Copyright 2008 Prentice Hall Publishing Company 1Chapter 10: Pricing Pricing Strategies

Copyright 2008 Prentice Hall Publishing Company 2Chapter 10: Pricing Pricing Is governed both by art and science. Is governed both by art and science. Requires balancing a multitude of complex forces. Requires balancing a multitude of complex forces. Cuts across every aspect of a small company. Cuts across every aspect of a small company. Is an important signal of a product’s or service’s value to customers. Is an important signal of a product’s or service’s value to customers. Involves both math and psychology. Involves both math and psychology.

Copyright 2008 Prentice Hall Publishing Company 3Chapter 10: Pricing Price Conveys Image Price sends important signals to customers – quality, prestige, uniqueness, and others. Price sends important signals to customers – quality, prestige, uniqueness, and others. Common small business mistake: Failure to recognize extra value, service, quality, and other benefits they offer and charging prices that are too low. Common small business mistake: Failure to recognize extra value, service, quality, and other benefits they offer and charging prices that are too low. Study: Only 15 percent to 35 percent of customers consider price to be the chief criterion when selecting a product or service. Study: Only 15 percent to 35 percent of customers consider price to be the chief criterion when selecting a product or service.

Copyright 2008 Prentice Hall Publishing Company 4Chapter 10: Pricing Competition and Pricing Must take into account competitors’ prices but it is not always necessary to match or beat them. Must take into account competitors’ prices but it is not always necessary to match or beat them. Key is to differentiate a company’s products and services. Key is to differentiate a company’s products and services. Price wars often eradicate companies’ profits and scar an industry for years. Price wars often eradicate companies’ profits and scar an industry for years. Best strategy: Stay out of a price war! Best strategy: Stay out of a price war!

Copyright 2008 Prentice Hall Publishing Company 5Chapter 10: Pricing Focus on Value The “right” price for a product or service depends on the value it provides for a customer. The “right” price for a product or service depends on the value it provides for a customer. Two aspects: Two aspects: Objective value Objective value Perceived value Perceived value Value ≠ low price, however. Value ≠ low price, however.

Copyright 2008 Prentice Hall Publishing Company 6Chapter 10: Pricing Dealing with Rising Costs Communicate with customers Communicate with customers Focus on improving efficiency Focus on improving efficiency Consider absorbing cost increases Consider absorbing cost increases Emphasize the value of your company’s product or service to customers Emphasize the value of your company’s product or service to customers Anticipate rising costs and try to lock in raw material prices early Anticipate rising costs and try to lock in raw material prices early

What determines price? Price Ceiling ("What will the market bear?") Price Floor ("What are the company's costs?") Acceptable Price Price Range Range ? ? ? ? ? ? ? ? ? ? ? Final Price (What is the company's desired "image?") Final Price (What is the company's desired "image?") ?

Copyright 2008 Prentice Hall Publishing Company 8Chapter 10: Pricing Customized or Dynamic Pricing A pricing technique in which the company sets different prices on the same products and services for different customers using the information that a company collects about its customers. A pricing technique in which the company sets different prices on the same products and services for different customers using the information that a company collects about its customers.

Copyright 2008 Prentice Hall Publishing Company 9Chapter 10: Pricing Introducing a New Product Three Goals: Getting the product accepted Getting the product accepted Revolutionary products Revolutionary products Evolutionary products Evolutionary products Me-too products Me-too products Maintaining market share as competition grows Maintaining market share as competition grows Earning a profit Earning a profit

Copyright 2008 Prentice Hall Publishing Company 10Chapter 10: Pricing Introducing a New Product Three Basic Strategies: Market penetration Market penetration Skimming Skimming Sliding-down-the-demand-curve Sliding-down-the-demand-curve

Copyright 2008 Prentice Hall Publishing Company 11Chapter 10: Pricing Pricing Techniques Odd pricing Odd pricing Price lining Price lining Leader pricing Leader pricing Geographical pricing Geographical pricing Opportunistic pricing Opportunistic pricing

Copyright 2008 Prentice Hall Publishing Company 12Chapter 10: Pricing Pricing Techniques Discounts Discounts Bundling Bundling Optional-product pricing Optional-product pricing Captive product pricing Captive product pricing Byproduct pricing Byproduct pricing Suggested retail prices Suggested retail prices

Copyright 2008 Prentice Hall Publishing Company 13Chapter 10: Pricing Pricing for Retailers: Markup Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Percentage (of Cost) Markup = Dollar Markup Cost of Unit Example: Dollar Markup = $25 - $15 = $10 Percentage (of Retail Price) Markup = $10 $25 = 40% Percentage (of Cost) Markup = $10 $15 = 67%

Copyright 2008 Prentice Hall Publishing Company 14Chapter 10: Pricing Pricing for Manufacturers: Breakeven Selling Price BreakevenSellingPriceQuantity = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced

Copyright 2008 Prentice Hall Publishing Company 15Chapter 10: Pricing Pricing for Manufacturers: Breakeven Selling Price BreakevenSellingPriceQuantity Example: = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced BreakevenSellingPrice = $0$0$0$0 6.98/unit 50,000 unit $110,000 $110,000 + { x } + 50,000 units = $9.18 per unit

Copyright 2008 Prentice Hall Publishing Company 16Chapter 10: Pricing Pricing for Service Firms: Price per Hour Price per Hour = Total cost per x 1 productive hour (1 - net profit target as productive hour (1 - net profit target as a % of sales) a % of sales) Example: Ned’s TV Repair Shop Price per Hour = $13.44 per x 1 hour (1 -.18) hour (1 -.18) = $16.38 per hour

Copyright 2008 Prentice Hall Publishing Company 17Chapter 10: Pricing Consumer Credit Credit cards Credit cards National National Private Private Installment credit Installment credit Trade credit Trade credit