Copyright 2008 Prentice Hall Publishing Company 1Chapter 10: Pricing Pricing Strategies

1Chapter 10: Pricing Copyright 2008 Prentice Hall Publishing Company

Pricing StrategiesPricing Strategies


PricingPricing Is governed both by art and science.Is governed both by art and science. Requires balancing a multitude of Requires balancing a multitude of

complex forces. complex forces. Cuts across every aspect of a small Cuts across every aspect of a small

company.company. Is an important signal of a Is an important signal of a

product’s or service’s value to product’s or service’s value to customers. customers.

Involves both math and psychology. Involves both math and psychology.


Price Conveys Price Conveys ImageImage

Price sends important signals to Price sends important signals to customers – quality, prestige, customers – quality, prestige, uniqueness, and others.uniqueness, and others.

Common small business mistake: Common small business mistake: Failure to recognize extra value, Failure to recognize extra value, service, quality, and other benefits service, quality, and other benefits they offer and charging prices that they offer and charging prices that are too low. are too low.

Study: Only 15 percent to 35 percent Study: Only 15 percent to 35 percent of customers consider price to be the of customers consider price to be the chief criterion when selecting a chief criterion when selecting a product or service. product or service.


Competition and Competition and PricingPricing

Must take into account Must take into account competitors’ prices but it is not competitors’ prices but it is not always necessary to match or beat always necessary to match or beat them. them.

Key is to differentiate a company’s Key is to differentiate a company’s products and services.products and services.

Price wars often eradicate Price wars often eradicate companies’ profits and scar an companies’ profits and scar an industry for years.industry for years.

Best strategy: Stay out of a price Best strategy: Stay out of a price war! war!


Focus on ValueFocus on Value The “right” price for a The “right” price for a

product or service depends on product or service depends on the value it provides for a the value it provides for a customer. customer.

Two aspects:Two aspects: Objective valueObjective value Perceived valuePerceived value

Value ≠ low price, Value ≠ low price, however. however.


Dealing with Rising Dealing with Rising CostsCosts

Communicate with customersCommunicate with customers Focus on improving efficiencyFocus on improving efficiency Consider absorbing cost Consider absorbing cost

increasesincreases Emphasize the value of your Emphasize the value of your

company’s product or service company’s product or service to customersto customers

Anticipate rising costs and try Anticipate rising costs and try to lock in raw material prices to lock in raw material prices earlyearly

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

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Final PriceFinal Price (What is the (What is thecompany's desired "image?")company's desired "image?")

Final PriceFinal Price (What is the (What is thecompany's desired "image?")company's desired "image?")

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Customized or Customized or Dynamic PricingDynamic Pricing

A pricing technique in A pricing technique in which the company sets which the company sets different prices on the different prices on the same products and services same products and services for different customers for different customers using the information that using the information that a company collects about a company collects about its customers. its customers.


Introducing a New Introducing a New ProductProduct

Three Goals:Three Goals: Getting the product acceptedGetting the product accepted

Revolutionary productsRevolutionary products Evolutionary productsEvolutionary products Me-too productsMe-too products

Maintaining market share as Maintaining market share as competition growscompetition grows

Earning a profitEarning a profit


Introducing a New Introducing a New ProductProduct

Three Basic Strategies:Three Basic Strategies: Market penetrationMarket penetration SkimmingSkimming Sliding-down-the-demand-curveSliding-down-the-demand-curve


Pricing Pricing TechniquesTechniques

Odd pricingOdd pricing Price liningPrice lining Leader pricingLeader pricing Geographical Geographical

pricingpricing Opportunistic Opportunistic

pricingpricing


Pricing Pricing TechniquesTechniques

DiscountsDiscounts BundlingBundling Optional-product Optional-product

pricingpricing Captive product Captive product

pricingpricing Byproduct pricingByproduct pricing Suggested retail pricesSuggested retail prices


Pricing for Pricing for Retailers: Retailers: MarkupMarkup

Dollar Markup = Retail Price - Cost of MerchandiseDollar Markup = Retail Price - Cost of Merchandise

Percentage (of Retail Price) Markup = Percentage (of Retail Price) Markup = Dollar MarkupDollar MarkupRetail PriceRetail Price

Percentage (of Cost) Markup = Percentage (of Cost) Markup = Dollar MarkupDollar MarkupCost of UnitCost of Unit

ExampleExample::

Dollar Markup = $25 - $15 = $10Dollar Markup = $25 - $15 = $10

Percentage (of Retail Price) Markup = Percentage (of Retail Price) Markup =

$10$10

$25$25= 40%= 40%

Percentage (of Cost) Markup = Percentage (of Cost) Markup = $10$10

$15$15= 67%= 67%


Pricing for Pricing for Manufacturers: Manufacturers:

Breakeven Selling PriceBreakeven Selling PriceBreakeven Breakeven SellingSellingPrice Price

QuantityQuantity

== ProfitProfitVariable Variable

cost per cost per unitunit

producedproduced

Total Total fixed fixed costscosts++

{{{{ xx

}}}}++

Quantity producedQuantity produced


Pricing for Pricing for Manufacturers: Manufacturers:

Breakeven Selling Breakeven Selling PricePriceBreakeveBreakeve

n n

SellingSelling

Price Price

QuantitQuantityy

ExamplExample:e:

= ProfiProfitt

Variable Variable cost per cost per unitunit

produceproducedd

Total Total fixed fixed costscosts++

{{ xx

}}++

Quantity Quantity producedproduced

Breakeven Breakeven

SellingSelling

Price Price = $$

006.98/6.98/

unitunit50,000 50,000

unitunit

$110,00$110,0000

+ { xx }+

50,000 50,000 unitsunits

= $9.18 per = $9.18 per unitunit


Pricing for Service Pricing for Service Firms: Firms:

Price per HourPrice per HourPrice per Hour = Total cost per x 1Price per Hour = Total cost per x 1

productive hour (1 - net profit target productive hour (1 - net profit target asas a % of sales)a % of sales)

Example: Ned’s TV Repair ShopExample: Ned’s TV Repair Shop

Price per Hour = $13.44 per x 1 Price per Hour = $13.44 per x 1 hour (1 -.18)hour (1 -.18)

= $16.38 per hour= $16.38 per hour


Consumer Consumer CreditCredit

Credit cardsCredit cards NationalNational PrivatePrivate

Installment creditInstallment credit Trade creditTrade credit

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Copyright 2008 Prentice Hall Publishing Company 1Chapter 10: Pricing Pricing Strategies