Pricing Strategies

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 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.

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 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.
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 Competition and Pricing
 Must 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!

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 Focus on Value
 The “right” price for a product or
service depends on the value it
provides for a customer.
 Two aspects:
 Objective value

 Perceived value

 Value ≠ low price, however.

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 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
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 What determines price?
Price Ceiling ("What will the market bear?")

? ? ?
Final Price (What is the
Acceptable company's desired "image?") ?
Price
?
Range ? ?
?
? ?
? ?
Price Floor ("What are the company's costs?")
 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.

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 Introducing a New Product

Three Goals:
 Getting the product accepted

 Revolutionary products

 Evolutionary products

 Me-too products

 Maintaining market share as competition

grows
 Earning a profit

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 Introducing a New Product

Three Basic Strategies:

 Market penetration
 Skimming
 Sliding-down-the-demand-curve

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 Pricing Techniques
 Odd pricing
 Price lining
 Leader pricing
 Geographical pricing
 Opportunistic pricing

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 Pricing Techniques
 Discounts
 Bundling
 Optional-product pricing
 Captive product pricing
 Byproduct pricing
 Suggested retail prices

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 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

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

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

Example:

Breakeven
Selling = $ + { 6.98/unit x 50,000 unit } + $110,000
Price 0 50,000 units
= $9.18 per
unit

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 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 = $13.44 per x 1 = $16.38 per hour

hour (1 -.18)

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 Consumer Credit
 Credit cards
 National

 Private

 Installment credit
 Trade credit

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