Pricing

• Pricing Objectives• Pricing Methods• Pricing Strategies

Can Firms Control Their Prices?

Supply and demand

Price and non-price competition

Buyer’s perception of price

Pricing Objectives

Survival

Profit Maximization

Target Return on Investment (ROI)

Market Share Goals

Status Quo Pricing

Pricing Methods

Cost-based pricing

Demand-based pricing

Competition-based pricing

Cost-Based Pricing

Markup – price is determined by adding an amount to the wholesale price

Markdown – subtracting an amount from the retail price

Markup & Markdown

Giant Eagle buys artichoke hearts for $1.77 a can and wants to add 40% to the wholesale cost, what would the retail price be?

Giant Eagle sells olive oil for $10.50 a bottle and wants to mark down the price 20%, what would the markdown price be?

Advantages & Disadvantages of Cost-Based Pricing

Advantages:

Easy to apply

Commonly used by retailers and wholesalers

Disadvantages:

Difficult to determine an effective markup percentage

Separates pricing from other business functions

Breakeven Analysis

Answers the question, “What is the lowest level of production and sales at which a company can break even on a particular product?”

Breakeven quantity – the number of units that must be sold for the total revenue to equal the total cost (for all units sold)

Breakeven Analysis

Breakeven Analysis

020000

400006000080000

100000

120000140000

0 500 1000

Quantity (Units)

Cos

t/R

even

ue

Fixed costs – $40,000

Variable costs – $60 per unit

Selling price – $120 per unit

What is the breakeven quantity?

Demand-Based

Pricing that is determined by how much customers are willing to pay for a product or serviceThis method results in a high price when demand is strong and a low price when demand is weakMay be differentiated based on considerations such as time of purchase, type of customer or distribution channel

Advantages and Disadvantages of Demand-Based Pricing

Advantage:

Potential for higher profits

Disadvantage:

Management must be able to estimate demand at different price levels, which may be difficult to do accurately

Segments must be separate enough so that those that buy at lower prices can’t sell to those who buy at higher prices

Competition-Based

Pricing that is determined by considering what competitors charge for the same good. Once you find out what your competition is charging, you must determine whether to charge the same, slightly more, or slightly less.

Pricing Strategies

Psychological pricing

Product line pricing

Promotional pricing

Discounting

Psychological Pricing

Odd-number pricing

Multiple-unit pricing

Reference pricing

Bundle pricing

Everyday low price (EDLP)

Customary pricing

Product Line Pricing

Establishing and adjusting the prices of multiple products within a product lineCaptive pricing – basic product low, but items required to operate or enhance it can be at a high levelPremium pricing – highest quality or most versatile version is given the highest pricePrice lining – setting a limited number of prices for selected groups or lines of merchandise

Promotional Pricing

Price leaders

Special event pricing

Comparison discounting

Discounting

Trade discounts

Quantity discounts

Cash discounts

Seasonal discount

Allowance