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METHODS OF SETTING BASE PRICE
•
Cost-Oriented Pricing
•
Demand-Oriented Pricing
COST-ORIENTED PRICING
•
Cost to acquire or manufacture the
product + expenses of doing business
+ projected profit margin = PRICE
•
Two common methods of cost-oriented
pricing
• Mark-up Pricing
MARKUP PRICING
Resellers add a dollar amount (markup) to their
cost to arrive at a price.
Example:
An item costs $10, and the percentage markup is
40%, then the retail price of the product would be
$10 x 40% = $4
$10 + $4 = $14
MARKUP PRICING
•
Is the difference between the
price of an item and its cost
•
Typically used by wholesalers
COST-PLUS PRICING
All costs and expenses are calculated, and then the desired profit is added to arrive at a price.
Example:
Materials (fabric, thread, zipper) ……….$7.50 Labor ………$1.50 Fixed Expenses ………..$0.25 Intended Profit ………$2.25
COST-PLUS PRICING
• Used by manufacturers and service companies
• All fixed and variable expenses are calculated separately
• Fixed expenses = expenses that do not change based on production
rent, interest, salaries, advertising, insurance
DEMAND-ORIENTED PRICING
• Marketers attempt to determine what consumers are willing to pay for a given good or service
• Price must be set in line with the consumer’s perceived value of the item
• Inappropriate pricing may cause the product to fail
• Relies on the supply and demand theory and demand elasticity
COMPETITION-ORIENTED PRICING
• Learn the competitions pricing
• Price above the competition
• Price below the competition
• Price in line with the competition
• No relationship between the cost and the price
• Competitive bid pricing – government agencies, contractors
ESTABLISHING A BASE PRICE
• To establish a base price or price range for a good or service all three pricing approaches can be used:
• Cost-Oriented pricing helps to determine the lowest price for a product.
• Demand-Oriented pricing helps to determine a range for the product depending on the products demand
• Competition-Oriented pricing used to ensure that the final price is inline with the competition or the
RESELLER CONSIDERATIONS
The way that manufacturers determine the prices they will charge resellers
1) Backward – determine the retail price and work backwards from that to determine what you will charge the wholesaler
2) Forward – work from the costs and expenses to determine what the final retail price should be
ONE PRICE VS. FLEXIBLE-PRICE POLICY
One-price policy
• all customer are charged the same prices
• quoted to customers by signs or price tags
• No exceptions or deviations from stated price
• Retail stores
• Consistent and reliable
ONE PRICE VS. FLEXIBLE-PRICE POLICY
Flexible-Price Policy
• Customers pay different prices for the same type or amount of merchandise
• Permits customers to bargain
• Common for cars, artwork, furniture
• Doesn't not offer consistent profits
PRODUCT LIFE CYCLE
Introduction
Growth
NEW PRODUCT INTRODUCTION
Three options:
• Competition pricing
• price in line with competition or the company’s philosophy
• Skimming pricing
• very high price for a new product
• Used when demand is greater than supply
• High profit when the product is “hot”
• Penetration pricing
• Very low price set for a new product
• Encourages many people to buy the new product
OTHER LIFECYCLE STAGES
• Determined by which method was initially used to introduce product
• Skimming:
• monitor pricing, once sales level off the price should be lowered
• Penetration:
• little change in the growth state
ADJUSTING THE BASE PRICE
• Product mix
• Geographical
• International
• Segmented
• Psychological
• Promotional pricing
• Discounts
PRODUCT MIX STRATEGIES
•
Involve adjusting prices to maximize the profitability
for a group of products rather than just one product
•
Price lining
:
•
sets a limited number of prices of a specific group or
line of merchandise.
•
Low, middle, high price
•
Optional product
– setting prices for accessories or
options sold with the main product
•
Captive product
– sets the price for one product low
PRODUCT MIX STRATEGIES
•
By-Product
– business gets rid of excess
materials using low prices
•
Bundle pricing
– company offers several
complementary products in a package sold at a
single price
•
Geographical Pricing
– refers to price
adjustments required because of the location of
the customer for delivery of products
•
International Pricing
– setting prices that take
SEGMENTED PRICING STRATEGIES
Uses two or more different price sof a product, thou there is no differns in the item’s cost
Four Factors aid marketers to use this type of pricing: 1) Buyer Identification – buyers sensitivity to price (ex. First class and coach seats)
2) Product design - different products for design styles 3) Product location – pricing according to where the product is sold
PSYCHOLOGICAL PRICING STRATEGIES
Pricing techniques that help create an illusion for customers 1) Odd-even pricing – setting prices that end in either odd of even numbers
odd numbers convey a bargain even numbers convey quality
2) Prestige pricing – setting higher than average prices to suggest status and high quality to the consumer
3) Multiple unit pricing – selling items as a group, rather than individually (ex. 3/$1.00, rather than $0.34 each
PROMOTIONAL PRICING
Used in conjunction with sales promotions where prices are reduced for a small amount of time.
• Loss Leader
• Special Event – back to school sale, limited time
-DISCOUNTS AND ALLOWANCES
Seller offers reductions form the usual price
• Cash Discounts – discount if bill is paid on time or early
• Quantity Discounts – discount for placing a large order
• Cumulative – on purchases made over a specific time period
• Non cumulative – on just one order
• Trade Discounts – the way that a price is quoted to a wholesaler and retailer
• Seasonal Discounts – discount for items purchased outside the customary buying season
PRICING AND TECHNOLOGY
Six steps in determining prices 1. Establish pricing objectives 2. Determine costs
3. Estimate demand 4. Study competition
ESTABLISH PRICING OBJECTIVES
• Understand the main goals of pricing
• make a profit
• Increase market share
DETERMINE COSTS
• Company must price its product high enough above costs to make a profit
• Determine the size of the market and how much customers are willing to pay
• Know what the competition is charging
ESTIMATE DEMAND
DECIDE ON A PRICING STRATEGY
• Use steps 2-4 to develop a base price
• Revisit objectives and determine a pricing strategy
• Set a price that will be quoted to customers
• Remember this is subject to change!
PRICING TECHNOLOGY
• Smart pricing
• allows marketers to make intelligent pricing decisions based on data and Web-based pricing crunches into usable information.
• compares sales data (current & historic), inventory levels, merchandise
• Communicating prices to customers
• Electronic shelves and digital price labels
• Messages set tot shoppers while they are in the store alerting them to deals on goods that interest the customer.
• Self checkouts, price scanning kiosks
• RFID
• Radio frequency identification
