Chapter 26 Section 1.pptx

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Chapter 26 n Pricing Strategies 1

Marketing Essentials

Marketing

Essentials

n Chapter 26 Pricing Strategies

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Chapter 26 n Pricing Strategies 2 SECTION 26.1

SECTION 26.1

What You'll Learn

Pricing Concepts

 _{The three basic pricing concepts involving}

cost, demand, and competition

 _{The concepts of pricing forward vs. pricing}

backward

 _{The idea of one-price policy vs. a}

flexible-price policy

 _{The two polar pricing policies for introducing}

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SECTION 26.1

Pricing Concepts

Why It's Important

Why It's Important

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SECTION 26.1

Pricing Concepts

Key Terms

Key Terms

 _markup

 _{cost-plus pricing}  _{one-price policy}

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SECTION 26.1

Pricing Concepts

There are three basic pricing concepts that you will want to consider in determining the price for any given product:

 _{cost-oriented pricing}

 _{demand-oriented pricing}

 _{competition-oriented pricing}

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SECTION 26.1

Pricing Concepts

Cost-Oriented Pricing

In cost-oriented pricing, marketers first calculate the costs of acquiring or making

a product and their expenses of doing business; then they add their projected profit margin to these figures to arrive at a price. Two common methods are:

 _{markup pricing}  _{cost-plus pricing}

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SECTION 26.1

Pricing Concepts

Cost-Oriented Pricing

Markup pricing is used primarily by

wholesalers and retailers who are involved in acquiring goods for resale. The markup must cover the business’s expenses.

Price = cost + markup (as percentage)

Cost-plus pricing is used by

manufacturers and service companies.

Price = all costs + all expenses (fixed and variable) + desired profit

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SECTION 26.1

Pricing Concepts

Cost-plus pricing breaks a price down into its component parts.

How might you relabel these entries shown here to show the similarity between markup pricing and cost-plus pricing?

Suburban Research Consultants

Cost-Plus Pricing

Questionnaire Design and $3,500 Printing

Postage 400

Labor (40 hours at $30) 1,200

Refreshments 100

Expenses 350

Profit 950

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SECTION 26.1

Pricing Concepts

Marketers who use demand-oriented pricing

attempt to determine what consumers are willing to pay for given goods and services. Demand-oriented pricing is effective when:

_{there are few substitutes for an item} _{there is demand inelasticity}

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SECTION 26.1

Pricing Concepts

Marketers who study their competitors to

determine the prices of their products are using

competition-oriented pricing. These marketers may elect to take one of three actions:

_price_above_{the competition} _price_below_{the competition}

_price_{in line with}_{the competition}

(going-rate pricing)

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SECTION 26.1

Pricing Concepts

Most marketers use all three pricing policies to determine prices.

 _{Cost-oriented pricing}_{helps determine}

the price floor (lowest selling price) for a product.

 _{Demand-oriented pricing}_helps

determine a price range for the product.

 _{Competition-oriented pricing}_ensures

that the final price is in line with the company’s pricing policies.

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SECTION 26.1

Pricing Concepts

To arrive at a wholesale price, a manufacturer can subtract all markups for channel members from the suggested retail price.

What problem would the above manufacturer have if its costs and expenses totaled $22? What might the manufacturer have to do?

Pricing Backward from Retail Price

Estimated retail price $50

Retailer's markup

(40% of retail) - $20

Wholesaler's price to retailer $30

Wholesaler's markup

(30% of wholesale) - $9

Manufacturer's price to wholesaler $21

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SECTION 26.1

Pricing Concepts

Adding markups to cost is another way manufacturers can price their goods.

Suppose in the example given here market research had shown that consumers would pay as much as $60 for the item. What would the manufacturer's options be?

Pricing Forward from Manufacturer’s Cost

Cost of producing item $15.75

Manufacturer's expenses and profit

(25% of cost) + $5.25

Manufacturer's price to wholesaler $21.00

Wholesaler's markup

(42.9% of cost) + $9.00

Wholesaler's price to retailer $30.00

Retailer's markup

(66.67% of cost) + $20.00

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SECTION 26.1

Pricing Concepts

A basic pricing decision every business must make is to choose between a one-price policy and a flexible-price policy.

 _A_{one-price policy}_{is one in which all}

customers are charged the same price for the goods and services offered for sale.

 _A_{flexible-price policy} _permits

customers to bargain for merchandise.

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SECTION 26.1

Pricing Concepts

Pricing plays an important role in the product life cycle. In this sequence of events,

products move through four stages:

 _introduction  _growth

 _maturity  _decline

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SECTION 26.1

Pricing Concepts

A business may elect to price a new product above, in-line, or below its competitors.

When a going-rate strategy is not used, two polar methods may be used:

_{skimming pricing} _{penetration pricing}

New Product Introduction

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SECTION 26.1

Pricing Concepts

Skimming pricing is a pricing policy that sets a

very high price for a new product to capitalize on the initial high demand for a new product.

 _Advantages:_{High profit margin; may}

cover research and development costs.

 _{Disadvantages:}_{Cost must eventually be}

lowered; attracts competition; if price is too high no one buys.

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SECTION 26.1

Pricing Concepts

Penetration pricing sets the initial price for a product very low to encourage as many people as possible to buy the product.

Advantages: Quick market penetration; can capture a large market; blocks

competition.

Disadvantages: Low demand leads to big losses.

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SECTION 26.1

Pricing Concepts

Pricing during subsequent periods in a

product's life cycle will be determined by which pricing method was originally used—skimming or penetration. At each phase of the life cycle, pricing strategies will work to extend the

product's life cycle.

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26.1

A

SSESSMENTSSESSMENT

Reviewing Key Terms and Concepts

1. Name the two most common methods of cost-oriented pricing.

2. Explain how cost-oriented,

demand-oriented, and competition-oriented pricing concepts can be combined to determine price.

3. What two methods may manufacturers use when considering the price to charge

wholesalers and retailers? How do they differ?

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26.1

A

SSESSMENTSSESSMENT

Reviewing Key Terms and Concepts

4. What is the difference between a one-price policy and a flexible-one-price policy?

5. Name and explain two polar pricing

methods that may be used when a new product is introduced into the market.

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26.1

A

SSESSMENTSSESSMENT

Thinking Critically

Would you use skimming pricing or

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Marketing Essentials

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