Pricing

Pricing Strategies: Prestige Pricing, Penetration Pricing, Captive Pricing, Reference Pricing

Price: Money or other considerations exchanged for the ownership/use of a product or service

• price=listprice-incentives\&allowances+extrafees

• value=\frac{perceivedbenefits}{price}

• Value Pricing: Practice of simultaneously increasing product and service pricing and value

Profit

• Unit volume: Quantity purchased or sold (sometimes counterproductive)

• Sales revenue: Dollar sales (price x number of unites sold)

• Market share: Ratio of the company’s sales to those of the industry competitors

• Survival: Profits, sales, market share are lower priority and just used to remain in business

• Social responsibility: Recognize obligations to customers/society

Pricing Constraints

• Demand for the product class, group, brand

  • The number of potential buyers affects the price

  • Greater demand = higher price

• Newness of the product

  • Newer product/earlier in lifecycle = higher price

  • Consider patents and limited competition early in life cycle

• Cost of producing/marketing the product

  • Pricing to ensure the company and its channels of distribution make an adequate profit

  • Portion of profit goes to manufacturer, portion to distributor

• Single Product or Product Line

  • Consider product cost and perceived value of multiple products in the line

• Competitor Pricing and Consumer Awareness

  • Do consumers know about competitors’ prices

  • What can competitors do to change prices in response to consumer demand

• Legal and ethical considerations

  • Price fixing

  • Price discrimination

  • Deceptive pricing

  • Geographical pricing

  • Predatory pricing

Demand

• Demand and price are inversely related

• Price Elasticity: how responsive demand is to a change in price

Cost Structure

• Fixed costs: Costs that do not vary with production or sales

• Variable costs: Costs that do vary directly with the level of production

• UnitVariableCost=\frac{VariableCost}{Quantity}

• Costs vary at different levels of production: As production increases, unit costs decrease

Pricing Strategies

• Cost-Oriented Approaches: Stress cost side of pricing over demand

  • Cost Plus: Add a specific amount to the unit cost to arrive at price

  • Standard Mark-up: Add a fixed percentage to the cost of products to arrive at the price

  • Why use cost-oriented approaches?

    • Sellers are more comfortable with determining costs

    • Easy to do pricing based on cost

    • Minimized competition when used by all firms in an industry

• Profit-Oriented Approaches

  • Target Profit

  • Target Return on Sales

  • Target Return on Investment

• Competition-Oriented Approaches

  • Customary: Competitive factors or standardization dictate the price

  • Above/at/below market price: Subjective feel for competitors’ price as a benchmark

  • Loss leader: Deliberately selling a product below its customary price in hopes of the customer also buying products with large markups

• New Product Pricing

  • Skimming: Highest initial price that customers will pay, over time the price will be lowered to attract more sensitive segments

  • Penetration: Low initial price to penetrate the market quickly and deeply, attracting many buyers to build market share

• Product Mix Pricing: The company sets prices for various products, considering how they relate to each other

  • Price Lining: Prices for multiple products in a line are set at intervals

  • Captive Product: Pricing products that must be used with the main product

  • By-product: Pricing low-value by-products to get rid of or make money on them

  • Product bundle: Combine several products and offer the bundle at a reduced price

• Psychological Pricing

  • Prestige Pricing: Setting prices artificially high to convey prestige or quality

  • Odd-even Pricing: Ending the price with certain numbers to influence buyer perceptions of the price

  • Multiple Unit Pricing: Packaging together two or more identical products together and selling them at a single price, increase sales by encouraging multi-unit purchases

  • Reference Pricing: Pricing a product at a moderate level and displaying it next to a more expensive product

• Price Policy: How a company sets the prices of products based on costs, value, demand, and competition

  • Fixed Pricing: One-price set for all buyers of a product

  • Dynamic Pricing: Setting different prices in real time in response to supply and demand conditions, customized by customer

Discounts

• Quantity: Reduction in unit cost for large order

• Seasonal: Encourage buyers to stock inventory earlier than normal demand requires

• Trade: Compensation to resellers

Promotional Allowances

• EDLP: Constant low price with few temporary price reductions

• High-Low: Higher everyday prices couples with frequent temporary discounts on selected products