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Chapter 14: Pricing Strategies

Price

Price: The sum of all the value(s) the consumer gives up to obtain the product or service.– Money– Time– Effort– Foregoing something else you otherwise would

have purchased– Brand, image, perception– Level of service, warranty, guarantee

Price Price is determined by external market issues:

– Supply versus demand (availability of substitutes)– Consumer value perceptions– Product costs– Competitor prices

Price is determined by internal strategic goals:– New product that needs to penetrate market?– High quality product that requires a high price?– Commodity or me too product requiring low price?– Trying to position the brand in a particular way?– Trying to knock /differentiate from a competitor?

Price Prices are set at

each step of the supply chain

Price is determined by the cost of the materials coming in, plus the value provided by the channel member (labor, branding, convenience, packaging quantity)

Producer

Wholesaler

Retailer

Consumer

Producer purchases raw materials, makes the

product, then charges a price to the Wholesaler

(cost + profit)

Wholesaler pays a price to the Producer, then

charges a price to the Retailer(cost + profit)

Retailer pays a price to the Wholesaler, then

charges a price to the Consumer (cost + profit)

Consumer pays a price to the Retailer based on their

perceived value of the product

Price Terminology

Revenue = Price x Sales Unit– Revenue per unit = $10 x 1 = $10– Total revenue = $10 x 150 units sold = $1500

Profit = Revenue – Costs– Profit per unit = $10 - $7 cost = $3– Total profit = ($10 x 150) – ($7 x 150)

= $1500 - $1050

= $450

Markup Markup: The amount the purchaser increases

the price before selling the product to the next channel member.

– Cost=$15.00– Selling price=$20.00– Differential = $5.00

Markup as % of cost = (Selling $ – Cost ) / Cost= $5/$15= 33%

Markup as % of selling price = (Selling – Cost) / Selling= $5/$20= 25%

Margin

Margin: Percentage of profit received based on the selling price.

Margin % on selling price = (Selling $ – Cost) /(Selling $)= $5/$20 = 25%

Margin and Markup Example (p. 721)

Retailer margin goal: 30% Wholesaler margin goal: 20% Suggested retail price: $600

– Retail price: $600– (Less 30% margin for retailer): ($180)– Retailer’s cost/wholesaler’s price: $420– (Less 20% margin for wholesaler): ($84)– Wholesaler’s cost/manufac. price: $336

Pricing Objectives

Profit Oriented: Setting prices so that total revenue is as large as possible relative to total costs

Sales Oriented: Short-term objective to maximize sales– Ignores profits, competition, and the

marketing environment– May be used to sell off excess inventory

Status Quo: Maintain existing prices, or meet competitors’ prices

Profit Oriented Pricing

Define costs for the product or service, define the targeted profit, and set price based on these components.

Price Skimming: A form of profit oriented pricing where a high price is charged when introducing a product, often due to lack of competition.

• Relies on high profit margins per unit and lower sales volume

• Best when the product has a significant competitive advantage, legal protection, inelastic demand

Profit Oriented Pricing: (Sometimes Called Cost Plus, Markup)

1) Your fixed costs

2) Your variable

costs+

=3) Your profit margin

+

Sales Oriented Pricing

Price is set to maximize the units sold, typically using low profit margin targets.

Penetration Pricing: A low introductory price is set to penetrate the market and generate larger sales volume.

• Relies on high sales volume and lower profit margins per unit.

• Often used when there are many competitors in the market, or the product does not have a significant competitive advantage

Sales-Oriented PricingCompetitive analysis establishes target

price points for your product

Analysis of initial costs establishes floor for your product

Status Quo Pricing

Goal is to maintain existing prices, or meet a competitor’s prices.– Passive pricing policy– Often used by other firms when there

is a dominant product in the market (price leader)

– Used for late-entering, “me-too” products

What is market share?

Market ShareMarket ShareA company’s product sales as a percentage of total sales for that industry in dollars or units.

Setting the Right Price

Choose a price strategy Fine tune with pricing tactics

Choose a price strategy Fine tune with pricing tactics

Understand your market pressuresUnderstand your market pressures

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

Results lead to the right price

Market Pressures: Stage in the Product Life Cycle

IntroductoryStage

GrowthStage

DeclineStage

$

High

$Stable

$Decrease

MaturityStage

$Decrease

Stable

High

UNIQUE PRICING STRATEGIES

These next slides are for your reference, not to know for an exam. You may or may not need this info for your project.

Market Pressure: Selling Against a Brand

Stocking well-known branded items at high prices in order to sell another brand at discounted prices.– Viva paper towels: $1.29– Safeway Brand: $0.99– Increase volume on store brand

Market Pressure: Reference and Prestige Pricing

Regular price: $45

Now Only: $25

Reference Pricing Prestige Pricing

http://www.vivre.com

Market Pressure: Psychological Price Positioning

Most Attractive?

Better Value?– A = 6.8 ¢ per oz.

– B = 7.7 ¢ per oz.

Psychological reason to price this way?

A32 oz.

B26 oz.

$2.19

$1.99

Assume Equal Quality

Unique Pricing Strategies

Product Line Pricing Product Mix Pricing Segmented Pricing

Product Line Pricing

Involves setting price steps between various products in a product line based on:

– Cost differences between products

– Customer evaluations of different features

– Competitors’ prices

Product Mix Pricing Strategies

Optional-Product– Pricing optional or

accessory products sold with the main product (i.e camera bag) at a high price.

Captive-Product– Pricing products that

must be used with the main product (i.e. film) at a high price.

Other Pricing Strategies

Segmented Pricing: Selling a product at different prices for reasons other than cost.– Customer segments (movie theater tickets)– Location (in-state versus out of state

students)– Time (season, month, time of day (train

tickets))– Product form (soda in large and small

bottles)

Pricing Restrictions

Can price products differently to different purchasers, provided the costs to sell to the purchasers are different.

Cannot price fix, or collude across competitors to set prices in the market.

Cannot require retailers to set prices at a particular level (can have a manufacturer’s suggested retail price, or MSRP)

Segmentation/Yield Management

Yield Management Systems

A technique for adjusting prices

that uses complex mathematical

software to profitably fill unused

capacity.

Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity

Yield Management Pricing