SBE 9.02 Pricing Strategy Notes
Steps in Setting Price
Determine pricing objectives:
Study costs:
Estimate demand:
Determine pricing objectives:
Study costs:
Estimate demand:
Study the competition:
Decide on a pricing strategy:
Set your price:
What is your purpose in setting a price?
Price planning must include an examination of business costs.
How many products can you sell in a given time period?
What is your purpose in setting a price?
Price planning must include an examination of business costs.
How many products can you sell in a given time period?
How will you respond to competitor’s prices?
Select the strategy with the greatest potential for profit.
Monitor sales, customer reactions, and company goals to plan for needed changes.
Strategies for Pricing
Cost Oriented Pricing
Implemented by carefully examining all of the costs associated with carrying a product and selling it to consumers then
adding the desired profit to arrive at a selling price.
Cost-plus pricing
Mark-up Pricing
Manufacturers & service organizations
Wholesalers & retailers
Examines costs then adds standard markup
Adds a predetermined percentage to cost of products
Products & services are all considered individually.
Same markup applied to all products carried by the business
Demand Oriented Pricing
Most effective when selling products with inelastic demand.
Requires price planners to estimate the value customers place on products and set prices accordingly.
When selling products with elastic demand, an inaccurate estimation can undermine the success of a business.
Competition Oriented Pricing
Used by all planners to some degree
Does not consider costs and expenses or profit goals in the pricing process
Pricing Techniques
Promotional pricing: Selling a product at a temporarily lower price to attract customers.
Loss leaders: Selling a product below cost in an effort to increase customer traffic.
Example: potato chips and soda
Special event pricing: Sales events designed to attract customers and encourage them to buy.
Example: Back-to-School Sale
Fixed pricing (One-Price Policy): Charging the same prices to all customers regardless of the quantity
of the purchase.
Variable pricing (Flexible-Price Policy): Encourages customers to bargain with sellers in an effort to
obtain the best price.
Example: Flea markets, car dealerships
Price lining:
Establishing price points between products in a product line; used to communicate
differences in quality and/or service to consumers.
Example: Appliances, cars, electronics
Unit pricing: Stating the price of a product per unit of standard measure.
Example: fruits and meat
Psychological pricing: Used by organizations that believe that customers base their perceptions of products
on price and that these perceptions affect customer buying decisions.
Odd/Even cent pricing: Prices ending in odd numbers communicate a bargain. Prices ending in even
numbers communicate quality.
$200 quality / $199 bargain
Prestige pricing: Customers equate high price with high quality. This technique sets a higher-than average
price for products to communicate quality and status. jeans at Wal-Mart $19.99 / jeans at Belk’s $65.00
Pricing for new products: Price planning is a vital step in ensuring product success for new products.
Skimming pricing: Setting a high price to capitalize on demand when introducing a product that has
little competition and will appeal to customers who like to be the first to have the
latest products. Example: ipad, MacBook Air
Penetration pricing: Setting a low price to motivate customers to purchase when introducing a product into a
competitive market and attempting to gain customer trial.
Example: Laundry detergent, snack foods