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

2. 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)

3. What is a Price (cont’d)?
Revenue is R=PxS (Price x Sales)
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
Revenue should be greater than total costs TC=FC+VC (seller makes a profit)
P x S > FC + VC

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

5. 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 competitive price lower than own costs, leading to negative profit (cost > price  loss)
“Price leader” situation
one dominant player sets prices, others follow
eg Ebay pricing sets the base price for other online auction pricing
Illegal to force others to set a price (price-fixing)

6. Cost-plus pricing Price: Average Cost plus a mark-up
Used in: Retailing, especially large variety sales such as supermarkets
Examples:
Average Cost + 40%
Average Cost + 10c
Advantages: simple to administer, price>cost always, easy to automate
Disadvantages: inflexible, not responsive to customers or competition

7. 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 (or Destroyer Pricing)
pricing intended to destroy competition, with losses recovered by price gouging later

8. 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 are vulnerable to changes in economic circumstances  “boom and bust” cycle likely
Case study: Helena Rubinstein cosmetics during 1930s (Great Depression)