Pricing Strategies and Determination

Pricing Strategies and Determination
chapter 14 Harcourt, Inc.

Objectives Explain pricing factors
Compare and contrast cost-based pricing methods Identify strategic concerns important in pricing decisions Dr. Rosenbloom

Objectives Evaluate reasons why base prices change over time
Understand new technology implications for pricing behavior, especially price customization Dr. Rosenbloom

What is Price? Price is the sacrifice that one party pays another to receive something in exchange For our case, price is a monetary value charged by an organization for the sales of its products Dr. Rosenbloom

Pricing Fairfield Inns The Martin Agency Dr. Rosenbloom

Pricing Alamo Car Rental Hal Riney and Partners Dr. Rosenbloom

Determining the Base Price
Cost-Plus Pricing Easiest, Often misleading A simple allocation of fixed and variable costs Standard mark-up - a standard profit margin Target return pricing - a standard amount of profit per item Ignores demand (price sensitivity) and fails to account for competition Dr. Rosenbloom

Demand Pricing Based on the elasticity of demand Higher prices are favored with inelastic Price increases offset volume losses Lower prices are favored with elastic Volume increases offset price reductions Consumers are indifferent with unitary demand Breakeven analysis Demand schedules Dr. Rosenbloom

Demand Pricing Profit-Maximization Calculate the profit at each price point on a demand curve and choose the highest In other words, which price produces the highest total contribution Verified by observing marginal revenue and cost figures Dr. Rosenbloom

Demand Pricing Where does demand information come from? Analytic modeling Experiments Customer surveys Managerial judgement Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Low cost focus Differentiation focus price unique Competitive Strategy Positioning Continuum Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Low cost focus Differentiation focus price unique Dr. Rosenbloom Competitive Strategy Positioning Continuum

Strategic Pricing Concerns Ethical Concerns Legal Concerns Objectives Goal-setting/Objective-setting Pricing to achieve a target ROI Pricing to stabilize price and margin Pricing to reach a target market share Pricing to meet or prevent competition Pricing for profit maximization Pricing for survival Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Penetration Pricing Strategy Skimming Pricing Strategy Decline Maturity Growth Introduction New product pricing Skimming Vs. Penetration Dr. Rosenbloom

Legal Concerns Ethical Concerns Strategic Pricing Concerns Penetration Pricing Strategy Skimming Pricing Strategy Decline Maturity Growth Introduction High initial price for quick ROI Inelastic demand Price insensitivity by the market Dr. Rosenbloom

Legal Concerns Ethical Concerns Strategic Pricing Concerns Skimming Pricing Strategy Penetration Pricing Strategy Decline Maturity Growth Introduction Low initial price with elastic demand Volume for lower production costs Imminent competition Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Price-Quality judgements Customers uncertain about brand quality prior to purchase look to price Customers look to price in high risk purchases Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Price Fixing Violation of Sherman Anti-Trust Act Conspiring to restrain trade Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Price Discrimination Violation of Robinson-Patman Act Illegal only when business to business Exception for cost justification Exception for competitor price matching Exception for no apparent harm to competition Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Resale Price Maintenance When a manufacturer and retailer agree on a minimum price to be charged to consumers at retail Manufacturers can set suggested prices (MSRP) Legal to stop selling to retailers who ignore MSRP Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Predatory Pricing Aggressive pricing to drive out newer, smaller rivals After removal of rival, prices are raised again Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Exaggerated Comparative Price Advertising Using comparison prices of dubious validity Product introduced at artificially high prices for a short time then dropped to a new low long-term price Dr. Rosenbloom

Strategic Pricing Concerns Ethical Concerns Legal Concerns Price gouging laws ATM fee practices Raising prices for necessities in disaster areas Dr. Rosenbloom

Adjustments to Base Prices
Reasons base prices change over time: Variation in objectives over product life cycle Introductory low prices, higher decline prices Competitive price moves Competitive forces dictate modification of pricing Rubbermaid, the U.S. Steel Industry Dr. Rosenbloom

Price Flexing Discounts/Allowances
Reasons base prices change over time: Price Flexing - Discounts/Allowances To Consumer To Trade Trade-in Allowances Functional Or Trade Cash Discounts Seasonal Rebates Quantity Cash Sales Promotion Dr. Rosenbloom

To Consumer Trade-in Allowances Used to encourage consumers to upgrade to newer or more expensive products Cash Discounts Rebates Dr. Rosenbloom

To Consumer Trade-in Allowances Seasonal or age-based discounts used to encourage purchases Cash Discounts Rebates Dr. Rosenbloom

To Consumer Trade-in Allowances After the purchase payment made to the consumer by the producer Cash Discounts Rebates Dr. Rosenbloom

To Trade Functional Or Trade Compensate the trade for functions performed: Buying & Selling Transportation Storage Financing Risk-taking Providing Information Standardizing & Grading Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Permits seasonal marketers to maintain steady production and to sustain operations in out-of-season lulls Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Seasonal Quantity Price Cash Spring Summer Fall Winter Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Induce larger-quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Encourage prompt payment from customers. Invoice includes payment terms and period of time that the cash discount is available Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days Seasonal Quantity Cash Sales Promotion 2/10, Net 30 Dr. Rosenbloom

To Trade Functional Or Trade Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

To Trade Functional Or Trade Off-Invoice Allowances Seasonal Quantity Bill-Back Allowances Cash Sales Promotion Stocking Allowances Dr. Rosenbloom

Other Forms of Price Flexing
Price shading Salesperson reduces base price because of the need to secure a large/important client Price customizing New technology allows for transaction-by-transaction customization Dr. Rosenbloom

Price promotion Sales, incentive pricing Retailers began forward-buying or diverting product Every Day Low Pricing (EDLP) is reducing the use of price promotion Couponing Free-standing inserts (in newspapers) Point of purchase Dr. Rosenbloom

Pricing for different segments Geographic segments Different prices in different zones Usage segments Different prices for high volume users Demographic segments Different prices for students, children, etc. Time segments On- and off-season rates Dr. Rosenbloom

Geographic Pricing Policies
FOB Pricing Uniform Delivered Pricing Zone Pricing Basing-Point Pricing Dr. Rosenbloom

Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the transportation charges Dr. Rosenbloom

Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing Using zone pricing all consumers in the same zone pay the same transportation charge Dr. Rosenbloom

Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing Using basing-point pricing, all freight costs are priced as if they originated from the same basing point Dr. Rosenbloom

Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing Using uniform delivered pricing all consumers pay the same transportation charges (average shipping expense to all customers) Dr. Rosenbloom

Pricing Policies Prestige Pricing Loss-Leader Pricing Odd-Even Pricing
Product Line Pricing Dr. Rosenbloom

Pricing Policies Prestige Pricing Loss-Leader Pricing Odd-Even Pricing Product Line Pricing Pricing at relatively high levels so as to convey an image of high quality or exclusivity Dr. Rosenbloom

Pricing Policies Prestige Pricing Loss-Leader Pricing Odd-Even Pricing Product Line Pricing Pricing policy which offers products at prices below or near cost to attract consumers from competitors’ stores Dr. Rosenbloom

Pricing Policies Prestige Pricing Loss-Leader Pricing Odd-Even Pricing Product Line Pricing Price lining is producing or marketing multiple products at different price points Bundling is marketing two or more products in a single package for a special price Dr. Rosenbloom

Pricing Policies Prestige Pricing Loss-Leader Pricing Odd-Even Pricing Product Line Pricing Odd pricing refers to a price ending with an odd number just under a round number Even pricing is used to convey high quality Dr. Rosenbloom

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