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- 1. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 10 - 1 Ch. 10: Pricing Strategies
- 2. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Pricing Is governed both by art and science. Requires balancing a multitude of complex forces. Influences every aspect of a small company. ► Is an important signal of a product’s or service’s value to customers. Involves both math and psychology.
- 3. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Business Challenges That Drive Pricing Decisions
- 4. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 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 failing to recognize extra value, service, quality, and other benefits they offer. Understand the target market and identify how much customers are willing to pay rather than how much to charge.
- 5. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Competition and Pricing Must take into account competitors’ prices, but it is not always necessary to match or beat them. Key is to differentiate a company’s products and services. Price wars often eradicate companies’ profits and scar an industry for years. Best strategy: Stay out of a price war!
- 6. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Focus on Value The “right” price for a product or service depends on the value it provides for a customer. Two aspects of price: ►Objective value ►Perceived value – determines the price customers are willing to pay. Value is not synonymous with low price.
- 7. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall What Determines Price?What Determines Price? Price CeilingPrice Ceiling -- What will the market bear?What will the market bear? Price FloorPrice Floor -- What are the company's costs?What are the company's costs? AcceptableAcceptable PricePrice RangeRange ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Final PriceFinal Price -- What is the company'sWhat is the company's desired "image?"desired "image?" Final PriceFinal Price -- What is the company'sWhat is the company's desired "image?"desired "image?" ?? ?? ?? ?? ?? FIGURE 10.1 ??
- 8. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 10 - 8 Product Benefit Service Benefit Image Benefit Monetary Cost Psychic Cost Time& Eff. Cost Total Custome r Benefit Total Custome r Cost Customer Perceived Value Customer Perceived Value
- 9. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Dealing with Rising Costs Add a surcharge Explain the reasons behind price increases Focus on improving efficiency Consider absorbing cost increases Modify the product or service to lower its cost Eliminate discounts, coupons, and freebies
- 10. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Dealing with Rising Costs Diversify your product line Anticipate rising costs and try to lock in prices of raw materials early Emphasize the value of your company’s product or service to customers Differentiate your product or service Raise prices incrementally and consistently (continued)
- 11. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Pricing Techniques Odd pricing Price lining Leader pricing Discounts (Markdowns) Bundling Geographic pricing
- 12. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Customized or Dynamic Pricing A pricing technique in which a company sets different prices on the same products and services for different customers using the information that it collects about its customers.
- 13. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Pricing Techniques Byproduct pricing Suggested retail prices Follow-the-leader pricing (continued)
- 14. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Below-Market Pricing Attract a sufficient level of volume to offset the lower profit margins. Trim operating costs by eliminating extra services such as: ► Delivery ► Installation ► Credit granting ► Sales assistance Risky!
- 15. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 10 - 15
- 16. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Pricing for Retailers: Markup Dollar Markup = $30 - $14 = $16 Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Example: Percentage (of Retail Price) Markup = $16 $30 = 53.3%
- 17. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Pricing for Service Firms: Price per Hour Price per Hour = Total Expenses 128,000 Total Hours 960 Cost to produce 1 hour = 22.22 Price per Hour = $22.22 per hour x .30 = 6.66 + 22.22 6.66+ 22.22 = $28.88 per hour
- 18. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Consumer Credit Credit cards – typical consumer has 7.7 credit cards. ► Research: Customers who use credit cards make purchases that are 112% higher than if they had used cash. ► On a typical $100 credit card purchase, cost to business = $2.20.
- 19. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall A Typical Credit Card Transaction
- 20. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall Consumer Credit Credit cards – typical consumer has 7.7 credit cards. ► Research: Customers who use credit cards make purchases that are 112% higher than if they had used cash. ► On a typical $100 credit card purchase, cost to business = $2.20 Installment credit Trade credit
- 21. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 10 - 21Ch. 10: Pricing Strategies ConclusionConclusion Pricing techniques impact every aspect of a company including: Image Customers Cash flow Profits
Editor's Notes
- What is pricing and what do you think we mean by governed by both and art and a science? Pricing is based on what a person must give up, “scarce resource” to obtain goods and services There are complicating factors such as the hold over from the last recession, and advances in technology: customers are price sensitive and using technology more and more. Think of the way we use our smart phones, Ipads to make price comparisons on the spot. One in four smartphone users use their smart phones to shop 59% use their smartphones to compare prices 41% user their smartphones to download coupons Pricing effects every aspect of business it can attract them or it can drive them away. How does pricing represent value to customers? too high drives them away too low can’t cover expenses, perception of inferior products Pricing is more than a math problem, it is a psychological test.
- These influences on pricing have resulted in a demand for transparency by the customers that we have not experienced before. Make the comparison between Need to Protect Brand Image an Increased Price Sensitivity.
- Because pricing decisions have such a pervasive influence on all aspects of business, businesses should consider a strategic approach in pricing their goods and services. The Wharton School of Business, University of Penn, found that taking a strategic approach and monitoring raised revenue on average from 1 – 8 % The book gives an example of a drug store chain in New York that found that parents were willing to pay more for newborn’s diapers than they were for toddler’s. They priced them accordingly taking a strategic approach and raised their revenue by 27%. A businesses pricing strategy is a significant determinant of its image in the market place, is influence by its competitors, and is an important perception of their value. Activity : Reade The Entrepreneurial Profile; Chris Carmon: Carmon Group p.361
- Retail systems research reports that 74% of retailers say that they operate “within extremely price competitive environments. It is important for small businesses to take into account their competitors pricing, but to not necessarily match or beat them. With that said, unless a business get differentiate themselves as being distinct, they will probably be in line with their competitor. What are some of the ways a business might distinguish itself? Price wars rarely are of benefit to anyone. Under cutting the market harms the overall market by degrading value. In fact, Small businesses often overestimate the power of price cuts. There enough margin. A business with a 25% price margin that cuts its prices by 10% would have to more than double to breakeven.
- Price one of our four Ps in marketing needs to meet our customer’s needs. There are two primary aspects to pricing, Objective Value or the price a customer would pay and perceived value, which is the price that a person is willing to pay. Perception is everything, and usually wins over objectivity, right or wrong. They don’t always act rationally. Value does not always equate with low price. Charging to low is more dangerous than charging too high. You can always lower your price, and people would rather see it go that direction.
- For most products there is an acceptable price range, and not a single ideal price. We all have heard the saying, “what the market will bare.” The price range is between the Price floor and the price ceiling. Let’s look at our chart. In marketing we call this positioning. The final price that is set will often determine the imagine that a customer will have about a particular business: Discount, Middle of the Road, or Prestige
- For most shoppers there are three reference points that define a fair price. Price they paid in the past Price competitors are charging for a similar product or service The cost a company incurs to provide the product or service The past is a baseline that customers relate to as prices rise. Customer’s often forget about inflationary costs year to year, and it is acceptable to remind customers that they must raise prices in response to these increases. It is better to increase in smaller increments that large increases at once. Many businesses, particularly those with large fuel bills will add a surcharge to their price. Businesses should look at their processes to see how they can increase efficiencies. Perhaps there are some costs that can get cut through changes in the way you conduct business. I.e. the way a delivery person might expedite services through reduction to outlying areas.
- Are there additional products and services you can offer your customers to gain a greater market share Knowing your business and looking at statistics and how your industry ebbs and flows will help you forecast rising costs. Raise the Perception Bar. Let your customer’s know that you have something of value and that their purchases are valued. Demonstrate that though you maybe offering a similar product or service that you have something that differentiates you from your competitor.
- Let’s look at several Pricing Techniques Odd Pricing – research has shown that folks are more likely to buy something that cost $10.49 than $11.00 because they think it is much cheaper. Sometimes omitting the $ sign can result in higher on average prices. Cornell University researchers have discovered that restaurants that omit the $ have achieved on average %5.55 more in sales than those that do include the $ Price lining – is very popular in some industries, such as iTunes. Leader Pricing - When companies markdown their customary price, in an attempt to attract more customers. Many businesses, such as Wal-mart will have significant cuts in fuel to encourage purchasing other products. Discounts – Can help move inventory that is just setting around. This is also known as mark downs Bundling – Such as ACS does with their phone, internet, and DSL. Geographic pricing – one types is price zoning, where they set different prices for customers in different locations because of the difference in fuel costs. FOB Factory is also a form of geographic pricing. Allows for uniformity in price.
- Byproduct pricing – loggers cut down trees and debark them, instead of throwing the bark away they sell it to go in gardens. Happens a lot in natural resources, want and waste laws. Suggested retail price – given from the manufacturer to ensure uniformity in pricing Follow-the-leader – match your competitor, be with in the range, however realize that you may loose an opportunity to differentiate yourself. Every industry is different, and no pricing strategy will work for all, but there are certainly options to consider.
- Calculate the percentage markup A computer software retailer used a markup rate of 40%. Find the selling price of a computer game that costs the retailer $25. (.4)(25) = 10 + 25 = 35 A golf shop pays its wholesaler $40 for a certain club, and then sells it to the a golfer for $75. What is the markup rate? First, calculate the markup $75 - $40 = $35 The markup over the original price $35/40 = 87.5% An item originally priced at $55 is marked 25% off. What is the sale price? .25*55 = 13.75 55 – 13.75 = 41.25