Pricing Strategies and TacticsPricing Strategies and Tactics

Chapter TwentyChapter Twenty

ObjectivesObjectives

Identify various pricing strategiesDiscuss differential pricing strategiesDescribe skimming and penetration pricingDemonstrate competition’s effect on pricingDiscuss inflation’s effect on pricingDiscuss product-line pricing strategiesExplore psychological aspects of priceDemonstrate geography’s influence on pricingDiscuss varied pricing toolsOverview legal restrictions on pricingIdentify a major ethical issue related to price

Pricing StrategiesPricing StrategiesPricing StrategiesPricing Strategies

Differential pricing strategiesCompetitive pricing strategiesProduct-line pricing strategiesPsychological and image pricing

strategiesDistribution-based pricing strategies

Differential pricing strategiesCompetitive pricing strategiesProduct-line pricing strategiesPsychological and image pricing

strategiesDistribution-based pricing strategies

Differential pricing Differential pricing strategiesstrategies

Different buyers pay different prices

$24.95$22.00100 units for

$2,000

155 Russian rubles

each

Differential Pricing Differential Pricing StrategiesStrategies

Differential Pricing Differential Pricing StrategiesStrategies

Types:Variable PricingSecond-Market

DiscountingSkimmingPeriodic discountingRandom discounting

Types:Variable PricingSecond-Market

DiscountingSkimmingPeriodic discountingRandom discounting

$24.95

$22.00100 units for $2,000

155 Russian rubles each

Price SkimmingPrice Skimming

Pricing high, usually at the Pricing high, usually at the beginning of a product’s lifebeginning of a product’s lifeExamples:Examples: personal computerspersonal computers CDsCDs electronicselectronics

Competitive Pricing Competitive Pricing StrategiesStrategies

Competitive Pricing Competitive Pricing StrategiesStrategies

Meeting competitionUndercutting competition

Meeting competitionUndercutting competition

Types:Types:

Price leadershipFollow the leader

Price leadershipFollow the leaderPenetration pricingPredatory pricingTraditionalInflationary

Penetration pricingPredatory pricingTraditionalInflationary

Penetration PricingPenetration Pricing

Low introductory price to Low introductory price to establish product quickly in establish product quickly in marketmarket

When to use:When to use: Elastic demandElastic demand Economies of scaleEconomies of scale Threat of strong competitionThreat of strong competition

Low introductory price to Low introductory price to establish product quickly in establish product quickly in marketmarket

When to use:When to use: Elastic demandElastic demand Economies of scaleEconomies of scale Threat of strong competitionThreat of strong competition

Product-Line PricingProduct-Line PricingStrategiesStrategies

Product-Line PricingProduct-Line PricingStrategiesStrategies

Captive pricing

Leader and Bait pricing

Price lining$45.99$39.99 $24.99 $19.99

Price-bundling & Multi-unit

Psychological & Image Psychological & Image PricingPricing

Psychological & Image Psychological & Image PricingPricing

Regular price: $45Regular price: $45

Now Only: Now Only: $25$25

Reference Pricing

Odd/Even Pricing

$1.87$1.87$4.95$4.95$9.99$9.99

$175 $175 $1000$1000

Prestige Pricing

Distribution-Based Distribution-Based PricingPricing

Distribution-Based Distribution-Based PricingPricing

F.O.BDelivered

ZoneUniform

Basing-point

XX

XX

MarkupsMarkupsMarkupsMarkups

ManufacturerManufacturer

CostCost $20.00$20.0020% markup20% markup $ 5.00$ 5.00Selling priceSelling price $25.00$25.00

WholesalerWholesaler

CostCost $25.00$25.0015% markup15% markup $ 4.41$ 4.41Selling priceSelling price $29.41$29.41

RetailerRetailer

CostCost $29.41$29.4141% markup41% markup $20.59$20.59Selling priceSelling price $50.00$50.00

Establishing Exact Establishing Exact PricesPrices

Establishing Exact Establishing Exact PricesPrices

Markup onMarkup onSelling PriceSelling Priceand on Costand on Cost

Cost-PlusCost-PlusMethodMethod

Break-evenBreak-evenAnalysisAnalysis

Target ReturnTarget ReturnPricingPricing

AverageAverageCostCost

Establishing Exact Establishing Exact PricesPrices

Establishing Exact Establishing Exact PricesPrices

Markup on Selling Price or Costs:Markup on Selling Price or Costs:

= % markup= % markupAmount added onAmount added on------------------------------------------------

Selling priceSelling price

Cost + Amount added on = PriceCost + Amount added on = PriceCost-Plus Method:Cost-Plus Method:

Average-cost method:Average-cost method:

All costsAll costs------------------------ =------------------------ =# Units produced# Units produced

Average costAverage costof a single unitof a single unit

Establishing Exact Establishing Exact PricesPrices

Establishing Exact Establishing Exact PricesPrices

Target Return Pricing:Target Return Pricing:

Fixed costs + Target returnFixed costs + Target return-------------------------------------- =-------------------------------------- =

Units to be soldUnits to be sold

PricePriceper unitper unit

LossLoss

Loss

Loss

Profit

Profit

ProfitProfit

Break-Break-evenevenpointpoint

Units produced & soldUnits produced & sold

Cost

&R

even

ue (

$)

Cost

&R

even

ue (

$) Total RevenuesTotal Revenues

Total CostsTotal Costs

Fixed CostsFixed Costs

Break-Even AnalysisBreak-Even AnalysisBreak-Even AnalysisBreak-Even Analysis

Price AdjustmentsPrice AdjustmentsPrice AdjustmentsPrice Adjustments

Cash discountsTrade discountsQuantity discountsSeasonal discountsChain discountsPromotional

allowances

Cash discountsTrade discountsQuantity discountsSeasonal discountsChain discountsPromotional

allowances

Pricing and the LawPricing and the Law

ROBINSON-PATMAN ACT OF 1936

Discriminatory prices illegal unless….Charged to meet competitionJustified by cost savings

Pricing and the LawPricing and the Law

Fair Trade Practices Act and their repeal in 1975

States: manufacturers may fix final selling price

Federal gov’t: illegal if good sold in different state

Pricing and Ethical Pricing and Ethical issuesissues

Are corporate social policy and corporate profit motive compatible?

ReviewReview

Identify various pricing strategiesDiscuss differential pricing strategiesDescribe skimming and penetration pricingDemonstrate competition’s effect on pricingDiscuss inflation’s effect on pricingDiscuss product-line pricing strategiesExplore psychological aspects of priceDemonstrate geography’s influence on pricingDiscuss varied pricing toolsOverview legal restrictions on pricingIdentify a major ethical issue related to price