Dr. Close

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Demographic ConsiderationsDemographic Considerations

Number of potential buyersNumber of potential buyers Location of potential buyersLocation of potential buyers Position of potential buyersPosition of potential buyers Expected consumption rates of potential buyersExpected consumption rates of potential buyers Economic strength of potential buyersEconomic strength of potential buyers

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Psychological ConsiderationsPsychological Considerations

Related to pricing is concerned with consumer's Related to pricing is concerned with consumer's perception on price changesperception on price changes

Types of psychological pricing strategiesTypes of psychological pricing strategies Prestige pricing – High price is charged to create a Prestige pricing – High price is charged to create a

signal that the product is exceptionally finesignal that the product is exceptionally fine Odd pricing or odd even pricing – Prices are set a Odd pricing or odd even pricing – Prices are set a

few dollars or a few cents below a round numberfew dollars or a few cents below a round number Bundle pricing – Several products are sold together Bundle pricing – Several products are sold together

at a single price to suggest good valueat a single price to suggest good value

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Price ElasticityPrice Elasticity

Price elasticity – A measure of consumers’ price Price elasticity – A measure of consumers’ price sensitivitysensitivity Estimated by dividing relative changes in the quantity Estimated by dividing relative changes in the quantity

sold by the relative changes in pricesold by the relative changes in price

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Supply Influences on Pricing Supply Influences on Pricing DecisionsDecisions

Pricing objectives – Should be derived from overall Pricing objectives – Should be derived from overall marketing objectives, which in turn should be marketing objectives, which in turn should be derived from corporate objectivesderived from corporate objectives

Common objectivesCommon objectives Pricing to achieve a target return on investmentPricing to achieve a target return on investment Stabilization of price and marginStabilization of price and margin Pricing to achieve a target market sharePricing to achieve a target market share Pricing to meet or prevent competitionPricing to meet or prevent competition

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Supply Influences on Pricing Supply Influences on Pricing DecisionsDecisions

Cost Considerations in PricingCost Considerations in Pricing Markup pricing – Percentage is added to the Markup pricing – Percentage is added to the

retailer’s invoice to determine final priceretailer’s invoice to determine final price Cost-plus pricing – Costs of producing a product plus Cost-plus pricing – Costs of producing a product plus

desired profit are added to achieve pricedesired profit are added to achieve price Rate-of-return or target pricing – Adding desired rate Rate-of-return or target pricing – Adding desired rate

of return on investment to total costsof return on investment to total costs

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Retail Pricing Strategies: EDLP or Retail Pricing Strategies: EDLP or High/Low?High/Low?

Advantages of EDLPAdvantages of EDLP Assures customers of low prices.Assures customers of low prices. Reduces advertising and operating expenses.Reduces advertising and operating expenses. Reduces stockouts and improves inventory Reduces stockouts and improves inventory

management.management. Advantages of High/Low pricingAdvantages of High/Low pricing

Increases profits through price discrimination.Increases profits through price discrimination. Sales create excitement.Sales create excitement. Sells merchandise.Sells merchandise.

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Product Considerations in PricingProduct Considerations in Pricing

Perishability – Discounting the products as they Perishability – Discounting the products as they approach being no longer fit for saleapproach being no longer fit for sale

Distinctiveness – Classified in terms of distinctionDistinctiveness – Classified in terms of distinction Branding and brand equity of products are commonly Branding and brand equity of products are commonly

made distinctive in customers’ mindsmade distinctive in customers’ minds

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Product Considerations in PricingProduct Considerations in Pricing

Life cycle – Stage of the life cycle that a product is in Life cycle – Stage of the life cycle that a product is in can have important implicationscan have important implications

Two approaches to pricingTwo approaches to pricing Skimming price policy – Seller changes a relatively high Skimming price policy – Seller changes a relatively high

price on a new productprice on a new product Penetration price policy – Seller charges a relatively low Penetration price policy – Seller charges a relatively low

price on a new productprice on a new product

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Environmental Influences onEnvironmental Influences onPricing DecisionsPricing Decisions

Factors to considerFactors to consider Number of competitorsNumber of competitors Market shares, growth, and profitability of competitorsMarket shares, growth, and profitability of competitors Strengths and weaknesses of competitorsStrengths and weaknesses of competitors Likely entry of new firms into the industryLikely entry of new firms into the industry Degree of vertical integration of competitorsDegree of vertical integration of competitors Number of products sold by competitorsNumber of products sold by competitors Cost structure of competitors Cost structure of competitors Historical reaction of competitors to price changesHistorical reaction of competitors to price changes

Going-rate pricing – Pricing at competitionGoing-rate pricing – Pricing at competition Sealed-bid pricing – Pricing below competitionSealed-bid pricing – Pricing below competition

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Environmental Influences on Pricing Environmental Influences on Pricing DecisionsDecisions

Price fixing is illegalPrice fixing is illegal Deceptive pricing practices – Outlawed under Section 5 Deceptive pricing practices – Outlawed under Section 5

of the Federal Trade Commission Actof the Federal Trade Commission Act Price discrimination that lessens competition or is Price discrimination that lessens competition or is

deemed injurious to it is outlawed by the Robinson-deemed injurious to it is outlawed by the Robinson-Patman ActPatman Act

Promotional pricing such as cooperative advertising Promotional pricing such as cooperative advertising and price deals are not illegaland price deals are not illegal

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A General Pricing ModelA General Pricing Model

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A General Pricing ModelA General Pricing Model

Set Pricing ObjectivesSet Pricing Objectives Pricing process begins with a clear statement of the Pricing process begins with a clear statement of the

pricing objectivespricing objectives Guide pricing strategy and should be designed to Guide pricing strategy and should be designed to

support overall marketing strategysupport overall marketing strategy Efforts to set prices must be coordinated with other Efforts to set prices must be coordinated with other

functional areasfunctional areas

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A General Pricing ModelA General Pricing Model

Evaluate Product – Price RelationshipsEvaluate Product – Price Relationships Priced relatively high – Offers value in the form of high Priced relatively high – Offers value in the form of high

quality, special features, or prestigequality, special features, or prestige Priced at about average – Offers value in the form of Priced at about average – Offers value in the form of

good quality for a reasonable pricegood quality for a reasonable price Priced relatively low – Offers value in the form of Priced relatively low – Offers value in the form of

acceptable quality at a low priceacceptable quality at a low price Value pricing – Setting prices so that targeted Value pricing – Setting prices so that targeted

customers will perceive products to offer greater value customers will perceive products to offer greater value than competitive offeringsthan competitive offerings

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A General Pricing ModelA General Pricing Model

Analyze Profit PotentialAnalyze Profit Potential Quantity discounts – Discounts for purchasing large Quantity discounts – Discounts for purchasing large

number of unitsnumber of units Promotional allowances – Form of price reductions in Promotional allowances – Form of price reductions in

exchange for the channel member performing various exchange for the channel member performing various promotional activitiespromotional activities

Slotting allowances – Payment to retailers to get them Slotting allowances – Payment to retailers to get them to stock items on their shelvesto stock items on their shelves

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A General Pricing ModelA General Pricing Model

Set Initial Price StructureSet Initial Price Structure Considers price to various channel members, as well as Considers price to various channel members, as well as

the recommended price to final consumers or the recommended price to final consumers or organizational buyersorganizational buyers

Change Price as NeededChange Price as Needed Channel members may bargain for greater marginsChannel members may bargain for greater margins Competitors may lower their pricesCompetitors may lower their prices Costs may increase with inflationCosts may increase with inflation In the long term, price structures tend to increase for In the long term, price structures tend to increase for

most products as production and marketing costs most products as production and marketing costs increaseincrease

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Eight Tips for Improving a Company’s Eight Tips for Improving a Company’s Pricing StrategyPricing Strategy

Base pricing strategies on sound research in order to Base pricing strategies on sound research in order to understand relevant price factorsunderstand relevant price factors

Continuously monitor pricing decisions because they Continuously monitor pricing decisions because they often help define company imageoften help define company image

Remember that consumers have trouble recognizing Remember that consumers have trouble recognizing subtle price differencessubtle price differences

Remember that consumers evaluate prices Remember that consumers evaluate prices comparativelycomparatively They often use a sense of what they think the item They often use a sense of what they think the item

should cost as a benchmarkshould cost as a benchmark

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Eight Tips for Improving a Company’s Eight Tips for Improving a Company’s Pricing StrategyPricing Strategy

Recognize that buyers typically have a range of Recognize that buyers typically have a range of acceptable prices defined by upper and lower limitsacceptable prices defined by upper and lower limits

Understand the importance of relative price to buyers Understand the importance of relative price to buyers – the relationship between a price and your – the relationship between a price and your competitors’ pricecompetitors’ price

Understand the importance of price information and it Understand the importance of price information and it effects on differentiating products within a product lineeffects on differentiating products within a product line

Recognize that price elasticity vary – it is easier to Recognize that price elasticity vary – it is easier to lose customers to price increases than gain them lose customers to price increases than gain them from price decreasesfrom price decreases