Chapter 16 â Pricing Concepts and Strategies Pricing Objectives ...
Chapter 16 – Pricing Concepts and Strategies Pricing Objectives Profitability objectives o Profits = revenue – expenses o Total revenue = price x quantity sold o Economic theory All firms behave rationally All firms try to maximize profit and minimize loss Volume objectives o Increased sales volume is ore important in the long run than immediate profits Market share objective Try to maximize market share Profit impact of market studies (PIMS) project Concentrate on non price factors Profit in long term depends on market share and quality Meeting competition budgets o Firms sometimes set prices to match established industry price leaders Value pricing Focus on benefits derived from your product in comparison to price and quality of the competitors products Prestige objectives o Establishing a relatively high price to develop and maintain and image of quality and exclusiveness that appeals to status-conscious consumer For high priced and luxury goods Not-for-profit organizations o Pricing strategy helps them achieve specific goals Profit maximization Charitable events Cost recovery Receiving funding for services provided Market incentives Increase consumption of their services Market suppression Pricing an item at high pricing so people do not buy Methods for Determining Prices Prices are traditionally determined in two basic ways o Supply and demand (depends on market structure) Firms don’t always attempt to maximize profits and demand curves and difficult to analyze o Cost-orientated analysis
Chapter 16 – Pricing Concepts and Strategies
Customary prices – traditional price that you are used of paying for a particular product or service Elasticity – measure of responsiveness of purchasers and suppliers to a change in price o Determinants: substitutes, complement, online transactions, necessity or luxury, income and short/long run Elasticity of Demand – percentage change of quantity of goods and services demanded divided by percentage change in price Price determination in practice o Cost plus pricing – adding percentage of specified dollar amount or markup, to the base cost of a product to cover unassigned costs and to provide a profit o Full cost pricing – uses all relevant variable costs in setting a product’s price and allocates those fixed costs not directly attributed to the production of the price item o Incremental cost pricing – attempts to use only cost directly attributable to a specific output in setting prices Break-even analysis – determine the number of products sold at a price to generate enough revenue to cover total cost o Break even point = total fixed costs/per unit contribution to fixed cost o Target returns Yield management – allows marketers to vary prices based on such factors as demand even though the cost of providing these goods and services remains the same
Pricing Strategies Skimming pricing o Setting a price for a product above market price o Luxury goods or maintaining an image of quality Penetration pricing strategy o Highly elastic demand o Low production and marketing costs o High likelihood of attracting strong competitors Everyday low pricing o Disadvantages: reduces revenue and generate an image of questionable quality Competitive pricing strategy o Setting price at par with competitors o Focus on non price factors to differentiate products o Opening price point – setting an opening price below that of the competition, usually on a high-quality private label item Price Quotations List price – price quoted to customers
Chapter 16 – Pricing Concepts and Strategies
Market price – price paid by customer in the ends after all reductions and add-ons Reductions from list price o Cash discount – giving cash back to customers for prompt payments o Trade discount – discounts given to intermediaries and supply chain, push money strategy o Quantity discount – price discount based on quantity of products purchased Cumulative quantity discount – discount determined by amounts of purchases over stated time periods Noncumulative quantity discount – discount to get the customer to purchase on the spot o Allowance – any financial incentive Trade in – given when customer is returning an old item for a new one Promotional allowance – supporting promotional mix strategy for a short period of time Minimum advertised pricing – given to retailers by manufacturers to not list their products below a certain price o Rebate – refund of a portion of the purchase price, usually granted by the product’s manufacturer
Geographic Considerations FOB pricing o Doesn’t include transportation charges/shipping costs o Fright origin – customers will be charged all that transportation cost from origin to where it is being bought Uniform-delivered pricing o Includes transportation costs in the price and divides it uniformly across all products o Phantom freight – people who live closer to the manufacturer have to pay more Zone pricing o Charging different prices for people in different zones Base-point pricing o Manufacturer decides base location and pay a particular price from there Pricing Policy Psychological pricing o Odd pricing – don’t round off o Unit pricing – charge per unit Price flexibility o One-price policy – all customers pay one price o Variable price policy – allowing customers and retailers to bargain
Chapter 16 – Pricing Concepts and Strategies
Product-line pricing o Different price levels within the same product line Promotional pricing o Price is set to maintain or go along with promotional strategy Loss leaders and leader pricing o Less than the cost to attract customers in hope to buy more o Variant of loss leader product for which marketers price above the cost to earn a minimum return to make up from the lost leaders
Topics in Pricing Competitive bidding and negotiated prices o Asking price quotations from different sellers o Negotiate a price with a preferred supplier Pricing in global markets o Standard wall by pricing – same pricing strategy in all countries o Dual pricing – different pricing strategy for domestic and international o Market differentiated pricing – modify strategy based on market o Transference pricing dilemma – pricing of moving goods between profit centres o Online pricing considerations – bots are a program or software that helps in price comparison o Cannibalization dilemma – new product impacts profits of previous products o Bundle pricing – two or more products together for a bundled price Pricing and the Law Federal, provincial and territorial laws Tariffs levied on imported goods and services Ticket scalping – method of campaigning at ticket booths The Competition Act Tries to foster a fair competitive environment Focuses on several price related factors o Price discrimination People are paying different prices for the same product o Price fixing Suppliers fix the price o Bid rigging Suppliers decide on a particular price code for buyers o Predatory pricing Price at a low level at a long time to beat competitors o False or misleading price representations Misleading customers about the process through your promotion strategies
Chapter 16 – Pricing Concepts and Strategies
Customary prices – traditional price that you are used of paying for a particular product or service Elasticity – measure of responsiveness of purchasers and suppliers to a change in price o Determinants: substitutes, complement, online transactions, necessity or luxury, income and short/long run Elasticity of Demand – percentage change of quantity of goods and services demanded divided by percentage change in price Price determination in practice o Cost plus pricing – adding percentage of specified dollar amount or markup, to the base cost of a product to cover unassigned costs and to provide a profit o Full cost pricing – uses all relevant variable costs in setting a product’s price and allocates those fixed costs not directly attributed to the production of the price item o Incremental cost pricing – attempts to use only cost directly attributable to a specific output in setting prices Break-even analysis – determine the number of products sold at a price to generate enough revenue to cover total cost o Break even point = total fixed costs/per unit contribution to fixed cost o Target returns Yield management – allows marketers to vary prices based on such factors as demand even though the cost of providing these goods and services remains the same
Pricing Strategies Skimming pricing o Setting a price for a product above market price o Luxury goods or maintaining an image of quality Penetration pricing strategy o Highly elastic demand o Low production and marketing costs o High likelihood of attracting strong competitors Everyday low pricing o Disadvantages: reduces revenue and generate an image of questionable quality Competitive pricing strategy o Setting price at par with competitors o Focus on non price factors to differentiate products o Opening price point – setting an opening price below that of the competition, usually on a high-quality private label item Price Quotations List price – price quoted to customers
Chapter 16 – Pricing Concepts and Strategies
Market price – price paid by customer in the ends after all reductions and add-ons Reductions from list price o Cash discount – giving cash back to customers for prompt payments o Trade discount – discounts given to intermediaries and supply chain, push money strategy o Quantity discount – price discount based on quantity of products purchased Cumulative quantity discount – discount determined by amounts of purchases over stated time periods Noncumulative quantity discount – discount to get the customer to purchase on the spot o Allowance – any financial incentive Trade in – given when customer is returning an old item for a new one Promotional allowance – supporting promotional mix strategy for a short period of time Minimum advertised pricing – given to retailers by manufacturers to not list their products below a certain price o Rebate – refund of a portion of the purchase price, usually granted by the product’s manufacturer
Geographic Considerations FOB pricing o Doesn’t include transportation charges/shipping costs o Fright origin – customers will be charged all that transportation cost from origin to where it is being bought Uniform-delivered pricing o Includes transportation costs in the price and divides it uniformly across all products o Phantom freight – people who live closer to the manufacturer have to pay more Zone pricing o Charging different prices for people in different zones Base-point pricing o Manufacturer decides base location and pay a particular price from there Pricing Policy Psychological pricing o Odd pricing – don’t round off o Unit pricing – charge per unit Price flexibility o One-price policy – all customers pay one price o Variable price policy – allowing customers and retailers to bargain
Chapter 16 – Pricing Concepts and Strategies
Product-line pricing o Different price levels within the same product line Promotional pricing o Price is set to maintain or go along with promotional strategy Loss leaders and leader pricing o Less than the cost to attract customers in hope to buy more o Variant of loss leader product for which marketers price above the cost to earn a minimum return to make up from the lost leaders
Topics in Pricing Competitive bidding and negotiated prices o Asking price quotations from different sellers o Negotiate a price with a preferred supplier Pricing in global markets o Standard wall by pricing – same pricing strategy in all countries o Dual pricing – different pricing strategy for domestic and international o Market differentiated pricing – modify strategy based on market o Transference pricing dilemma – pricing of moving goods between profit centres o Online pricing considerations – bots are a program or software that helps in price comparison o Cannibalization dilemma – new product impacts profits of previous products o Bundle pricing – two or more products together for a bundled price Pricing and the Law Federal, provincial and territorial laws Tariffs levied on imported goods and services Ticket scalping – method of campaigning at ticket booths The Competition Act Tries to foster a fair competitive environment Focuses on several price related factors o Price discrimination People are paying different prices for the same product o Price fixing Suppliers fix the price o Bid rigging Suppliers decide on a particular price code for buyers o Predatory pricing Price at a low level at a long time to beat competitors o False or misleading price representations Misleading customers about the process through your promotion strategies
