Pricing, Ch#11

Strategies

Terms Ch#11

Fixed Odd / Even PricingVariable Price LiningGouging Promotional PricingBait and Switch Multiple Unit PricingPredatory Bundle PricingResale Price Maintenance ElasticityDiscount Pricing Break-Even Point (BEP)Price Skimming Penetration Pricing Mark-up Prestige Pricing

Mark-down Leader Pricing / Loss Leader

Why is Pricing Important?

Pricing decisions is important because customers have alternatives to choose from.

In a Free-Enterprise economic system, customers are in a position to seek good value

Value = perceived benefits price So, businesses can increase value and stimulate sales

by increasing benefits or reducing the price.

Price Sensitivity and Demand

When increases

can decrease

as fewer customers feel the product is a good value

Market pricing principles state that Laws of Supply and Demand do not set prices, businesses do.

price

sales

Considerations in Setting Prices

The four factors consider in setting prices:• The price sensitivity of consumers• The cost of the merchandise and services• Competition• Legal restrictions

Elasticity

Elasticity = percent change in quantity sold percent change in price

Pricing

Regardless of Supply or Demand, to stay in business, the business must sell the product for more than it costs. In other words, all products should be “Mark-ed Up”. “Mark-downs” should be avoided.

Markups

Selling Price = Cost + Markup

100% = 70% + 30%

Selling Price = $10.00 and markup = 30%

Selling Price = Cost + Markup

$ 10.00 = $7.00 + $ 3.00

Reasons for Taking Markdowns

• Get rid of slow-moving, obsolete, uncompetitive priced merchandise

• Increase sales and promote merchandise• Generate cash to buy additional merchandise• Increase traffic flow and sale of complementary

products generate excitement through a sale

Fixed Costs

Do not change when sales volume increases or decreases. An example of a fixed cost is rent on a lease.

Variable Costs

Changes as unit sales increase or decrease.

An example of a variable cost is labor.

Break-even point

Understanding the Implication of Fixed and Variable Costs

Fixed Costs + Variable Costs = BEP =Total Cost

Break-even point (BEP)

Variable Costs

Fixed Costs

Pricing strategies of: Every Day Low Prices (Selling almost

everything in the store cheaper)

Vs. Hi / Lo Prices (Ads featuring only some products)

Advantages of EDLP & Hi-Lo

EDLP• Builds loyalty –

guarantees low prices to customers

• Lower advertising costs

• Better supply chain management– Fewer stock outs– Higher inventory turns

Hi-Lo• Higher profits – price

discrimination• More excitement• Build short-term

sales and generates traffic

Variable Pricing

Change your prices for different geographical regions or even changing prices for senior citizens.

• Certain items are priced lower than normal to increase customers traffic flow and/or boost sales of complementary products.

• Best items: Purchased frequently, primarily by price-sensitive shoppers.

• Examples: Bread, eggs, meat or disposable diapers.

Leader (Loss) Pricing

Allan Rosenberg/Cole Group/Getty ImagesDennis Gray/Cole Group/Getty Images

Psychological Pricing

Often used in retailing, is the belief that consumer perceptions are influenced by price. Types of Psychological Pricing includes: Bundling, Multiple-Unit, Prestige, Odd / Even, Price Lining and Promotional.

Bundling / Bundle Pricing

Grouping pricing of complementary products together sold at a lower price to benefit consumers. An example of this is Verizon cable and internet grouped together at a lower price.

Price Lining

• A limited number of predetermined price points.• Ex: $59.99 (good), $89.99 (better), and 129.99 (best)

product lines.• Business Benefits from:

– Elimination of confusion of many prices.– Merchandising task is simplified.– Gives buyers flexibility.– Can get customers to “trade up.”

Odd / Even Pricing

This is a psychological price method that suggests that customers are sensitive to ending numbers of pricing (pennies).

Odd: 9.99 sounds cheap, Even: $10.00 sounds expensive, but might denote quality

Multiple Unit Pricing

• Instead of saying $1.00 each

Tell the customer it’s 10 for $10.00

Or instead of saying Egg McMuffins are $1.75 each, they are 2 for $3.50

Prestige Pricing

• Customers believe that pricing has a direct correlation with quality.

• Surrogate of quality is price.• When a business charges a high price and the

business claims it has quality merchandise, customers tend to believe the claims.

BOGO Pricing

• Buy One Get One --- Price

Businesses usually double their prices before going BOGO.

Discount Pricing

This is merely a reduction in price to encourage customers to buy. Examples of this includes:

Cash discounts: % reduction if cash is used Quantity discounts: Increase in order size equals reduction

of price Seasonal discounts to reduce inventory. Unseasonable

items are sold at a discount. Trade discounts: Given to perpetuate business to business

relationships Promotional discounts: Passed on from the manufacturer

to the consumer to increase volume. Example: couponing.

Promotional Pricing

Lower prices for a limited period of time, to stimulate sales. Example: Super Burgers are: $1.00! This month only!

When introducing a new product…

Businesses often choose one of two types of strategies:

1. Price Skimming

2. Penetration Pricing

Price Skimming

When the product has no competitors and the product has an extreme uniqueness; The price of the product can be initially high. Often businesses introducing a product need to recoup research and development costs or large capital expenditures. As competitors enter the marketplace, the price can be lowered to meet competition.

Penetration Pricing is almost the opposite.

The goal of penetration pricing is to saturate the market. By giving the product away, there the hope that consumers will like it so much that they will later buy it, if given the chance.

This is done by couponing, sampling and just passing it out where there might be a large % of the target market. (Often done at county fairs, malls, supermarkets and Costco.)

Legal and Ethical Pricing Issues

Predatory Pricing

Resale Price Maintenance

Price fixing

Bait and Switch tactics

Gouging

PhotoDisc/Getty Images

Predatory Pricing

Is illegal, violates antitrust laws . This is often known as “Dumping”. It is similar to penetration pricing structure, but is often done to change an industry and not just to produce sales.

Simply put, low prices, below cost, until competitors are out of business.

Resale Price Maintenance

Price fixing imposed by a producer on other intermediaries to deter price-based competition.

Price Fixing

An illegal practice in which competing companies agree to restrict prices.

Bait and Switch (Illegal in California)

Retail tactic, advertising a product at a low price to bring customers into the store; however there is little or no inventory to support a sale of that product. Retailers then suggest other products instead.

Gouging

Priced at a higher price, because no other retailer is present.