Pricing Pricing StrategiesStrategies

the price is what you pay, the price is what you pay, the value is what you the value is what you receive…anonymousreceive…anonymous

3 Potent Forces3 Potent Forces

Image Image (premium or (premium or least price)least price)

Competition Competition (nonprice)(nonprice)

Value Value (objective or (objective or perceived)perceived)

Rising CostsRising Costs

Communicate with customersCommunicate with customers Improve efficiency in the companyImprove efficiency in the company Absorb the cost increasesAbsorb the cost increases Emphasize the value of the productEmphasize the value of the product Anticipate rising costs/lock in prices Anticipate rising costs/lock in prices

earlyearly

Pricing FactorsPricing Factors

Product/service Product/service costscosts

Market factorsMarket factors Sales volumeSales volume Competitors’ Competitors’

pricesprices Competitive Competitive

advantageadvantage sensitivitysensitivity Desired imageDesired image

Economic conditionsEconomic conditions Business locationBusiness location Seasonal Seasonal

fluctuationsfluctuations Psychological Psychological

factorsfactors Credit Credit

terms/purchase terms/purchase discountsdiscounts

Customers’ priceCustomers’ price

Customized or Customized or Dynamic PricingDynamic Pricing

A A pricing technique that sets pricing technique that sets different prices on the same different prices on the same products and services for products and services for different customers using the different customers using the information that a company information that a company collects about its customerscollects about its customers

Pricing Strategies and Pricing Strategies and TacticsTactics

Introducing a New ProductIntroducing a New Product Getting the Product Accepted Getting the Product Accepted

-revolutionary -revolutionary -evolutionary -evolutionary -me-too -me-too

Maintaining the Market ShareMaintaining the Market Share Earning a ProfitEarning a Profit

Pricing Strategies and Pricing Strategies and TacticsTactics

Introducing a Introducing a New ProductNew Product

Market Market PenetrationPenetration

SkimmingSkimming Sliding down Sliding down

the Demand the Demand CurveCurve

Pricing Strategies and Pricing Strategies and TacticsTacticsPricing Established Goods and Services

Odd Pricing: sets prices that end in odd numbers to create the psychological impression of low prices

Price Lining: greatly simplifies the pricing function by pricing different products at different price points, depending on quality, features, and cost

Leader Pricing: involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices

Strategies and Tactics (cont’d)

Geographic Pricing:

zone: involves setting different prices for different territories because of different transportation costs

delivered: charges all of its customers the same price regardless of location

FOB-Factory: sells merchandise to customers who then also pay for the shipping costs

Strategies and Tactics (cont’d)

Opportunistic Pricing: involves charging customers unreasonably high prices when goods or services are in short supply

Discounts: reductions from normal list prices, ex. Multiple-unit pricing: offering customers discounts if they purchase in quantity

Bundling: involves grouping together several products into a package that offers extra value at a special price, ex. optional, captive, byproduct

Suggested Retail Price: manufacturer suggestion

Pricing Strategies for Retailers

Markup: difference between cost of a product and its selling price

Dollar Markup=Retail Price – Cost % Retail Markup=Dollar Markup/Retail Price % Cost Markup=Dollar Markup/CostMarkup=Operating

Expenses+Reductions+Profits Net Sales +Reductions Follow-the-Leader Below-Market Pricing

Pricing Strategies for Retailers

(cont’d)Sale Rack Shuffle clothing company makes a dress for $50 Sells dress to retailer at $80 Retailer marks dress up to $200 If unsold after 8-12 weeks, marks down

by 25% to $150 If still unsold, marks down further until it

does. Clothing company and retailer agree how to share the cost of markdown.

Pricing Strategies for Manufacturers

Direct Costing absorption costing: traditional method in which all manufacturing and overhead costs are absorbed into total cost variable costing: includes in the product’s cost only those that vary directly with the quantity produced.

Pricing Strategies for Manufacturers

(cont’d)Full Absorption Income StatementSales 790,000Cost of Goods Materials 250,500 Direct Labor 190,200 Factory Overhead 120,200 560,900Gross Profit 229,100Operating Expenses General and Administrative 66,100 Selling 112,000 Other 11,000 189,100Net Income 40,000

Pricing Strategies for Manufacturers (cont’d)

Direct Cost Income StatementSales Revenue 790,000Variable Costs Materials 250,500 Direct Labor 190,200Variable factory overhead 13,200

502,000Contribution Margin (36.5%) 288,000Fixed Costs Factory Overhead 107,000 Fixed selling expenses 63,900 General and Administrative 66,100 Others 11,000 248,000Net Income 40,000

Pricing for Manufacturers

(cont’d)Computing the Break-Even Selling PriceSelling Price=Profit + (Variable Cost/U x Qty

Produced) +Total Fixed Cost Qty Produced

Pricing Strategies for Service Firms

Hourly Rate with Profit

With Materials Without Materials

Impact of Credit on Pricing

Credit Cards

Installment Credit

Trade Credit