1. Price Strategy Considerations
Chapter11.1

2. Factors Affecting Price
Cost and Expenses
Prices have to exceed cost and expenses
Fixed costs do not vary with the number of units sold
Examples: Rent, Utilities, Insurance Premiums
Variable costs do change depending on the number of units sold.
Examples: cost of goods sold, sales commissions, delivery expenses.
Cost is also affected by pricing structure in the distribution channel

3. Factors Affecting Price
Supply and Demand
When the demand for a product is high and supply is low, you can command a high price.
When the demand is low and the supply is high, you must set lower prices.
Prices are not always affected by supply and demand due to sensitivity of market demand
Inelastic demand – customer buy regardless of price (Examples: Milk, Gas)
Elastic demand – customers are sensitive to price
(Examples: gourmet foods, luxury items)

4. Factors Affecting Price
Consumer Perceptions
Price helps create an image in the mind of customers
Low price may reflect low quality
High prices may turn customers away
Prices set at the high end of a competitive range convey quality and status
Keep in mind the perceptions of your target market

5. Factors Affecting Price
Competition
When the target market is price conscious, competitors’ pricing may determine your pricing.
Government Regulations
The Clayton Act & The Robinson-Patman Act
Illegal to sell for businesses to sell the same product to different customers at different prices.
Price Gouging – the practice of pricing above the market when no alternative retailer is available.
Price Fixing – competing companies agree, formally or informally, to restrict prices within a specific range.
Resale Price Maintenance – imposed by a manufacturer on wholesale or retail resellers of its products to deter price-based competition
Unit pricing – required pricing of goods on the basis of cost per unit of measure, such as pound or ounce, in addition to the price per item.

6. Pricing Objectives Obtaining a Return on Investment
AKA ROI
The amount earned as a result of that investment
ROI is the practice of setting a price to achieve a specified return
Obtaining Market Share
A business’s portions of the total sales generated by all competing companies in a given market.
Other Objectives
Social and ethical considerations
Meeting the competition’s prices
Establishing an image
During difficult economic times - survival

7. Pricing Strategy Decisions
Three Steps
Select a basic approach to pricing
Cost-Based Pricing – must consider your business costs and your profit objectives
Includes figuring cost to make or buy product plus related cost of doing business
Demand-Based Pricing
Exist when demand for a product is inelastic
Exist when customers believe your product is different or has greater value than the competition
Competition-Based Pricing
Decide if it is best to set price below, in line with, or above the competition
Only concerned with being competitive
Determine your pricing policy
Flexible-Price - allowing customers to bargain for price
Allows customers to haggle over price
One-Price Policy – all customers are charged the same price

8. Price Strategy Decisions
Three Steps
Set a price based on the state of the product life cycle
Stage 1: Introduction
Sales volume is relatively low
Marketing cost high
Profits are lower even negative
Price Skimming involves charging a high price to recover costs and maximize profit as quickly as possible.
Penetration Pricing builds sales by charging a low initial price to keep unit costs to customers as low as possible.
May discourage competition.

9. Price Strategy Decisions
Set a price based on the state of the product life cycle (cont.)
Stage 2: Growth
Sales climb rapidly
Unit costs are decreasing
The product begins to show profit
Competitors come into the market
If using price skimming during this stage, prices should be lowered to appeal to price-conscious customers in the growth stage
If using penetration pricing, make only minor price changes during this stage, other promotions will be used to keep sales high
Stage 3: Maturity
Principal goal is to stretch the life cycle of the product
Sales begin to slow and profits peak, but profits fall off as competition increases
To maintain steady prices, businesses must identify new markets or make product improvements
Stage 4: Decline
Sales and profits continue to fall
Prices are cut to generate sales or clear inventory

10. Pricing Techniques
Psychological Pricing: refers to pricing techniques that are based on the belief that customers’ perceptions of a product are strongly influenced by price
Prestige pricing – higher-than-average prices are used to suggest status and prestige to the customer
Odd/even pricing – odd numbers, such as $19.99 are employed to suggest bargains. Even prices, $20, suggest higher quality
Price lining - items in a certain category are priced the same
Promotional pricing – lower prices are offered for a limited period of time to stimulate sales; it is temporary
Multiple-unit pricing – items are priced in multiples, such as 3items for 99 cents
Bundle pricing – several complementary products are sold at a single price. Example: computer companies including software in the sale of computers

11. Pricing Techniques
Discount pricing – offers customers reductions from the regular price
Cash discounts – given in return for prompt payment.
Quantity discounts – given in return for purchasing larger quantities than they would ordinarily buy
Trade discounts – given to distributions channel members who provide marketing function for the manufacturer
Promotional discounts – used when manufacturers want to pay wholesalers or retailer for carrying out promotional activities.
Seasonal discounts – used for products that have a high seasonal demand