Chapter 10 Pricing In Your New Business

Pricing Very difficult Customer seek low prices, BUT You’ve got to cover your costs! Reflects value and utility Pricing is part psychology and part mathematics. Want to capture all of the value the customer perceives, plus you want to make certain you produce a margin. Compounded by low volume sold in early years. Example: Bud Light prices In London, UK

The Power of Price Attracts customers Signals to customers More important to profitability than cost control When a company that has a 10% profit margin raises its prices by 1%, its profits increase by 10%. Monetary value of the benefits versus the sacrifices a customer gives up to use the product. Consider a pair of jeans from Kohl’s and a pair of jeans from a boutique on Rodeo Drive

Remember… Unless a small company can differentiate itself by creating a distinctive image in its customers’ minds or by offering superior service, quality, design, convenience, or speed, it must match its competitors’ prices or risk losing sales!” However, THAT’S A LOT OF “UNLESS!” What can we do to base ourselves in nonprice competition??

Pricing versus Competitors Competitors’ prices should be considered, but not considered the final say May have different strategy May have different cost structure May lure customers, but they will leave you quickly May start a price war that you cant finish! Need great differentiation point of value

The Concept of a Fair Price What do consumers think is a fair price? 1. Price that consumer paid in the past 2. What competitors may charge for something similar 3. Some relationships to your actual costs It’s all about value – real AND perceived!

To Introduce a New Product… Two Strategic Options: Skimming Penetration pricing Need to get it in initial customers’ hands Need to maintain market share after initial selling period Need to earn a profit

Other Pricing Tactics Odd Pricing $12.99 Price Lines Good, better, best Leader Pricing Turkeys at Thanksgiving Geographic pricing Zone Delivered FOB pricing Bundling Captive product and optional product

Pricing Based Upon Cost Markup Based on retail price and cost levels Cost-plus pricing Importance of contribution margin Absorption costing versus direct costing Breakeven price

Other Pricing Issues Pricing for service firms Price per hour Price per hour plus materials Taking credit cards for payment Could eat 2-3% of your total revenue Increases probability, speed, and total amount of transaction – probably worth your investment!