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Pricing Strategies

Pricing Strategies. the price is what you pay, the value is what you receive…anonymous. 3 Potent Forces. Image (premium or least price) Competition ( nonprice ) Value (objective or perceived). Rising Costs. Communicate with customers Improve efficiency in the company

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Pricing Strategies

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  1. Pricing Strategies the price is what you pay, the value is what you receive…anonymous

  2. 3 Potent Forces • Image (premium or least price) • Competition (nonprice) • Value (objective or perceived)

  3. Rising Costs • Communicate with customers • Improve efficiency in the company • Absorb the cost increases • Emphasize the value of the product • Anticipate rising costs/lock in prices early

  4. Product/service costs Market factors Sales volume Competitors’ prices Competitive advantage sensitivity Desired image Economic conditions Business location Seasonal fluctuations Psychological factors Credit terms/purchase discounts Customers’ price Pricing Factors

  5. Customized or Dynamic Pricing A pricing technique that sets different prices on the same products and services for different customers using the information that a company collects about its customers

  6. Pricing Strategies and Tactics Introducing a New Product • Getting the Product Accepted -revolutionary -evolutionary -me-too • Maintaining the Market Share • Earning a Profit

  7. Pricing Strategies and Tactics Introducing a New Product • Market Penetration • Skimming • Sliding down the Demand Curve

  8. Pricing Strategies and Tactics Pricing Established Goods and Services • Odd Pricing: sets prices that end in odd numbers to create the psychological impression of low prices • Price Lining: greatly simplifies the pricing function by pricing different products at different price points, depending on quality, features, and cost • Leader Pricing: involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices

  9. Strategies and Tactics (cont’d) Geographic Pricing: zone: involves setting different prices for different territories because of different transportation costs delivered: charges all of its customers the same price regardless of location FOB-Factory: sells merchandise to customers who then also pay for the shipping costs

  10. Strategies and Tactics (cont’d) • Opportunistic Pricing: involves charging customers unreasonably high prices when goods or services are in short supply • Discounts: reductions from normal list prices, ex. Multiple-unit pricing: offering customers discounts if they purchase in quantity • Bundling: involves grouping together several products into a package that offers extra value at a special price, ex. optional, captive, byproduct • Suggested Retail Price: manufacturer suggestion

  11. Pricing Strategies for Retailers • Markup: difference between cost of a product and its selling price Dollar Markup=Retail Price – Cost % Retail Markup=Dollar Markup/Retail Price % Cost Markup=Dollar Markup/Cost Markup=Operating Expenses+Reductions+Profits Net Sales +Reductions • Follow-the-Leader • Below-Market Pricing

  12. Pricing Strategies for Retailers (cont’d) Sale Rack Shuffle • clothing company makes a dress for $50 • Sells dress to retailer at $80 • Retailer marks dress up to $200 • If unsold after 8-12 weeks, marks down by 25% to $150 • If still unsold, marks down further until it does. Clothing company and retailer agree how to share the cost of markdown.

  13. Pricing Strategies for Manufacturers Direct Costingabsorption costing: traditional method in which all manufacturing and overhead costs are absorbed into total cost variable costing: includes in the product’s cost only those that vary directly with the quantity produced.

  14. Pricing Strategies for Manufacturers (cont’d) Full Absorption Income Statement Sales 790,000 Cost of Goods Materials 250,500 Direct Labor 190,200 Factory Overhead 120,200 560,900 Gross Profit 229,100 Operating Expenses General and Administrative 66,100 Selling 112,000 Other 11,000 189,100 Net Income 40,000

  15. Pricing Strategies for Manufacturers (cont’d) Direct Cost Income Statement Sales Revenue 790,000 Variable Costs Materials 250,500 Direct Labor 190,200 Variable factory overhead 13,200 502,000 Contribution Margin (36.5%) 288,000 Fixed Costs Factory Overhead 107,000 Fixed selling expenses 63,900 General and Administrative 66,100 Others 11,000 248,000 Net Income 40,000

  16. Pricing for Manufacturers (cont’d) Computing the Break-Even Selling Price Selling Price= Profit + (Variable Cost/U x Qty Produced) +Total Fixed Cost Qty Produced

  17. Pricing Strategies for Service Firms • Hourly Rate with Profit • With Materials • Without Materials

  18. Impact of Credit on Pricing • Credit Cards • Installment Credit • Trade Credit

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