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Unit 8
Pricing
Pricing
• Why don’t businesses charge
customers the price they pay for
the goods they sell?
Unit 8 Vocabulary
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Break-even Point
Bundle Pricing
Cost-plus Pricing
Everyday Low Prices
(EDLP)
Flexible-price Policy
Geographical Pricing
Law of Diminishing
Marginal Utility
Loss Leader
Market Share
Market Position
Markup Pricing
Return on Investment
One-price Policy
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Penetration Pricing
Prestige Pricing
Price
Price Discrimination
Price Fixing
Price Lining
Product Mix Pricing
Strategies
Promotional Pricing
Psychological Pricing
Seasonal Discounts
Segmented Pricing Strategy
Skimming Pricing
Trade Discounts
Unit Pricing
Unit 8 Essential
Question
• What are the various pricing
strategies utilized to maximize
return and meet customer’s
perception of value?
Essential Question 1
Pricing
• What is nature and scope of the pricing
function?
Pricing
• How does price relate to value?
• What products would you be
willing to buy even if it meant
not being able to buy other
products?
• What is the maximum you
would be willing to pay for the
product?
Price Planning
• What is Price?
• Price is the value of money (or its
equivalent) placed on a good or service.
Relationship of Price to
Product Value
• Value is a matter of anticipated
satisfaction.
• The seller’s objective is to set price high
enough to make a profit and yet not so
high that it exceeds the value potential
customers place on it.
Importance of Price
• It is a major factor in the success or
failure of a business.
• It helps establish and maintain a firm’s
image, competitive edge, and profits.
Essential Question 2
Pricing
• What is the difference between
market share and market position as
it relates to price?
Market Share v. Position
• Market Share: A firms percentage of
the total sales volume generated by all
competitors in a given market.
• Market Position: A firms rank, based
on sales volume, compared to all
competitors in a given market.
Essential Question 3
Pricing
• How does markup, markdown, sales
price, discount dollars and discount
percentage compare and contrast?
Price Calculations
• Cost: The total amount a firm pays for a
product.
• Retail Price: The amount a firm sells its
products for.
• Markup: The dollar amount added to
the cost to reach the retail price.
Price Calculations
• Margin: The percent of markup. One
margin point is equal to one percent
markup.
• Sales Price: Temporary price of a
product below the retail price.
Price Calculations
• Markdown: The amount subtracted from
the retail price to reach the sales price.
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Discount Dollars: The dollar amount marked
down from the retail price to the sales price.
Discount percentage: The percentage marked
down from the retail price to the sales price.
Price Calculations
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Wanda’s Manufacturing purchases widgets
from Marketing Parts Wholesalers for $100
and resells them for $150.
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What is the cost of widgets?
What is the retail price of widgets?
What is the markup of widgets?
What is the margin of widgets?
How much profit is made on the sale of each widget?
Price Calculations
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Wanda’s Manufacturing has a surplus of
widgets and is offering an incentive by selling
widgets at $112.50.
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What is the retail price of widgets?
What is the sales price of widgets?
What is the dollar markdown of widgets?
What is the percent markdown of widgets?
Essential Question 4
Pricing
• What are the factors that affect price?
Factors Affecting Prices
• Costs and Expenses
– Break-even Point: The point at which the money from
product sales equals the costs of making and distributing the
product.
Fixed Expenses
– (Number of Units) =
Unit Sales Price - Variable Expenses
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• Supply and Demand
– Elasticity depends on:
• Availability of substitutes.
• Price relative to income.
• Luxury versus necessity.
Factors Affecting Prices
• Consumer Perceptions
– Consumers tend to equate high
prices with quality, status, prestige,
and exclusiveness.
• Competition
– Price Competition - Competition
based on assumption that customers
will purchase lower price.
– Nonprice Competition Competition based on other
marketing factors.
Factors Affecting Prices
• Government Regulations
– Price Fixing:
• Where competitors agree on certain price ranges within
which they set their own price.
• Price fixing (collusion) is illegal because it eliminates
competition.
– Price Discrimination:
• Occurs when a firm charges different prices to similar
customers in similar circumstances.
• Price Discrimination is illegal.
Factors Affecting Prices
• Technological Trends
– The major technology trend affecting business
today is the internet.
– Business that adapt to technological changes can
create a competitive edge.
– Business that do not adapt to technological change
could become obsolete.
Essential Question 5
Pricing
• What are the key price mix
strategies?
The Pricing Concept
• The combination of pricing strategies,
pricing policies, and pricing techniques
in combination with the business’s
pricing goal.
Goals of Pricing
• Gain Market Share
– A firm’s percentage of the total sales
volume generated by all competitors in a
given market.
• Return on Investment:
– Used to determine the relative
profitability of a product.
– Is calculated by profit divided by
investment.
Goals of Pricing
• Meet the Competition
– Some companies simply price their
product the same as the competition.
– The price is either same as the industry
leader or the average price of the
industry.
Basic Price Strategies
• Cost-Based Pricing: - Cost of product plus
the cost of doing business plus your projected
profit margin (markup).
• Demand-Based Pricing - Determine what
customers are willing to pay and set the price
accordingly.
– Demand must be inelastic.
– Customers must believe the product is different or of
greater value.
• Competition-Based Pricing - You determine
whether to price above, below, or in line with
the competition.
Pricing Policies
• Flexible-Price Policy:
– Allows customers to haggle over price.
– Takes into account changing market conditions
such as shifts in demand and prices of
competitors.
• One-Price Policy:
– Tells customers they are treated equally.
– Strongly recommended for service businesses.
Pricing Techniques
• Psychological Pricing: Based on the belief
that customers base perceptions of a product
on price.
– Prestige Pricing: Uses higher than average prices
to suggest exclusiveness, status, and prestige.
– Odd/Even Pricing:
• Uses odd prices ($19.99) to suggest bargains.
• Uses even prices ($20.00) to suggest higher quality.
– Price Lining: Prices items according to category.
– Promotional Pricing: Offers lower prices for a
limited period to generate sales.
Pricing Techniques
• Discount Pricing: Offers reductions from the
regular price to customers.
– Cash Discounts: Normally given to customer for prompt
payment.
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– Quantity Discounts: Encourages buyers to order large
amounts.
– Trade Discounts: Given to distribution-channel members
who provide marketing services for the manufacturer.
– Promotional Discounts: Manufacturers pay wholesalers or
retailers for carrying out promotional activities for the
manufacturer.
– Seasonal Discounts: Used for products which have a heavy
seasonal demand.
Essential Question 6
Pricing
• What is the impact of product life
cycles on marketing decisions?
Pricing
• If you were to classify the human
life cycle into 4 phases, what would
they be?
• How would you equate the human
life cycle to the product life cycle?
Product Life Cycle
• All products move through a four stage
life cycle.
• Introduction
– Skimming Pricing: Charging a high price to
recover costs then dropping the price when the
product is no longer unique.
– Penetration Pricing: Charge a low price to
build customer base and discourage
competition.
Product Life Cycle
• Growth
– Sales increase and unit costs decrease.
– If you skimmed you will need to lower price to
expand customer base.
– If you were penetrating, little to no change is
necessary.
Product Life Cycle
• Maturity
– Need to look for new markets and possible
product improvements to hold prices.
• Decline
– Cut prices to stimulate sales and clear
inventory.