Chapter 21 Pricing Objectives Sales Based a firm wants sales growth and or to maximize market share o Reasons for this Sees market saturation or sales growth as a major step Maximize unit sales and will trade lower per unit profits for larger total Assumes greater sales lower cost per unit o Penetration Pricing low prices are used to capture the mass market Works when customers are sensitive to prices Can even tap into new markets Profit Based maximize profit earn a satisfactory profit optimize the return on investment o Skimming Prices using high prices to attract the market segment more concerned with product quality uniqueness or status than price o Use when competition can be minimized funds are needed for early cash recovery consumers are willing to pay unit costs remain equal or rise as sales increase o Sometimes people use skimming then penetration Status Quo Based avoid unfavorable government actions minimize the effects of competitor actions maintain good channel relations stabilize prices Broad Price Policy Sets the overall direction and tone for a firm s pricing efforts and makes sure pricing decisions are coordinated with the firm s choices as to a target market o Passive role with customer purchases based on service convenience and quality o Active role purchases based on low price Outlining Steps for Broad Price Policy o Integrating individual decisions o Interrelationship of price and product Pricing Strategy Cost Based Pricing a firm sets prices by computing merchandise service and overhead costs and then adding an amount to cover its profit goal o Benefits easy to derive greater certainty seeks reasonable profits o Used by firms who state goal based on ROI o Price floor lowest acceptable price a firm can charge and attain its profit goal o Limitations no consideration for market conditions overhead is difficult to calculate Methods in Cost Based Pricing o Cost Plus Pricing prices are set by adding a predetermined profit to costs Simplest form Neg profit expressed in terms of costs not tied to consumer demand little incentive to improve efficiency Most effective when price fluctuations have little influence on sales and when a firm is able to control prices Price total costs projected profit units produced o Markup Pricing considers per unit product costs and the markups required to cover selling costs and profits Markups should be expressed in terms of price rather than cost Most commonly used by wholesalers and retailers Price Product cost 100 markup percent 100 Reason why markups are commonly stated in terms of selling price Computed as of sales Firms quote selling prices as reduction from final list prices Competitive price data is more readily available Profitablility appears smaller if based on price Variable markup policy separate categories of products receive different percentage markups Very popular o Target Pricing prices are set to provide a particular rate of return on investment for a standard volume of production Used by capital intensive firms and public utilities 5 major shortcomings No useful for firms whit low capital investments it understates selling price The entire standard volume may not be sold at the target price There may be production problems Price cuts for overstock Volume decreases price increases o Break even analysis computes the sales needed to break even at a specific price Does not consider ROI Limitations Demand is not considered Assumed that all costs can be divided into fix variable Assumes Variable costs are constant Assumes Fixed costs remain constant o Price floor Pricing The lowest price at which it is worthwhile to increase the amount of goods or services it makes available for sales Price floor marginal rev marginal cost all per unit Demand Based Pricing a firm sets prices after studying consumer desires and ascertaining the range of prices acceptable to the target market o Identify a price ceiling the maximum amount consumers will pay for a given good or service Depends on elasticity and consumers opinion on the price Very competitive situations lead to small markups due to substitutes o Demand minus pricing a firm finds the proper selling price and works backward to compute costs Used by firms selling directly to consumers o Chain markup pricing traces demand minus calculations from channel members o Modified breakeven analysis melds traditional breakeven analysis with demand to suppliers evaluation at various prices o Price discrimination a firm sets two or more distinct prices for a product so as to appeal to different final consumers Customer based Product based Time based Place based Yield management pricing it determines the mix of price quantity combinations that generate the highest levels of revenues at a given point in time Competition based pricing competitors prices rather than demand or cost considerations simple and follows the market which tends to be fair o Price leadership occurs when one or a few firms initiate price changes in and industry they are effective when others follow o Competitive bidding tow or more firms independently submit prices to a customer usually b to b some use models Combination pricing using multiple pricing systems Implementing a Pricing strategy Customary vs variable pricing o Customary a firm sets prices and seeks to maintain them for an extended time Food mags mass transit o Variable pricing a firm intentionally alter prices in response to cost fluctuations or differences in consumer demand One price vs flexible pricing o One price a firm charges the same price to all customers seeking to purchase a good or service under similar conditions Builds customer confidence rule for retailers o Flexible pricing prices are based on the consumer s ability to negotiate or on the buying power of a large customer Odd pricing used when selling prices are set at levels below even dollar values o Example 4 99 Price quality association consumers may believe high prices represent thigh quality an low prices represent low quality o Prestige pricing a theory drawn from the price quality association that assumes consumers will not buy items at prices they consider to be too low Acceptable range Leader pricing advertise and sell key items in its product assortment at less than usual profit margins increase consumer traffic o Common among well know high turnover frequently bought products Multiple unit pricing a practice where by a firm offers discount to consumer to encourage them to buy in
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