Basic Pricing Policies

1
Basic Pricing Policies

• Chapter 26

2
Pricing Concepts

• Cost-Oriented Pricing
• Markup Pricing
• Resellers add a markup to their cost to arrive at
  the price
• Markup is usually a percentage
• Cost-Plus Pricing
• All costs and expenses are calculated and then
  the desired profit is added to arrive at the
  price
• Demand-Oriented Pricing
• Determine what consumers are willing to pay
• Pricing by consumers perceived value of the item
• Competition-Oriented Pricing
• Pricing based on the competitors price
• Price at, above or below

3
Pricing in the Product Life Cycle

• New Product Introduction
• Skimming pricing- sets a very high initial price,
  then the price is lowered later
• Penetration pricing- sets a very low initial
  price to encourage as many people to buy as
  possible, then the price is later increased
• Growth Phase
• Prices remain stable
• Maturity Phase
• May see price reductions
• Decline Phase
• Reduced prices

4
Product Mix Pricing Strategies

• Adjusting product prices to maximize
  profitability for a group of products rather than
  on just one item
• Bundle Pricing- items sold together
• Price Lining
• Sets a limited number of prices for specific
  groups of merchandise
• 25, 35, 50 (low, middle, high quality)
• Optional Product Pricing
• Prices for accessories or options sold with the
  main product Ex. Car pricing (leather, sunroof,
  etc.)
• Geographical Pricing- price adjustments based on
  location (Alaska, Hawaii)

5
Segmented Pricing Strategies

• Uses two or more different prices for a product,
  even though there is no difference in the items
  cost
• Buyer Identification
• Recognizes a buyers sensitivity to price
• Product Design
• Different prices for different product styles
• Purchase Location
• Pricing according to where the product is sold
• Time of Purchase
• Peak times (Ex. Skiing over Christmas)

6
Psychological Pricing Strategies

• Creates an illusion for customers
• Odd/Even Pricing
• Setting prices that end in odd or even numbers
• Odd numbers convey bargains
• Even numbers convey quaility
• Prestige Pricing
• Sets higher than average prices to convey status
  and high quality image
• Multiple Unit Pricing
• 3 for 1
• Suggests savings

7
Promotional Pricing

• Used in conjunction with sales promotions where
  prices are reduced for a short period of time
• Loss Leader Pricing
• Increases store traffic by offering popular items
  at or below cost
• Once you get the customers in the store, then
  they will likely buy regularly priced merchandise
• Special Event Pricing
• Act now! Anniversary Sale, Columbus Day Sale
• Rebates and Coupons
• Rebates are partial refunds offered by the
  manufacturer to the consumer
• Coupons allow price reductions at the time of
  purchase

8
Discounts and Allowances

• Cash Discounts
• Quantity Discounts
• Trade Discounts
• Seasonal Discounts
• Allowances

9
Steps in Determining Prices

• Establish Pricing Objectives
• What are the goals? Profit? Market Share?
• Determine costs
• What did it cost to make it?
• Estimate demand
• Who/How many are willing to buy it?
• Study competition
• What does the competition charge?
• Decide on a pricing strategy
• Set prices