Pricing Strategies


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Pricing Strategies

  1. 1. Pricing Strategies the price is what you pay, the value is what you receive…anonymous
  2. 2. 3 Potent Forces <ul><li>Image (premium or least price) </li></ul><ul><li>Competition (nonprice) </li></ul><ul><li>Value (objective or perceived) </li></ul>
  3. 3. Rising Costs <ul><li>Communicate with customers </li></ul><ul><li>Improve efficiency in the company </li></ul><ul><li>Absorb the cost increases </li></ul><ul><li>Emphasize the value of the product </li></ul><ul><li>Anticipate rising costs/lock in prices early </li></ul>
  4. 4. Pricing Factors <ul><li>Product/service costs </li></ul><ul><li>Market factors </li></ul><ul><li>Sales volume </li></ul><ul><li>Competitors’ prices </li></ul><ul><li>Competitive advantage </li></ul><ul><li>sensitivity </li></ul><ul><li>Desired image </li></ul><ul><li>Economic conditions </li></ul><ul><li>Business location </li></ul><ul><li>Seasonal fluctuations </li></ul><ul><li>Psychological factors </li></ul><ul><li>Credit terms/purchase discounts </li></ul><ul><li>Customers’ price </li></ul>
  5. 5. Customized or Dynamic Pricing <ul><li>A pricing technique that sets different prices on the same products and services for different customers using the information that a company collects about its customers </li></ul>
  6. 6. Pricing Strategies and Tactics <ul><li>Introducing a New Product </li></ul><ul><li>Getting the Product Accepted -revolutionary -evolutionary -me-too </li></ul><ul><li>Maintaining the Market Share </li></ul><ul><li>Earning a Profit </li></ul>
  7. 7. Pricing Strategies and Tactics <ul><li>Introducing a New Product </li></ul><ul><li>Market Penetration </li></ul><ul><li>Skimming </li></ul><ul><li>Sliding down the Demand Curve </li></ul>
  8. 8. Pricing Strategies and Tactics <ul><li>Pricing Established Goods and Services </li></ul><ul><li>Odd Pricing : sets prices that end in odd numbers to create the psychological impression of low prices </li></ul><ul><li>Price Lining : greatly simplifies the pricing function by pricing different products at different price points, depending on quality, features, and cost </li></ul><ul><li>Leader Pricing : involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices </li></ul>
  9. 9. Strategies and Tactics (cont’d) <ul><li>Geographic Pricing: </li></ul><ul><li>zone : involves setting different prices for different territories because of different transportation costs </li></ul><ul><li>delivered : charges all of its customers the same price regardless of location </li></ul><ul><li>FOB-Factory : sells merchandise to customers who then also pay for the shipping costs </li></ul>
  10. 10. Strategies and Tactics (cont’d) <ul><li>Opportunistic Pricing : involves charging customers unreasonably high prices when goods or services are in short supply </li></ul><ul><li>Discounts : reductions from normal list prices, ex. Multiple-unit pricing: offering customers discounts if they purchase in quantity </li></ul><ul><li>Bundling : involves grouping together several products into a package that offers extra value at a special price, ex. optional, captive, byproduct </li></ul><ul><li>Suggested Retail Price: manufacturer suggestion </li></ul>
  11. 11. Pricing Strategies for Retailers <ul><li>Markup: difference between cost of a product and its selling price </li></ul><ul><li>Dollar Markup=Retail Price – Cost </li></ul><ul><li>% Retail Markup=Dollar Markup/Retail Price </li></ul><ul><li>% Cost Markup=Dollar Markup/Cost </li></ul><ul><li>Markup= Operating Expenses+Reductions+Profits </li></ul><ul><li>Net Sales +Reductions </li></ul><ul><li>Follow-the-Leader </li></ul><ul><li>Below-Market Pricing </li></ul>
  12. 12. Pricing Strategies for Retailers (cont’d) <ul><li>Sale Rack Shuffle </li></ul><ul><li>clothing company makes a dress for $50 </li></ul><ul><li>Sells dress to retailer at $80 </li></ul><ul><li>Retailer marks dress up to $200 </li></ul><ul><li>If unsold after 8-12 weeks, marks down by 25% to $150 </li></ul><ul><li>If still unsold, marks down further until it does. Clothing company and retailer agree how to share the cost of markdown. </li></ul>
  13. 13. Pricing Strategies for Manufacturers <ul><li>Direct Costing absorption costing : traditional method in which all manufacturing and overhead costs are absorbed into total cost variable costing : includes in the product’s cost only those that vary directly with the quantity produced. </li></ul>
  14. 14. Pricing Strategies for Manufacturers (cont’d) <ul><li>Full Absorption Income Statement </li></ul><ul><li>Sales 790,000 </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Materials 250,500 </li></ul><ul><li>Direct Labor 190,200 </li></ul><ul><li>Factory Overhead 120,200 560,900 </li></ul><ul><li>Gross Profit 229,100 </li></ul><ul><li>Operating Expenses </li></ul><ul><li>General and Administrative 66,100 </li></ul><ul><li>Selling 112,000 </li></ul><ul><li>Other 11,000 189,100 </li></ul><ul><li>Net Income 40,000 </li></ul>
  15. 15. Pricing Strategies for Manufacturers (cont’d) <ul><li>Direct Cost Income Statement </li></ul><ul><li>Sales Revenue 790,000 </li></ul><ul><li>Variable Costs </li></ul><ul><li>Materials 250,500 </li></ul><ul><li>Direct Labor 190,200 </li></ul><ul><li>Variable factory overhead 13,200 502,000 </li></ul><ul><li>Contribution Margin (36.5%) 288,000 </li></ul><ul><li>Fixed Costs </li></ul><ul><li>Factory Overhead 107,000 </li></ul><ul><li>Fixed selling expenses 63,900 </li></ul><ul><li>General and Administrative 66,100 </li></ul><ul><li>Others 11,000 248,000 </li></ul><ul><li>Net Income 40,000 </li></ul>
  16. 16. Pricing for Manufacturers (cont’d) <ul><li>Computing the Break-Even </li></ul><ul><li>Selling Price </li></ul><ul><li>Selling Price= </li></ul><ul><li>Profit + (Variable Cost/U x Qty Produced) +Total Fixed Cost </li></ul><ul><li>Qty Produced </li></ul>
  17. 17. Pricing Strategies for Service Firms <ul><li>Hourly Rate with Profit </li></ul><ul><li>With Materials </li></ul><ul><li>Without Materials </li></ul>
  18. 19. Impact of Credit on Pricing <ul><li>Credit Cards </li></ul><ul><li>Installment Credit </li></ul><ul><li>Trade Credit </li></ul>