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CHAPTERPricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10
PricingIs governed both by art and science.!! Requires balancing a multitude ofcomplex forces.!! Influences every aspect of a smallcompany.!! Is an important signal of a product sor service s value to customers.!! Involves both math and psychology.!!Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 2
Price Conveys Image!!Price sends important signals to customers:Quality, prestige, uniqueness, and others.!!Common small business mistake:Charging prices that are too low and failingto recognize extra value, service, quality, andother benefits they offer.!!Study: Only 15 to 35% of customers considerprice to be the chief criterion when making apurchase.Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 3
Competition and Pricing!!Must take into account competitors prices, but it is not always necessary tomatch or beat them.!!Key is to differentiate a company sproducts and services.!!Price wars often eradicate companies profits and scar an industry for years.!!Best strategy: Stay out of a price war!Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 4
Focus on Value!!The right price for a product or servicedepends on the value it provides for acustomer.!!Two aspects of price:!! Objectivevalue!! Perceivedvalue – determines the pricecustomers are willing to pay.!!Value is not synonymous with low price.Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 5
Dealing with Rising Costs!!Pass along rising costs!!Explain the reasons behind priceincreases!!Focus on improving efficiency!!Consider absorbing cost increases!!Modify the product orservice to lower its costCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 6
Dealing with Rising Costs(continued)!!Diversify your product line!!Anticipate rising costs and try to lockin prices of raw materials early!!Emphasize the value of yourcompany s product orservice to customersCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 7
What Determines Price?!!Price Ceiling - What will the market bear?!Acceptable"Price"Range!?!?!?!?!?! ?!Final Price -"!What is the company's!desired "image?"!?!?!?!?!?!?!?!?!?!?!?!Price Floor - What are the company's costs?!FIGURE 10.1Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 8
Customized orDynamic PricingA pricing technique in which acompany sets different prices onthe same products and services fordifferent customers using theinformation that it collectsabout its customers.Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 9
Introducing A New ProductThree Goals:1. Getting the product accepted!! Revolutionary!! Evolutionary!! Me-tooproductsproductsproducts2. Maintaining market share ascompetition grows3. Earning a profitCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 10
Introducing A New Product3 Basic Strategies:!! Marketpenetration!! Skimming!! LifeCh. 10: Pricing StrategiesCycle PricingCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 11
Pricing Techniques!!Odd pricing!!Price lining!!Leader pricing!!Discounts (Markdowns)!!BundlingCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 12
Pricing Techniques(continued)!! Optional-product!! Captivepricingproduct pricing!! Byproductpricing!! Suggestedretail pricesCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 13
Pricing for Retailers: MarkupDollar Markup Retail Price - Cost of MerchandiseDollar MarkupPercentage (of Retail Price) Markup Retail PricePercentage (of Cost) Markup Dollar MarkupCost of UnitExample:Dollar Markup 25 - 14 11Percentage (of Retail Price) Markup Percentage (of Cost) Markup Ch. 10: Pricing Strategies 11 25 40.0% 11 78.6% 14Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 14
Follow the Leader Pricing!!Match competitor prices.!!A me too pricing policy.!!Robs a company of the opportunityto create a distinctiveimage in its customers eyes.Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 15
Below-Market Pricing!!Attract a sufficient level of volumeto offset the lower profit margins.!!Trim operating costs by eliminatingextra services such as:!! Delivery!! Installation!! Credit!! Sales!!grantingassistanceRisky!Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 16
Pricing for Manufacturers!! Directcosting and pricing!!Absorption costing!!Variable or direct costing!! BreakevenCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 17
Pricing for Manufacturers:Breakeven Selling PriceTotal{ Variable costBreakevenQuantity }fixed{ per unit x produced } costsProfit Selling Quantity producedPriceExample:BreakevenSellingPrice 0 { 6.98/unit x 50,000 unit } 110,00050,000 units 9.18 per unitCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 18
Pricing for Service Firms:Price per HourPrice per Hour Total cost perproductive hourx1(1 - net profit targetas a % of sales)Example: Ned s TV Repair ShopPrice per Hour 18.59 per hourx1(1 - .18) 22.68 per hourCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 19
Consumer Credit!!Credit cards – typical consumer has 4 creditcards.!!Research: Customers who use creditcards make purchases that are 12% higherthan if they had used cash.!! Ona typical 100 credit card purchase,cost to business 2.29!!Installment credit!!Trade creditCh. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 20
E-Commerce and CreditCards!!About 2 percent of online credit cardtransactions are fraudulent.!!Steps:Use an address verification system!! Require a CVV2 number!! Check customers IP addresses!! Monitor Web site activity with analytics!! Verify large orders!! Post notices on Web site that your company usesanti-fraud technology!!Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 21
ConclusionPricing techniques impact everyaspect of a company including:Ch. 10: Pricing Strategies!!Image!!Customers!!Cash flow!!ProfitsCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 22
All rights reserved. No part of this publication may bereproduced, stored in a retrieval system, or transmitted, in anyform or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission ofthe publisher. Printed in the United States of America.Ch. 10: Pricing StrategiesCopyright 2011 Pearson Education, Inc. Publishing as Prentice Hall10 - 23
Optional-product pricing !!Captive product pricing !!Byproduct pricing !!Suggested retail prices (continued) . Example: Profit Variable cost per unit produced Total fixed costs { { x } } Quantity produced Breakeven Selling Price 50,000 units 9.18 per unit .
