Pricing Strategies

Price

• Calculating the selling price for the product/service calls for the business person to don two hats! That of marketer, and that of accountant. Keep in mind that the selling price should be what the customer will be prepared to pay! The accountant knows that the price must of course cover all costs, and give a profit (the reason business operate).

Goals of Pricing

A firms percentage of the total sales Volume generated by all the competitors in a market.

Price vs. Nonprice

• Is a calculation that is used to determine the relative profitability of a product. A company may price its products to achieve a certain return on investment. Formula is: Return-Investment divided by Investment

• Assume your company sells trash cans for $8 each. Your cost to make and market the trash cans is $6.50 per unit. Profit is money earned by a business minus costs and expenses.

• $8 - $6.50 = $1.50 / $6.50 = .23 This means that your rate of return on investment is 23 percent.

Return On Investment (ROI)

Factors affecting your pricing strategy include:

• Supply and demand• Your costs and expenses• Competition

3 Basic Pricing Strategies

Cost Oriented

• Cost Oriented Pricing: price is determined by adding a profit element on top of the cost of making the product.

• Markup is the difference between the price of an item and its cost. It is generally expressed as a percentage. The markup in dollars is added to the cost to determine the price:

Cost + markup = Price $25 + $15 = $40.00

Example: An oak desk, which sells for $251.95 is marked up $108.00. What is the cost of the desk to the shop owner?

Practice Markup Pricing

• A computer software retailer used a markup rate of 40%. Find the selling price of a computer game that cost the retailer $25.

• A gold shop pays its wholesaler $40 for a certain club, and then sells it to a golfer for $75. What is the markup rate?

• Marketers who use demand-oriented pricing attempt to determine what present customers are willing to pay for given goods and services.

Demand Oriented

. How much value does the customer place on the product?Price is determined by demand

1. Price above, price in line, or price under the competition?

2. no relation to cost of the product or supply and demand

3. prices based solely on competitors’ price

competitive bid pricing - Price based off the competition

Ex: Competing gas stations

going-rate pricing - what every one else is doing, usually set by the firm with

largest market share. Ex. Airlines

Competition-Oriented Pricing

Pricing Techniques

Skimming PricingPenetration Pricing

• a pricing policy that sets a very high price for a new product

• As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.

Skimming Pricing

Penetration Pricing

• Opposite of skimming• setting a relatively low initial entry price,

usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.

Psychological Pricing

Refers to techniques that create an illusion for customers or that makes shopping easier for them.

Technique involves setting pricesthat end in either odd or even numbers

Practice of setting higher-than-averagePrices to suggest status to the consumer.

Suggestive bargainPackages. 3 for .99

BundleCombining several products and offering the bundle at a reduced price

Promotional Pricing

On sale pricing

Involves the seller’s offering reductions from the usual price.

Discounts are offered to buyers to encourage them to paytheir bills quicker!

Offered to buyers for placing large orders.

Offered to buyers to purchase products in advance.