Pricing Strategies and Tactics

Business Development

Objectives

Identify various pricing strategiesDiscuss differential pricing strategiesDescribe skimming and penetration pricingDemonstrate competition’s effect on pricingDiscuss inflation’s effect on pricingDiscuss product-line pricing strategiesExplore psychological aspects of priceDemonstrate geography’s influence on pricingDiscuss varied pricing toolsOverview legal restrictions on pricingIdentify 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 lifeExamples:

personal computers

CDs

electronics

Competitive Pricing Strategies

Meeting competitionUndercutting competition

Types:

Price leadershipFollow the leaderPenetration pricingPredatory pricingTraditionalInflationary

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 PricingStrategies

Captive pricing

Leader and Bait pricing

Price lining$45.99 $39.99 $24.99 $19.99

Price-bundling & Multi-unit

Psychological & Image Pricing

Regular price: $45

Now Only: $25

Reference Pricing

Odd/Even Pricing

$1.87

$4.95

$9.99

$175

$1000

Prestige Pricing

Distribution-Based Pricing

F.O.B

Delivered

Zone

Uniform

Basing-point

X

X

Markups

Manufacturer

Cost $20.0020% markup $ 5.00Selling price $25.00

Wholesaler

Cost $25.0015% markup $ 4.41Selling price $29.41

Retailer

Cost $29.4141% markup $20.59Selling 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:

= % markupAmount added on

------------------------

Selling price

Cost + Amount added on = Price

Cost-Plus Method:

Average-cost method:

All costs

------------------------ =

# Units produced

Average cost

of a single unit

Establishing Exact Prices

Target Return Pricing:

Fixed costs + Target return

-------------------------------------- =

Units to be sold

Price

per unit

Loss

Profit

Break-evenpoint

Units produced & sold

Co

st

&R

eve

nu

e (

$)

Total Revenues

Total Costs

Fixed Costs

Break-Even Analysis

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 strategiesDiscuss differential pricing strategiesDescribe skimming and penetration pricingDemonstrate competition’s effect on pricingDiscuss inflation’s effect on pricingDiscuss product-line pricing strategiesExplore psychological aspects of priceDemonstrate geography’s influence on pricingDiscuss varied pricing toolsOverview legal restrictions on pricingIdentify a major ethical issue related to price