1. Chapter 26
Pricing Strategies

2. Pricing Concepts 26.1 After finishing this section, you will know:
The three basic pricing concepts involving cost, demand, and competition
The concepts of pricing forward vs. pricing backward
The idea of one-price vs. flexible-price policy
The two polar pricing policies for introducing a new product

3. Basic Pricing Strategies
You need to find the right price for the target market
There are three concepts to consider in determining the price of a product

4. Basic Pricing Strategies
Cost-Oriented Pricing
Calculate the costs of acquiring or making a product and expenses of doing business
Add projected profit margin to arrive at a price

5. Basic Pricing Strategies
Markup pricing- used by wholesalers and retailer involved in acquiring goods for resale
Markup- the difference between the price of an item and its cost expressed as a percentage
Must be high enough to cover the expenses of running a business and include intended profit

6. Basic Pricing Strategies
Cost-Plus pricing- all costs and expenses are calculated, and then the desired profit is added to arrive at a price
Used by manufacturers and service companies
All fixed and variable expenses are calculated separately for different goods and services

7. Basic Pricing Strategies
Demand-Oriented Pricing
Attempt to determine what consumers are willing to pay for goods and services
Price must be in line with the consumers’ perceived value of the goods

8. Basic Pricing Strategies
Effective when there are few substitutes for a product and there is demand elasticity
Customers will higher prices because they believe an item is different
Sometimes prices do not reflect major differences in the good or service, but demand

9. Basic Pricing Strategies
Competition-Oriented Pricing
Marketers who study their competitors in order to set prices
Marketers have three choices after they learn the price their competitors are charging:
Price above the competition
Price below the competition
Price in line with the competition

10. Basic Pricing Strategies
Competitive bid pricing- determines the price for a product based on bids submitted by competitors to a company or government agency

11. Combining Pricing Considerations
Most marketers use all three pricing policies to determine prices
Cost-oriented pricing helps determine the price floor for a product
Demand-oriented pricing determines a price range for the product defined by the price floor and the ceiling price

12. Combining Pricing Considerations
Competition-oriented pricing is used to assure the final price is in line with the company’s pricing policies
Manufacturers may also consider the prices they will charge wholesalers and retailers

13. Combining Pricing Considerations
This can be done two ways:
Work backward from the final retail price
Work forward from costs and expenses to the final retail price

14. Pricing Policies and Product Life Cycle
Every business must make a choice between a one-price and a flexible-price policy

15. One-Price vs. Flexible-Price Policy
One-price policy- all customers are charged the same price for the goods and services offered for sale
Price tags, signs, no deviations permitted

16. One-Price vs. Flexible-Price Policy
Flexible-price policy- customers pay different prices for the same type of amount of merchandise
Permits customers to bargain for merchandise
Not common in retail stores
Becoming popular for e-tailing by means of online auctions

17. Product Life Cycle Products move through four stages:
Introduction, growth, maturity, and decline

18. New Product Introduction
Skimming pricing- sets a very high price for a new product
Used when demand is greater than supply
Price has to be lowered once the market for the product changes to more price-conscious
A disadvantage is that the initial price attracts competition, and price set above what consumers are willing to pay

19. New Product Introduction
Penetration pricing- the initial price for a new product is set very low
Encourages as many people as possible to buy the product and penetrate the market
Most effective in the sale of price-sensitive products
Captures a large number of customers in a short period of time
Will not work if the product is not in high demand

20. Other Product Stages
Pricing in later stages depends on the initial method used

21. Skimming
Monitor closely, when sales level off, price should be lowered

22. Penetration Very little change will be made during the growth stage
Promotions are used to keep sales high
The principal goal during the maturity stage is to stretch the life of the product
Some companies revitalize products
Others seek new markets in the global market place

23. Penetration
Sales decrease and profit margins are reduced in the decline stage
Companies are forced to reduce prices in order to generate sales

24. Assignment Page 473 Reviewing Key Terms and Concepts #1-5
Thinking Critically #6

25. Setting Prices 26.2 After finishing this section, you will know:
The various pricing techniques
The steps in setting prices

26. Pricing Techniques There are two types of pricing techniques:
Psychological
Discount

27. Psychological Pricing
Psychological pricing –techniques that create an illusion for customers or that makes shopping easier
Appeal to particular market segments because of shared perceptions and buying habits

28. Psychological Pricing
There are seven psychological pricing techniques:
Odd-even pricing- setting prices that end in odd or even numbers
odd numbers- convey a bargain image
Even numbers- convey a quality image

29. Psychological Pricing
Prestige pricing- sets higher-than-average prices to suggest status and prestige
many consumers believe that higher prices mean higher quality
Multiple-unit pricing- suggest a bargain and helps increase sales volumes
3 for $.99

30. Psychological Pricing
Bundle pricing- including several complementary products in a package sold at a single price
Price is lower than if all products were purchased separately

31. Psychological Pricing
Promotional pricing- used with sales promotions when prices are lower than average
Loss-leader pricing- increases store traffic by offering popular items for low prices
Special-event pricing- items are reduced in price for a short period of time based on an event

32. Psychological Pricing
Every day low prices (EDLP)- low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future
Price lining- requires a store to offer merchandise in a given category at certain prices

33. Discount Pricing
Discount Pricing- sellers offering reductions from the usual price
Granted for the buyer’s performance of certain functions

34. Discount Pricing There are five types of discount pricing techniques:
Cash discounts- offered to buyers to encourage them to pay their bills quickly
2/10 net 30

35. Discount Pricing
Quantity discounts- offered to buyers for placing large orders
Noncumulative- offered on one order
Cumulative- offered on all orders over a period of time

36. Discount Pricing
Trade discounts- not really discounts but rather the way manufacturers quote prices to wholesalers and retailers
Suggested retail prices are set
Distribution channel members are quoted discounts from the list price for performing functions

37. Discount Pricing
Seasonal discounts- offered to buyers willing to buy at a time outside the customary buying season
Promotional discounts and allowances- offered to wholesalers and retailers willing to advertise or promote products
Can be in the form of percentage discounts or free merchandise
Can be offered directly to the consumer

38. The Six Steps for Determining Price
Determine pricing objectives- what is the purpose in setting a price
Do you want to increase sales volume or sales revenue?
Establish a prestigious image for your product and your company?
Increase your market share and market position?

39. The Six Steps for Determining Price
Study costs- give careful consideration to the costs involved in making or acquiring goods
Determine how to reduce costs without affecting the quality or image of the product
Estimate demand- use market research
Set prices at a level that consumers are willing to pay

40. The Six Steps for Determining Price
Study competition- investigate competitor prices for similar products
Decide on a pricing strategy- choose a higher, lower, or in line price
Set price- set an initial price and be prepared to monitor and evaluate the effectiveness

41. Assignment Page 480 Reviewing Key Terms and Concepts #1-5
Thinking Critically #6