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Pricing

Pricing. Marketing I Mr. Yates. Pricing?. There are many ways to price a product. By looking at all the variables you can determine the best policy / strategy in various situations. . “Markup”.

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Pricing

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  1. Pricing Marketing I Mr. Yates

  2. Pricing? • There are many ways to price a product. • By looking at all the variables you can determine the best policy / strategy in various situations.

  3. “Markup” • Markup is a term used in marketing to indicate how much the price of a product is above the cost of producing and distributing the product. • It can be expressed as a fixed amount or as a percentage.

  4. Markup Example • Let's look at an example: • Initial Retail is $1.99 • Cost is $1.40 • Difference = $0.59 • Thus the Initial Markup is ($0.59/$1.40) x 100% = 42.14% • The Profit Margin is the profit relative to the sales price = ($0.59/$1.99) x 100% = 29.65%

  5. The Pricing Matrix

  6. Pricing Objectives I • Current profit maximization - seeks to maximize current profit, taking into account revenue and costs. • Current profit maximization may not be the best objective if it results in lower long-term profits. • Current revenue maximization - seeks to maximize current revenue with no regard to profit margins. • The underlying objective often is to maximize long-term profits by increasing market share and lowering costs. • Maximize quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve.

  7. Pricing Objectives II • Maximize profit margin - attempts to maximize the unit profit margin, recognizing that quantities will be low. • Quality leadership - use price to signal high quality in an attempt to position the product as the quality leader. • Partial cost recovery - an organization that has other revenue sources may seek only partial cost recovery.

  8. Pricing Objectives III • Survival - in situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the firm to remain in the market. • In this case, survival may take a priority over profits, so this objective is considered temporary. • Status quo - the firm may seek price stabilization in order to avoid price wars and maintain a moderate but stable level of profit.

  9. Premium Pricing • Use a high price where there is a uniqueness about the product or service. • This approach is used where a a substantial competitive advantage exists. • Such high prices are charge for luxuries such as Luxury Cruises, top of the line hotel rooms, and First Class flights.

  10. Penetration Pricing • The price charged for products and services is set artificially low in order to gain market share. • Once this is achieved, the price is increased. • This approach was used by …

  11. Economy Pricing • This is a no frills low price. • The cost of marketing and manufacture are kept at a minimum. • Supermarkets often have economy brands for soups, spaghetti, etc.

  12. Price Skimming • Charge a high price because you have a substantial competitive advantage. • However, the advantage is not sustainable. • The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. • Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented.

  13. Price Skimming (more detail) • Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. • Price skimming is sometimes referred to as riding down the demand curve.

  14. Psychological Pricing • This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. • For example 'price point perspective' 99 cents not one dollar.

  15. Product Bundling • Here sellers combine several products in the same package. • This also serves to move old stock. Videos and CDs are often sold using the bundle approach.

  16. Promotional Pricing • Pricing to promote a product is a very common application. • There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).

  17. “Cost Plus” Pricing • There are several varieties, but the common thread in all of them is • cost of the product, + additional amount to represent profit. • Cost-plus pricing is often used on government contracts, and has been criticized as promoting wasteful expenditures.

  18. Cost Plus Calculation • Price of a product or service is determined by using: • direct costs, • indirect costs, • and fixed costs (whether related to the production and sale of the product or service or not). • These costs are converted to per unit costs for the product and then a predetermined percentage of these costs is added to provide a profit margin.

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