PricePrice

List price, List price,

discounts, discounts,

payment period, payment period,

credit.credit.

Setting the priceSetting the price

Gearing of priceGearing of price• e.g. goods priced at £100, with a profit of e.g. goods priced at £100, with a profit of

10% i.e. £10 for every goods sold10% i.e. £10 for every goods sold

• Sell at £101 then 10% increase in profitSell at £101 then 10% increase in profit

• Sell at £99 then a 10% decrease in profitSell at £99 then a 10% decrease in profit

• The geariing/ration of cost to profit is 9:1The geariing/ration of cost to profit is 9:1

Setting the PriceSetting the Price

Increasing Specification

Decreasing Price

1. Premium Strategy

2. High Value Strategy

3. Superb Value Strategy

6. Good-value Strategy

5. Medium Value Strategy

6. Good-value Strategy

9. Economy Strategy

8. False-economy Strategy

9. Economy Strategy

Select the pricing Select the pricing objectives.objectives.

The firm must first decide what it wants to The firm must first decide what it wants to accomplish with a particular product e.g.accomplish with a particular product e.g.

Survival of the firm.Survival of the firm.

The firm wants to maximise current profit.The firm wants to maximise current profit.

The firm wants to maximise current revenue.The firm wants to maximise current revenue.

The firm wants to maximise sales growth.The firm wants to maximise sales growth.

The firm wants to maximise market price The firm wants to maximise market price skimming.skimming.

The firm may want to be the product quality The firm may want to be the product quality leader.leader.

Determining Determining demand.demand.

Unique-value effect. Unique-value effect. – Buyers are less price sensitive when the product is Buyers are less price sensitive when the product is

more unique.more unique.

– Designer JewelleryDesigner Jewellery

Total expenditure effect. Total expenditure effect. – Buyers are less price sensitive the less the Buyers are less price sensitive the less the

expenditure is to a ratio of their income.expenditure is to a ratio of their income.

– Bread, Milk?Bread, Milk?

Determining Determining demand.demand.

Sunk investment effect. Sunk investment effect. – Buyers are less price sensitive when the Buyers are less price sensitive when the

product is used in contribution with assets product is used in contribution with assets previously bought.previously bought.

– PrintersPrinters

Estimating costsEstimating costs

Costs, i.e. direct cost of both materials and Costs, i.e. direct cost of both materials and labour, and the overheads incurred. labour, and the overheads incurred.

The cost behaviour at different levels of The cost behaviour at different levels of production.production.• Build a lot, the price decreasesBuild a lot, the price decreases

The cost behaviour with accumulated The cost behaviour with accumulated experience.experience.• If you are an experienced carpenter you can If you are an experienced carpenter you can

make more widgets than an inexperienced make more widgets than an inexperienced craftsmancraftsman

Competitor Competitor PricingPricing

Analysing the competitor's prices and offers.Analysing the competitor's prices and offers.

Relevant to market sectorRelevant to market sector– E.g. Curry, Comet, DixonsE.g. Curry, Comet, Dixons

If they drop prices so should you?If they drop prices so should you?

Selecting a Selecting a pricing method.pricing method.

Given knowledge of the price elasticity of Given knowledge of the price elasticity of demand, the cost function of the product, and demand, the cost function of the product, and the competitor's prices the company is now in the competitor's prices the company is now in a position to select a price, this could be based a position to select a price, this could be based on the following methods:-on the following methods:-

• Mark-up pricing.Mark-up pricing.

• Perceived value pricingPerceived value pricing

• Target return on pricingTarget return on pricing

• Going rate pricing.Going rate pricing.

Mark-up pricing.Mark-up pricing.

The variable costs of a web service is £10,000 The variable costs of a web service is £10,000 pounds, where the variable costs can be pounds, where the variable costs can be considered to be primarily the direct costs. considered to be primarily the direct costs.

The product has fixed costs of £5,000, The product has fixed costs of £5,000, comprised of fixed overheads and new comprised of fixed overheads and new capital equipment. The expected sales of the capital equipment. The expected sales of the product are 50. The manufacturer's unit cost product are 50. The manufacturer's unit cost is thus:-is thus:-

Mark-up pricing Mark-up pricing exampleexample

direct (variable) cost + fixed direct (variable) cost + fixed costs/number of unit salescosts/number of unit sales

= 10,000 + 5,000/50 = 10,000 + 100 = = 10,000 + 5,000/50 = 10,000 + 100 = £10,100£10,100

Marked up priceMarked up price

this is called the works cost break-even price this is called the works cost break-even price based on 50 unit sales. based on 50 unit sales.

If the mark up is to be say 20%, then the If the mark up is to be say 20%, then the selling price would be selling price would be

£10,100/(1-0.2) = £12,625,£10,100/(1-0.2) = £12,625,

i.e. the profit is thus £2,525 which is 20% of i.e. the profit is thus £2,525 which is 20% of the selling price.the selling price.

Break even pointBreak even point

If the firm only sold 2 units at £12,625 each, If the firm only sold 2 units at £12,625 each, it's revenue would be £ 12,625 *2 = it's revenue would be £ 12,625 *2 = £25,250. The firm's costs would be:-£25,250. The firm's costs would be:-

= £ 10,000 *2 + £5,000 = £25,000. = £ 10,000 *2 + £5,000 = £25,000.

The firm would break-even on sales of 2 units The firm would break-even on sales of 2 units at a price of £12625 each. at a price of £12625 each.

Thus we can see that there is a inter Thus we can see that there is a inter relationship between price, fixed and relationship between price, fixed and variable costs, profit, break-even, and loss.variable costs, profit, break-even, and loss.

Perceived value Perceived value pricing pricing

In this case the firm sets it's price at what it In this case the firm sets it's price at what it thinks the customers believe is the thinks the customers believe is the perceived price for the goods, perceived price for the goods,

Advertising/branding plays a large part in this Advertising/branding plays a large part in this strategy.strategy.– E.g. BurberryE.g. Burberry

Small scale consultancies can offer the Small scale consultancies can offer the same service as large scale services but same service as large scale services but can they change a premium for their namecan they change a premium for their name

Target return on Target return on pricing pricing

In this the firm decides the profit of a product In this the firm decides the profit of a product to be dependent on a fixed rate of to be dependent on a fixed rate of investment on the capital used in the investment on the capital used in the organisation (ROI) e.g. 25%.organisation (ROI) e.g. 25%.

e.g. product works cost = works cost + e.g. product works cost = works cost + [ROI*Invested Capital]/No of units sold[ROI*Invested Capital]/No of units sold

Target return on Target return on pricing - examplepricing - example

Capital Invested in a year is say £1,000,000 Capital Invested in a year is say £1,000,000 and the No of units sold is again 50, then and the No of units sold is again 50, then the selling price would be:-the selling price would be:-

= £10K + £[0.25*1,000,000/50] = £10K + = £10K + £[0.25*1,000,000/50] = £10K + £5K = £15K£5K = £15K

Going rate Going rate pricing. pricing.

In this the firm bases it's prices largely on the In this the firm bases it's prices largely on the basis of the competitor's prices, with less basis of the competitor's prices, with less attention placed on it's own cost or market attention placed on it's own cost or market demand.demand.

E.g. Baked Beans, Toys at XmasE.g. Baked Beans, Toys at Xmas

Selecting a final Selecting a final price.price.

Psychology.Psychology.

Company Pricing policyCompany Pricing policy

Promotions and discounts.Promotions and discounts.

Geographical pricing.Geographical pricing.

Product mix bundling.Product mix bundling.

Discriminatory pricing.Discriminatory pricing.

PsychologyPsychology

Customers often believe that increased price Customers often believe that increased price means increased quality, means increased quality,

They also have 'reference prices' which are They also have 'reference prices' which are prices the buyer believes he ought to pay prices the buyer believes he ought to pay for an item. for an item.

Psychology - 2Psychology - 2

Prices at say £99 instead of £100 are also Prices at say £99 instead of £100 are also used as a psychological ploy.used as a psychological ploy.– E.g. Sainsbury's introduced the chancellors E.g. Sainsbury's introduced the chancellors

4p duty on wine making for instance, wine go 4p duty on wine making for instance, wine go from 4.99 to 5.03. Sales plummetedfrom 4.99 to 5.03. Sales plummeted

– Asda marks prices at levels such as 4.87 Asda marks prices at levels such as 4.87 Why?Why?

Company Pricing Company Pricing policypolicy

Prices have to be consistent with the Prices have to be consistent with the company policy, if not authority is usually company policy, if not authority is usually needed to deviate from this policy.needed to deviate from this policy.

This can be internal pricing e.g.This can be internal pricing e.g.– we have a limit on items of this typewe have a limit on items of this type

Or externalOr external– We will always price using the .99 methodWe will always price using the .99 method

Promotions and Promotions and discounts.discounts.

Sales can be raised by promotional pricingSales can be raised by promotional pricing

Can also be used to entice people to buy Can also be used to entice people to buy other services as wellother services as well

Geographical Geographical pricing pricing

Prices can vary according to areas of the Prices can vary according to areas of the country or world, country or world,

these depend on transport, distribution, local these depend on transport, distribution, local labour and land costs, and income at the labour and land costs, and income at the specific location.specific location.– Tesco vs. Tesco ExpressTesco vs. Tesco Express

Product mix Product mix bundling. bundling.

Selling packages of combined services or Selling packages of combined services or products at a discountproducts at a discount– E.g. buy a website and we’ll host it for freeE.g. buy a website and we’ll host it for free

Discriminatory Discriminatory pricingpricing

You sell to one customer at price A and You sell to one customer at price A and another customer at price B for the same another customer at price B for the same productproduct

Quite common for service sales in web Quite common for service sales in web sectorsector

PlacePlace

Channels, Channels,

coverage, coverage,

location, location,

distribution and distribution and

transport.transport.

Place simply refers to how you will sell your Place simply refers to how you will sell your products to your customers. products to your customers.

What you are selling will directly influence how What you are selling will directly influence how you distribute it, and it affects mainly those you distribute it, and it affects mainly those businesses that are in production. businesses that are in production.

If you own a small retail outlet or offer a service If you own a small retail outlet or offer a service to your local community then you are at the end to your local community then you are at the end of the distribution chain so and will be directly of the distribution chain so and will be directly supplying a variety of products directly to the supplying a variety of products directly to the customer.customer.

What is Place?What is Place?

ChannelsChannels

Direct Supply / Direct SaleDirect Supply / Direct Sale

Direct to retailerDirect to retailer

Wholesaler, merchant or agent supplierWholesaler, merchant or agent supplier

Direct Supply / Direct Supply / Direct SaleDirect Sale

Retail, Mail order, Door to Door and e-Retail, Mail order, Door to Door and e-commercecommerce

AdvantagesAdvantages– Direct contact will your customers Direct contact will your customers – Easier to detect the subtle changes which are Easier to detect the subtle changes which are

occurring and adapt to the changes; i.e. occurring and adapt to the changes; i.e. demand for price changes or overall demand for demand for price changes or overall demand for your products.your products.

– You also have complete control over your You also have complete control over your product range, how it is sold and at what price product range, how it is sold and at what price

Direct Supply / Direct Supply / Direct Sale 2Direct Sale 2

DisadvantagesDisadvantages– storage facilities/retail premises requiredstorage facilities/retail premises required– Customer support – returnsCustomer support – returns– Consumer confidence can prove a tricky Consumer confidence can prove a tricky

business.business.

Direct to retailerDirect to retailer

AdvantagesAdvantages– Less upfront cost for premisesLess upfront cost for premises– Allows the company to cover outlets either Allows the company to cover outlets either

regionally or nationallyregionally or nationally

DisadvantagesDisadvantages– Less contact with customers Less contact with customers – Less responsive to demandLess responsive to demand– Middle man takes a cutMiddle man takes a cut

Wholesaler, merchant Wholesaler, merchant or agent supplier or agent supplier

Sell through an agentSell through an agent

AdvantagesAdvantages– Regular income and product flowRegular income and product flow– Less stock to carryLess stock to carry

DisadvantagesDisadvantages– Lack of customer contactLack of customer contact– Lose company identity (products may be re-branded Lose company identity (products may be re-branded

by the agent)by the agent)

You may decide to have a combination of all threeYou may decide to have a combination of all three