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Pricing
Introduction
 The prices a company sets for its
product and services must:
1) gain acceptance with the target
customers and
2) make a profit for the organisation.
How do you navigate it all?!
Pricing Strategy
 Price is defined as:
“The amount in money for which something is
offered for sale.”
 A Pricing Strategy is defined as:
A plan which determines the best (at the time
of making) pricing decision.
There are so many!
Pricing Strategy
 When setting prices we must consider:
 The price that the competition charges.
 The cost of providing the product or service.
 The company’s market position e.g. is it a market
leader?
 The type and nature of demand e.g. if an
increase or a decrease in price will affect
amounts purchased.
 The market segments (or target market) we are
seeking to attract.
Pricing Strategy
Key Formulas
Profits = Total Revenues – Total Costs
OR
Profits = (Prices x Quantities sold) – Total Costs
Total Cost= Fixed costs + Variable Costs
Price Examples
Company
Price
Quantity
Sold
Total
Costs
A
$6
200
$400
B
$4
400
$1000
C
$4
300
$1700
Profit
Fixed & Variable Costs
FIXED COSTS
$ amount is the same monthly regardless of
volume of Sales or Production
Examples:
 Mortgage
 Rent
 Equipment/computer costs
 Utilities (sometimes)
 Salaries
 Property taxes
Fixed & Variable Costs
VARIABLE COSTS
$ amount differs depending on level of
volume of the sales or production of the
product/service
Examples:
Raw materials
Gas & electricity
Supplies
Commissions
Labour wages
Cost-Plus Pricing
 Selling Price = Unit Cost + Markup = FC + VC +
Markup
 Markup % = Selling Price – Unit Cost X 100
Unit Cost
 Margin = Selling Price – Unit Cost
The adding of a Markup to the cost ensures a profit
Quantity Discount
 Quantity discounts:
 Deductions from a seller’s list price that are
offered to encourage customers to buy in bulk
 eg. Buy a particular resort package – children fly
free
Cash Discounts
 A deduction granted to buyers for paying by
cash or within a specified time.
 They are usually calculated on a net amount due
after first deducting trade and quantity discounts
from the base price.
Price Lining
 Involves selecting a limited number of prices
at which a business will sell related products.
 A shoe shop which will sell several styles of shoes
at $69.95 and another group at $89.95.
Loss Leader Pricing
 Selected products or
services sold at cost
or less
 To attract customers
who will make other
purchases too
 This hopefully will
more than compensate
for the losses on “leader”
Follow the Competition
 Price equal to or just below the competition
 Watch costs relative to price to ensure profit.
Penetration Pricing
 New product or service priced significantly
below competition
 To win market share
 If sales volume is large, profit can be high.
Skimming
 When no or limited competition
 High price set
 Watch for competitors moving in!!
Super Sizing
Adding a low cost to a product to increase its
selling price and profitability.
Eg. Supersize Fries at McDonalds
It costs very little for McDonalds to add on the
extra fries but they can charge more.
Everyday Low Prices
 Low priced store
 Sales every week
 Everyday low pricing strategy
 Zellers, Walmart, Dollarama
Negotiated Pricing
A buyer makes offers to purchase and a seller
makes offers to sell a particular product or
service for less then the published price.
Interest-Free Pricing
Business offers consumers a chance to finance
their purchase with low or no interest charges
for the extent of the contract.
Combo Pricing (bundling)
Offers the consumer a deal on one part of the
sale, but the business makes a large profit on
the other parts it requires the customer to
buy.
Psychological Pricing
 Prices appear less
than they really are
 Eg. 299.98 vs. $300