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Pricing

$. $. Pricing. Or, how to make people pay for a load of old tat. What is a Price? . Signal to the buyer that the seller will trade Sometimes a price indicates: Minimum that seller will accept Starting point for negotiation Indicator of quality? (unreliable) . What is a Price (cont’d)?.

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Pricing

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  1. $ $ Pricing Or, how to make people pay for a load of old tat

  2. What is a Price? • Signal to the buyer that the seller will trade • Sometimes a price indicates: • Minimum that seller will accept • Starting point for negotiation • Indicator of quality? (unreliable)

  3. What is a Price (cont’d)? • Revenue is R=PxS (Price x Sales) • Depends on total costs = Fixed + variable costs • Seller’s fixed costs (do not vary with sales) eg rent • Variable costs (increase with each unit sold) eg stock • Revenue should be greater than total costs TC=FC+VC (seller makes a profit) • P x S > FC + VC

  4. Methods of pricingthere are many methods of pricing – this is just a simple intro…

  5. Competitive Pricing • Price based on the price of competitors • Usually the same as competitors • Sometimes undercutting competitors slightly • Advantages: easy to set price, responsive • Disadvantages: no relationship to costs • possible to set competitive price lower than own costs, leading to negative profit (cost > price  loss) • “Price leader” situation • one dominant player sets prices, others follow • egEbay pricing sets the base price for other online auction pricing • Illegal to force others to set a price (price-fixing)

  6. Cost-plus pricing • Price: Average Cost plus a mark-up • Used in: Retailing, especially large variety sales such as supermarkets • Examples: • Average Cost + 40% • Average Cost + 10c • Advantages: simple to administer, price>cost always, easy to automate • Disadvantages: inflexible, not responsive to customers or competition

  7. Penetration Pricing • Significantly lower price than competitors • Price aimed at rapidly building market share • Goal: High sales, low profit • Extreme version = Loss Leader (price below cost to recover profit elsewhere, egCostCo) • Used in: introducing a new product, repositioning an old product • Advantages: Low price attracts consumers • Disadvantages: • temporary effect because most competitors respond with their own price-cutting • low (or negative) profit margin is a risk to the seller’s profitability • Possibility of (illegal) Predatory Pricing (or Destroyer Pricing) • pricing intended to destroy competition, with losses recovered by price gouging later

  8. Market Skimming or Prestige Pricing • Higher price than competitors • Justified by quality or an intangible benefit • “snob value” • Used in: high-end retail such as fashion & cosmetics; motor vehicles; real estate • Advantage: Attracts an elite (wealthy) clientele  very high profit • Disadvantage: Small volumes are vulnerable to changes in economic circumstances “boom and bust” cycle likely • Case study: Helena Rubinstein cosmetics during 1930s (Great Depression)

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