Pricing

CH 5
 What is the Price?

In general terms, price is a

component of an exchange or
transaction that takes place
between two parties and refers to
what one party (i.e., buyer) to
obtain something offered by
another party (i.e., seller).
 Five Cs of
Pricing
The factors affecting pricing
 The Five Cs of pricing are as follows
 Company objectives
 Customers
 Costs
 Competition
 Channel members
1.) Company Objectives:

Even though all company methods and objectives may

ultimately be oriented towards making a profit, firms
implement a profit orientation specifically by focusing on
target profit pricing, maximizing profits, or target return
pricing.
 Profit Orientation
 Sales Orientation
 Competitor Orientation
 Customer Orientation
Factors Affecting Price

costs and supply and

expenses demand

technological
trends
$ consumer
perceptions

government
competition
regulations
 Costs and Expenses

Fixed costs and expenses, such as rent, utilities,

and insurance premiums, affect price.

fixed costs and expenses that are not subject

to change depending on the number of units sold
 Costs and Expenses
Variable costs and expenses, such as the cost
of goods or services, sales commissions,
delivery charges, and advertising, also affect
price.

variable costs and expenses that are subject

to change depending on the number of units
sold
 Costs and Expenses
If you are selling goods, their costs are affected by
the pricing structure in the channel of distribution.

Each channel member has to make a profit to make

handling the goods worthwhile. Their cost and profit
together is your cost.
 Supply and Demand
The law of supply and demand also affects price.

When the demand for a product is high and

supply is low, you can command a high price.

When the demand for a product is low and supply

is high, you must set lower prices.
 Consumer Perception
The price of your products helps create your
image in the minds of customers.

If your prices are too low, customers may

consider your products inferior.

If your prices are too high, you may turn some

customers away.
 Competition
Competition can affect pricing when the target
market is price conscious because competitors’
pricing may determine your pricing.

Businesses can charge higher prices than

competitors if they offer added value, such as
personal attention, credit, and warranties.
 Government
Regulations
Be fair to customers and familiarize yourself with
federal and state laws that address pricing,
including:

price gouging
price fixing
resale price maintenance
unit pricing
bait-and switch advertising
 Government
Regulations
A company that
price gouging an
engages in price illegal practice in
gouging or price which competing
fixing is violating companies agree,
federal and state laws. formally or informally,
to restrict prices within
a specified range
price fixing pricing
above the market
when no other retailer
is available
 Government
Regulations
resale price maintenance
Resale price price fixing imposed by a
maintenance is illegal. manufacturer on wholesale
or retail resellers of its
products to deter
price-based competition
Unit pricing is
required by law. unit pricing the pricing
of goods on the basis of
cost per unit of measure,
such as a pound or an
ounce, in addition to the
price per item
 Government Regulations

Unethical practices, such bait and switch a

as bait and switch, are deceptive method of
not only illegal but also selling in which a
unfair to customers. customer, attracted to a
store by a sale-priced
item, is told either that
the advertised item is
unavailable or that it is
inferior to a higher-
priced item that is
available
 Technological Trends
The Internet and technological trends affect price
strategy.

Adapting to technological changes can give an

entrepreneur a competitive edge; not adapting
can cause some businesses to become obsolete.
 Technological Trends

Before setting prices, consider the following

objectives:

obtaining a target return on investment

obtaining market share
social and ethical concerns
meeting the competition’s prices and
establishing an image
survival
sometimes maintaining the status quo
 Pricing Strategy
Decisions
Consider your target market as you
make these pricing strategy decisions:

Set a price
Select a basic based on the
Determine your
approach to stage of the
pricing policy.
pricing. product life
cycle.
 Setting a Basic Price
There are three basic approaches to
pricing

cost-based demand-based competition-

pricing pricing based pricing
 Pricing Policies
 Establishing
a pricing policy frees you from
making the same pricing decisions over
and over again and lets employees and
customers know what to expect.

A flexible-price policy is one in which

customers pay different prices for the
same type or amount of merchandise.

A one-price policy is one in which all

customers are charged the same price for
all the goods and services offered for sale.
 Product Life Cycle Pricing
All products move through the four-stage
life cycle:

1 Introduction

2 Growth

3 Maturity

4 Decline
 Product Life Cycle Pricing
Price skimming is commonly used when
introducing a product.
price skimming the practice of charging a high price
on a new product or service in order to recover costs and
maximize profits as quickly as possible; the price is then
dropped when the product or service is no longer unique

Penetration pricing is also commonly used

when introducing a product.

penetration pricing a method used to build sales by

charging a low initial price to keep unit costs to
customers as low as possible
 Pricing Technique
psychological pricing
Once you have introduced a pricing technique, most
your new product through often used by retail
penetration pricing or price businesses, that is based
on the belief that
skimming, you need to
customers’ perceptions of
adjust your prices so they a product are strongly
are more attractive to influenced by price; it
customers by using includes prestige pricing,
psychological pricing. odd/even pricing, price
lining, promotional pricing,
multiple-unit pricing, and
bundle pricing
Psychological Pricing
Techniques

prestige odd/even
pricing pricing

bundle Psychological
price
pricing Pricing lining
Techniques

multiple-unit promotional
pricing pricing
Pricing Technique
A business may use prestige pricing to
foster a high-end image.
prestige pricing a pricing technique in
which higher-than-average prices are
used to suggest status and prestige to
the customer
Pricing Technique
When a business uses odd/even pricing,
customers may think they are getting a
bargain.
odd/even pricing a pricing technique
in which odd-numbered prices are used to
suggest bargains, such as $19.99
Pricing Technique
A store that sells all its jeans at $20, $40,
and $60 is using price lining.

price lining a pricing technique in

which items in a certain quality category
are priced the same
Pricing Technique
A new restaurant that offers “1950s
prices for three days only” is using
promotional pricing, a temporary
pricing technique.

promotional pricing a pricing

technique in which lower prices are
offered for a limited period of time to
stimulate sales
Pricing Technique

When a store sells three pairs of socks for

$10, it is using multiple-unit pricing.

multiple-unit pricing a pricing

technique in which items are priced in
multiples, such as 3 items for 99 cents
Pricing Technique
Businesses that sell computer hardware
often use bundle pricing to sell software
that may not have sold otherwise.

bundle pricing a pricing technique in

which several complementary products
are sold at a single price, which is lower
than the price would be if each item was
purchased separately
Pricing Technique
Discount pricing is used by all types of
businesses to encourage customers to
buy.
discount pricing a pricing technique
that offers customers reductions from the
regular price; some reductions are basic
percentage-off discounts and others are
specialized discounts
PRICE STRATEGY

 Carry out a break-even analysis.

 Apply formulas used in calculating
markup and markup percentages.
 Employ formulas used to compute
discounts.
 List considerations for updating the
price strategy.
Break-Even-Analysis
 To calculate the break-even point,
you divide fixed costs by the selling
price minus your variable costs.
 break-even point the point at which
the gain from an economic activity
equals the costs involved in pursuing it
 Break-even analysis does not tell you
what price you should charge for a
product, but it gives you an idea of the
number of units you must sell at
various prices to make a profit.
MARK UP
 Businesses that purchase or
manufacture goods for resale use
markup pricing based on the cost of
the item.
 markup the amount added to the
cost of an item to cover expenses and
ensure a profit
MARKDOWN
Entrepreneurs may use markdown
pricing to tempt shoppers to buy in order
to reduce inventory.
markdown the amount of money
taken off an original price
DISCOUNTS
A discount is a reduction in price to the
customer.
multiply the item price by the discount
percentage
then subtract the discount dollars from
the price
POSSIBLE CHANGES TO
PRICING STRATEGY

Adjusting prices to maximize profit

Reacting to market prices

Revising terms of sale

 ADJUSTING PRICES TO
MAXIMIZE PROFITS
Before you adjust prices to maximize profit,
ask yourself two questions:

Are your products’

What are your
prices elastic or
competitors’ prices?
inelastic?
REACTING TO MARKET
PRICES
As part of ongoing market research keep an
eye on current market prices for your
products.

If competitors’ prices fall, you will lose

customers if you do not lower prices.

If competitors’ prices rise, it is important to

your business’s financial health to raise prices
REVISING TERMS OF
SALE
Another way to change your pricing
strategy is to revise the terms of sale,
such as
 changing credit policies
introducing discounts
offering leasing
arranging financing
E-Commerce Payment
Methods
After creating an inviting e-commerce
environment for shoppers, you will want to
be sure they can easily and quickly pay for
their purchases.

Consumers can pay for online purchases

using credit cards, debit cards, e-cash,
smart cards, and e-wallets.
E-Commerce Payment
Methods
 debit card a card issued by a financial institution
than can be used as an alternative to cash;
purchase amounts on a debit card are withdrawn
directly from the purchaser’s checking or savings
account

 e-cash a legal form of electronic money transfer

used in e-commerce and transacted via the Internet

 e-wallet a software application that stores a

customer’s data, such as name, address, and credit
card number, for easy retrieval during online
purchases
E-Commerce Payment
Methods
 merchant account a bank account that
enables a business to receive the proceeds of
credit card purchases
 return on investment (ROI) the amount
earned as a result of an investment
 selling price the actual or projected price per
unit
 smart card an electronic prepaid cash card
that includes a computer chip that can store
data; used to make purchases or financial
transactions over the Internet