The Price Strategy
Factors Affecting Price
 Costs and Expenses
 Fixed costs and expenses are not subject to change depending on the
number of units sold.
 Variable costs and expenses are subject to change depending on the
number of units sold.
 Supply and Demand
 When the demand for product is high and supply is low, you can
command a high price.
 When the demand is low and supply is high, you must set lower prices.
 Consumer Perceptions
 The price of your products helps create your image in the minds of
customers.
 Prices set low are perceived as lacking quality
 Prices set high may turn away customers.
 Competition
 When the target market is price conscious, competitors’ pricing may
determine your pricing.
 Customers usually pay more for personal attention, credit, and warranties.
 Government Regulations
 Price gouging is pricing above the market when no alternative retailer is
available.
 Price fixing is an illegal practice in which competing companies agree,
formally or informally, to restrict prices within a specific range.
 Resale price maintenance is price fixing imposed by a manufacturer on
wholesale or retail resellers of its products to deter price-based
competition.
 Unit pricing is the required pricing of goods on the basis of cost per unit of
measure.
 Bait-and-switch is where a customer is attracted to a store by sale-priced
items, but are convinced to buy the higher-priced items.
 Technology Trends
 The internet and technology trends affect price strategy.
 Amazon.com has changed the way people buy books.
 Provides customers with easy access to prices, product information, and
service.
 Adapting to technological changes can give you a competitive edge.
Pricing Objectives
 Obtaining a Target Return on Investment
 Return on Investment (ROI) is the amount earned as a result of that
investment.
 Obtaining Market Share
 Market share is a business’s portion of the total sales generated by all
competing companies in a given market.
 Other Objectives
 Social and ethical considerations
 Meeting the competition’s prices and establish an image.
 During difficult economic times, survival.
Pricing Strategy Decisions
 Setting a Basic Price
 Cost-Based Pricing – you must consider your business costs and your
profit objectives.
 Demand-Based Pricing – requires you to find out what customers are
willing to pay for your products.
 Competition-Based Pricing – you need to find out what your competitors
charge.
 Price Policies
 Establishing a pricing policy frees you from making the same pricing
decision over and over again.
 Flexible-Price Policy – pay different prices for the same product.
 One-Price Policy – charged the same price for goods/services
offered.
 Product Life Cycle Pricing
 Stage 1: Introduction – sales volume is relatively low, marketing cost are
high, and profits are low.
 Stage 2: Growth – sales climb rapidly, unit costs are decreasing, product
begins to profit.
 Stage 3: Maturity – sales begin to slow and profits peak.
 Stage 4: Decline – sales and profits continue to fall.
 Pricing Techniques
 Psychological Pricing – refers to pricing techniques that are based on the
belief that customers’ perceptions of a product are strongly influenced by
price.
 Prestige pricing – higher-than-average price to suggest status and
prestige.
 Odd/even pricing - $19.99 vs. $20.00
 Price lining – all items in a certain category are priced the same.
 Promotional pricing – limited time offer at a lower price.
 Multiple-unit pricing – items are priced in multiples (3 for $0.99)
 Bundle pricing – several complementary products are sold at a
single price.
 Discount Pricing – offers customers reductions from the regular price.
 Cash discounts
 Quantity discounts
 Trade discounts
 Promotional discounts
 Seasonal discounts
 Questions to Ask About Price Decisions
 What motivates customers who will buy my product? Are they price
sensitive?
 How much will my customers be willing and able to buy at what price?
 How will outside factors affect my price strategy?
 What will my price objectives be?
 Should I adopt a flexible or one-price policy?
 Where will my product be in the product life cycle?
Break-Even Analysis
 Is the point at which the gain from an economic activity equals the cost incurred
in pursing it.
 Selling price is the actual or projected price per unit.
Fixed Costs
÷
Unit Selling Price – Variable Cost
= Break-Even Point (Units)
Markup
 Is the amount added to the cost of an item to cover expenses and ensure a profit.
1. Cost + Markup = Price
2. Markup ÷ Cost = % Markup on Cost
3. Markup ÷ Selling Price = % Markup on Selling Price
Markdown
 Is the amount of money taken off from the original price.
Price x Markdown % = $ Markdown
($105 x 30% (0.30) = $31.50)
Price – Markdown = Sale Price
($105 - $31.50 = $73.50)
Discounts
 A reduction in price to the customer.
Price x Discount % = Discount $
($200 x 0.20 = $40)
Price – Discount $ = Discount Price
($200 - $40 = $160)
Possible Changes to Pricing Strategy
 Adjusting Prices to maximize Profit
 Are your products’ prices elastic or inelastic?
 What are your competitors’ prices?
 Reacting to market Prices
 Keep an eye on current market pricing, if prices fall you can lose
customers quickly if you do not lower your price.
 Revising Terms of Sale
 Change your credit policies or introduce trade, quantity, or cash discounts.