. By giving the product away, there the hope that consumers will like it so much that they will later buy it, if given the chance. This is done by couponing, sampling and just passing it out where there might be a large % of the target market. (Often done at county fairs, malls, supermarkets and Costco.)

Legal and Ethical Pricing Issues Predatory Pricing Resale Price Maintenance Price fixing Bait and Switch tactics Gouging PhotoDisc/Getty Images

Predatory Pricing Is illegal, violates antitrust laws. This is often known as “Dumping”. It is similar to penetration pricing structure, but is often done to change an industry and not just to produce sales. Simply put, low prices, below cost, until competitors are out of business.

Resale Price Maintenance Price fixing imposed by a producer on other intermediaries to deter price-based competition.

Price Fixing An illegal practice in which competing companies agree to restrict prices.

Bait and Switch (Illegal in California) Retail tactic, advertising a product at a low price to bring customers into the store; however there is little or no inventory to support a sale of that product. Retailers then suggest other products instead.

Gouging Priced at a higher price, because no other retailer is present.