Pricing Or, how to make people pay for a load of old tat $$

What is a Price? Signal to the buyer that the seller will trade Sometimes a price indicates: – Minimum that seller will accept – Starting point for negotiation – Indicator of quality (unreliable) Depends on total costs = Fixed + variable costs – Seller’s fixed costs (do not vary with sales) eg rent – Variable costs (increase with each unit sold) eg stock – Should be greater than or equal to total costs =FC+VC so seller makes a profit

Methods of pricing there are many methods of pricing – this is just a simple intro…

Competitive Pricing Price based on the price of competitors – Usually the same as competitors – Sometimes undercutting competitors slightly Advantages: easy to set price, responsive Disadvantages: no relationship to costs – possible to set a price lower than own costs – negative profit (cost > price  loss) “Price leader” situation one dominant player, others follow eg Ebay pricing sets the base price for all other online auction pricingEbay

Cost-plus pricing Price: Average Cost plus a given markup Used in: Retailing, especially large variety sales such as supermarkets Examples: – Average Cost + 40% – Average Cost + 10c Advantages: simple to administer, always>costs Disadvantages: inflexible, not responsive to customers or competition

Penetration Pricing Significantly lower price than competitors – Price aimed at rapidly building market share – Goal: High sales, low profit – Extreme version = Loss Leader (price below cost to recover profit elsewhere, eg CostCo) Used in: introducing a new product, repositioning an old product Advantages: Low price attracts consumers Disadvantages: – temporary effect because most competitors respond with their own price-cutting – low (or negative) profit margin is a risk to the seller’s profitability – Possibility of (illegal) Predatory Pricing pricing intended to destroy competition, with losses recovered by price gouging later

Market Skimming or Prestige Pricing Higher price than competitors – Justified by quality or an intangible benefit – “snob value” Used in: high-end retail such as fashion & cosmetics; motor vehicles; real estate Advantage: Attracts an elite (wealthy) clientele  very high profit Disadvantage: Small volumes vulnerable to changes in economic circumstances for clients  “boom and bust” cycle likely