Chapter Twenty Pricing Strategies and Tactics Objectives Identify various pricing strategies Discuss differential pricing strategies Describe skimming and penetration pricing Demonstrate competition’s effect on pricing Discuss inflation’s effect on pricing Discuss product-line pricing strategies Explore psychological aspects of price Demonstrate geography’s influence on pricing Discuss varied pricing tools Overview legal restrictions on pricing Identify a major ethical issue related to price Pricing Strategies Differential pricing strategies Competitive pricing strategies Product-line pricing strategies Psychological and image pricing strategies Distribution-based pricing strategies Differential pricing strategies Different buyers pay different prices $24.95 Differential Pricing Strategies Types: Variable Pricing Second-Market Discounting Skimming Periodic discounting Random discounting $24.95 Price Skimming Pricing high, usually at the beginning of a product’s life Examples: personal computers CDs electronics Competitive Pricing Strategies Types: Meeting competition Undercutting competition Price leadership Follow the leader Penetration pricing Predatory pricing Traditional Inflationary Penetration Pricing Low introductory price to establish product quickly in market When to use: Elastic demand Economies of scale Threat of strong competition Product-Line Pricing Strategies Captive pricing Leader and Bait pricing Price lining $45.99 $39.99 $24.99 $19.99 Price-bundling & Multi-unit Psychological & Image Pricing Reference Pricing Regular price: $45 Now Only: $25 $1.87 $4.95 $9.99 $175 $1000 Odd/Even Pricing Prestige Pricing Distribution-Based Pricing X X F.O.B Delivered Zone Uniform Basing-point Markups Manufacturer Wholesaler Retailer Cost $20.00 Cost $25.00 Cost $29.41 20% markup $ 5.00 15% markup $ 4.41 41% markup $20.59 Selling price $25.00 Selling price $29.41 Selling price $50.00 Establishing Exact Prices Markup on Selling Price and on Cost Cost-Plus Method Break-even Analysis Target Return Pricing Average Cost Establishing Exact Prices Markup on Selling Price or Costs: Amount added on -----------------------Selling price = % markup Cost-Plus Method: Cost + Amount added on = Price Establishing Exact Prices Average-cost method: All costs Average cost ------------------------ = of a single unit # Units produced Target Return Pricing: Fixed costs + Target return Price -------------------------------------- = per unit Units to be sold Break-Even Analysis Cost &Revenue ($) Total Revenues Profit Loss Breakeven point Units produced & sold Total Costs Fixed Costs Price Adjustments Cash discounts Trade discounts Quantity discounts Seasonal discounts Chain discounts Promotional allowances Pricing and the Law ROBINSON-PATMAN ACT OF 1936 Discriminatory prices illegal unless…. Charged to meet competition Justified by cost savings Pricing 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 issues Are corporate social policy and corporate profit motive compatible? Review Identify various pricing strategies Discuss differential pricing strategies Describe skimming and penetration pricing Demonstrate competition’s effect on pricing Discuss inflation’s effect on pricing Discuss product-line pricing strategies Explore psychological aspects of price Demonstrate geography’s influence on pricing Discuss varied pricing tools Overview legal restrictions on pricing Identify a major ethical issue related to price