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: Easy to apply Commonly used by retailers and wholesalers Disadvantages: Difficult to determine an effective markup percentage Separates pricing from other business functions Advantages & Disadvantages of Cost-Based Pricing
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 • 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 service • This method results in a high price when demand is strong and a low price when demand is weak • May be differentiated based on considerations such as time of purchase, type of customer or distribution channel
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 Advantages and Disadvantages of Demand-Based Pricing
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 line • Captive pricing – basic product low, but items required to operate or enhance it can be at a high level • Premium pricing – highest quality or most versatile version is given the highest price • Price 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