chapter
Chapter 14:
Pricing Strategies
Price
 Price: The sum of all the value(s) the
consumer gives up to obtain the
product or service.
–
–
–
–
Money
Time
Effort
Foregoing something else you otherwise
would have purchased
– Brand, image, perception
– Level of service, warranty, guarantee
Price

Price is determined by external market issues:
– Supply versus demand (availability of substitutes)
– Consumer value perceptions
– Product costs
– Competitor prices

Price is determined by internal strategic goals:
– New product that needs to penetrate market?
– High quality product that requires a high price?
– Commodity or me too product requiring low price?
– Trying to position the brand in a particular way?
– Trying to knock /differentiate from a competitor?
Price

Prices are set at
each step of the
supply chain

Price is
determined by
the cost of the
materials
coming in, plus
the value
provided by the
channel
member (labor,
branding,
convenience,
packaging
quantity)
Producer purchases raw
materials, makes the
product, then charges a
price to the Wholesaler
(cost + profit)
Producer
Wholesaler pays a price to
the Producer, then
charges a price to the
Retailer(cost + profit)
Wholesaler
Retailer pays a price to the
Wholesaler, then charges
a price to the Consumer
(cost + profit)
Retailer
Consumer pays a price to
the Retailer based on their
perceived value of the
product
Consumer
Price Terminology
 Revenue = Price x Sales Unit
– Revenue per unit = $10 x 1 = $10
– Total revenue = $10 x 150 units sold = $1500
 Profit = Revenue – Costs
– Profit per unit = $10 - $7 cost = $3
– Total profit = ($10 x 150) – ($7 x 150)
= $1500 - $1050
= $450
Markup
 Markup: The amount the purchaser increases
the price before selling the product to the next
channel member.
– Cost=$15.00
– Selling price=$20.00
– Differential = $5.00
Markup as % of cost
= (Selling $ – Cost ) / Cost
= $5/$15
= 33%
Markup as % of selling price = (Selling – Cost) / Selling
= $5/$20
= 25%
Margin
 Margin: Percentage of profit received based on
the selling price.
Margin % on selling price
= (Selling $ – Cost) /(Selling $)
= $5/$20
= 25%
Margin and Markup Example (p. 721)
 Retailer margin goal: 30%
 Wholesaler margin goal: 20%
 Suggested retail price: $600
–
–
–
–
–
Retail price:
(Less 30% margin for retailer):
Retailer’s cost/wholesaler’s price:
(Less 20% margin for wholesaler):
Wholesaler’s cost/manufac. price:
$600
($180)
$420
($84)
$336
Pricing Objectives
 Profit Oriented: Setting prices so that
total revenue is as large as possible
relative to total costs
 Sales Oriented: Short-term objective to
maximize sales
– Ignores profits, competition, and the
marketing environment
– May be used to sell off excess inventory
 Status Quo: Maintain existing prices, or
meet competitors’ prices
Profit Oriented Pricing
 Define costs for the product or service, define
the targeted profit, and set price based on
these components.
 Price Skimming: A form of profit oriented
pricing where a high price is charged when
introducing a product, often due to lack of
competition.
• Relies on high profit margins per unit and lower sales
volume
• Best when the product has a significant competitive
advantage, legal protection, inelastic demand
Profit Oriented Pricing:
(Sometimes Called Cost Plus, Markup)
=
3) Your profit margin
+
2) Your variable
costs
+
1) Your fixed costs
Sales Oriented Pricing
 Price is set to maximize the units sold,
typically using low profit margin targets.
 Penetration Pricing: A low introductory
price is set to penetrate the market and
generate larger sales volume.
• Relies on high sales volume and lower profit
margins per unit.
• Often used when there are many competitors in the
market, or the product does not have a significant
competitive advantage
Sales-Oriented Pricing
Competitive analysis establishes target
price points for your product
Analysis of initial costs establishes floor
for your product
Status Quo Pricing
 Goal is to maintain existing prices,
or meet a competitor’s prices.
– Passive pricing policy
– Often used by other firms when there
is a dominant product in the market
(price leader)
– Used for late-entering, “me-too”
products
What is market share?
Market Share
A company’s
product sales as a
percentage of total
sales for that
industry in dollars
or units.
Setting the Right Price
Establish pricing goals
Estimate demand, costs, and profits
Understand your market pressures
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
Market Pressures: Stage in the Product
Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
$
$
$
$
High
Stable
Decrease
Decrease
Stable
High
UNIQUE PRICING
STRATEGIES
These next slides are for your reference, not to know for an
exam. You may or may not need this info for your project.
Market Pressure: Selling Against a Brand
 Stocking well-known branded items
at high prices in order to sell
another brand at discounted prices.
– Viva paper towels: $1.29
– Safeway Brand: $0.99
– Increase volume on store brand
Market Pressure: Reference
and Prestige Pricing
Reference Pricing
Prestige Pricing
Regular price: $45
Now Only:
$25
http://www.vivre.com
Market Pressure: Psychological
Price Positioning
 Most Attractive?
 Better Value?
A
32 oz.
B
$2.19
– A = 6.8 ¢ per oz.
– B = 7.7 ¢ per oz.
$1.99
26 oz.
Assume Equal Quality
 Psychological
reason to price this
way?
Unique Pricing Strategies
 Product Line Pricing
 Product Mix Pricing
 Segmented Pricing
Product Line Pricing
Involves setting price
steps between various
products in a product
line based on:
– Cost differences
between products
– Customer evaluations
of different features
– Competitors’ prices
Product Mix Pricing Strategies
Optional-Product
– Pricing optional or
accessory products
sold with the main
product (i.e camera
bag) at a high price.
 Captive-Product
– Pricing products that
must be used with
the main product (i.e.
film) at a high price.
Other Pricing Strategies
 Segmented Pricing: Selling a product
at different prices for reasons other
than cost.
– Customer segments (movie theater
tickets)
– Location (in-state versus out of state
students)
– Time (season, month, time of day (train
tickets))
– Product form (soda in large and small
bottles)
Pricing Restrictions
 Can price products differently to
different purchasers, provided the costs
to sell to the purchasers are different.
 Cannot price fix, or collude across
competitors to set prices in the market.
 Cannot require retailers to set prices at a
particular level (can have a
manufacturer’s suggested retail price, or
MSRP)
Segmentation/Yield Management
Yield Management Systems
A technique for adjusting prices
that uses complex mathematical
software to profitably fill unused
capacity.
Yield Management Pricing
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity