Pricing

Pricing Strategies
Strategies

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 1

 Pricing
 Is governed both by art and science.
 Requires balancing a multitude of
complex forces.
 Cuts across every aspect of a small
company.
 Is an important signal of a product’s
or service’s value to customers.
 Involves both math and psychology.

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 2

 Three Pricing Forces: Image,
Competition, and Value
 Price conveys image
 When setting prices, business owners
must consider competitors’ prices
 Focus on value

Copyright ©2009 Pearson

Education, Inc. Publishing as
3 Copyright 2008 Prentice Hall Publishing Company Prentice Hall
 Three Pricing Forces: Image,
Competition, and Value (Continued)

 When setting prices, business owners

must consider competitors’ prices
 Avoid price wars!
 Focus on value
 Objective value vs. perceived value
 Three reference points:
 Price paid in the past
 Prices competitors charge
 Company’s costs

Copyright ©2009 Pearson

Education, Inc. Publishing as
4 Copyright 2008 Prentice Hall Publishing Company Prentice Hall
 Price Conveys Image
 Price sends important signals to customers
– quality, prestige, uniqueness, and others.
 Common small business mistake: Failure to
recognize extra value, service, quality, and
other benefits they offer and charging
prices that are too low.
 Study: Only 15 percent to 35 percent of
customers consider price to be the chief
criterion when selecting a product or
service.
Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 5
 Competition and Pricing
 Take into account competitors’ prices but it
is not always necessary to match or beat
them.
 Key is to differentiate a company’s
products and services.
 Price wars often eradicate companies’
profits and scar an industry for years.
 Best strategy: Stay out of a price war!

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 6

 Focus on Value
 The “right” price for a product or service
depends on the value it provides for a
customer.
 Objective value vs. perceived value
 Three reference points:
 Price paid in the past
 Prices competitors charge
 Company’s costs

 Value ≠ low price, however.

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 7

 Dealing with Rising Costs
 Communicate with customers
 Focus on improving efficiency
 Consider absorbing cost increases
 Emphasize the value of your company’s
product or service to customers
 Anticipate rising costs and try to lock in raw
material prices early

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 8

 What Determines Price?
Price Ceiling ("What will the market bear?")

? ?
?
Final
FinalPrice
Price(What
(Whatis
isthe
the
Acceptable company's
company'sdesired
desired"image?")
"image?")
?
Price
?
Range ? ?
?
? ?
?
?
Price Floor ("What are the company's costs?")
Factors Affecting Price
 Product or service costs  Economic conditions
 Customers’  Seasonal fluctuations
characteristics  Customers’ price
 Market forces sensitivity
 Competitors’ prices  Psychological factors
 Sales volume  Credit terms and
 Company’s image purchase discounts
 Customers expectations  Desired image

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Copyright 2008 Prentice Hall Publishing Company
 Customized or Dynamic Pricing
A pricing technique in which the company sets different
prices on the same products and services for different
customers using the information that a company collects
about its customers.

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 11

 Introducing a New Product
Three Goals:
1. Getting the product accepted

Three types of products

 Revolutionary products transform an industry
 Evolutionary products make improvements to products that
are already on the market
 Me-too products are those that allow a company merely to keep
up with competitors
2. Maintaining market share as competition grows
3. Earning a profit

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 12

 Introducing a New Product

Three Basic Strategies:

 Market penetration

 Skimming

 Sliding-down-the-demand-curve

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 13

 Pricing Established Goods and Services
 Odd pricing  Opportunistic pricing
 Price lining  Discounts (or Markdowns)
 Leader pricing  Bundling
 Geographical  Optional-product pricing
pricing  Captive product pricing
 Zone pricing  Byproduct pricing
 Uniform delivered  Suggested retail prices
pricing  Follow-the-leader
 F.O.B. seller

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 14

Pricing for Retailers: Markup

Dollar Markup = Retail Price - Cost of Merchandise

Dollar Markup
Percentage (of Retail Price) Markup = Retail Price

Percentage (of Cost) Markup = Dollar Markup

Cost of Unit

Copyright © 2009 Pearson

Copyright 2008Education, Inc.  Publishing
Prentice Hall Publishing as Prentice Hall
Company
Pricing for Retailers: Markup

Dollar Markup = Retail Price - Cost of Merchandise

Dollar Markup
Percentage (of Retail Price) Markup = Retail Price

Percentage (of Cost) Markup = Dollar Markup

Cost of Unit
Example:
Dollar Markup = $25 - $15 = $10
$10
Percentage (of Retail Price) Markup = = 40%
$25
$10 = 67%
Percentage (of Cost) Markup =
$15
Copyright © 2009 Pearson
Copyright 2008Education, Inc.  Publishing
Prentice Hall Publishing as Prentice Hall
Company
 Pricing for Retailers (contd…)
 Follow-the-Leader Pricing
 Below-Market Pricing

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 17

Pricing for Manufacturers:
Cost-Plus Pricing
Selling Price

Profit Margin

Selling and
Administrative Costs

Direct Labor
Direct Materials
Factory Overhead

Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Copyright 2008 Prentice Hall Publishing Company
 Pricing for Manufacturers:
Breakeven Selling Price
Quantity Total
Breakeven { Variable cost
x fixed
Selling Profit + per unit produced } +
= costs
Price
Quantity produced

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 19

 Pricing for Manufacturers:
Breakeven Selling Price
Quantity Total
Breakeven { Variable cost
x fixed
Selling Profit + per unit produced } +
= costs
Price
Quantity produced

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 20

 Pricing for Service Firms:
Price per Hour
Price per Hour = Total cost per x 1
productive hour (1 - net profit target as
a % of sales)

Example: Ned’s TV Repair Shop

Price per Hour = $18.59 per x 1 = $22.68 per hour

hour (1 -.18)

Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Copyright 2008 Prentice Hall Publishing Company
 Pricing for Service Firms:
Price per Hour
Price per Hour = Total cost per x 1
productive hour (1 - net profit target as
a % of sales)

Example: Ned’s TV Repair Shop

Price per Hour = $18.59 per x 1 = $22.68 per hour

hour (1 -.18)

Copyright © 2009 Pearson Education, Inc.  Publishing as Prentice Hall

Copyright 2008 Prentice Hall Publishing Company
 Credit and Pricing
 Credit cards
 Merchants incur fees to be able to accept credit cards

 Application fee

 Transaction fees

 Interchange fees

 Equipment fee

 Licensing fee

 Holdbacks and chargebacks

 Installment credit
 Trade credit

Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company 23