# Pricing of Products

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```					  Pricing Products:
Pricing Considerations and Strategies

1
What Is Pricing?

Process of determining what a company will
receive in exchange for its products

2
Objectives
Pricing objectives are goals that
producers hope to attain in pricing
products for sale
 Profit-Maximizing Objectives

   Market Share Objectives
 Market share is a company’s

percentage of total market sales
for a specific product type
   Other Pricing Objectives

3
Cost-Oriented Pricing
Cost-oriented
pricing considers the
firm’s desire to make a
profit and its need to
cover production costs
   Markup is the amount
to sell it at a profit

4
Cost
Fixed cost: Costs that do not vary with production
or sales level
Variable cost: Costs that vary directly with the level
of production
Total costs: The sum of the fixed and variable costs
for any given level of production
Cost at different levels of production:
   Short run average cost
   Long run average cost

5
COST CALCULATIONS
Fixed Cost
Unit cost= Variable cost + ---------
Unit Cost

Unit cost
Mark up price =     -----------
1- Desired return on sales

6
Breakeven Analysis
Breakeven analysis assesses costs versus
revenues for various sales volumes
 Variable cost is a cost that changes with the

quantity of a product produced or sold
 Fixed cost is a cost unaffected by the quantity

of a product produced or sold
 Breakeven point is the sales volume at which

the seller’s total revenue from sales equals total
costs with neither profit nor loss

7
CALCULATIONS
Fixed Cost
Break Even = ------------------
Price – Variable cost

8
Breakeven Analysis

9
Pricing Existing Products
Pricing above prevailing market prices
for similar products

Pricing below market prices

Pricing at or near market prices

10
Pricing New Products
Price skimming is setting an initial high
price to cover new product costs and
generate a profit

Penetration pricing is setting an initial
low price to establish a new product in
the market

11
Fixed versus Dynamic Pricing

Dynamic pricing works because information flow
on the Web notifies millions of buyers of
instantaneous change in product availability.
 Sellers can alter prices privately, on a one-to-

one, customer-to-customer basis.

Fixed pricing is still the most common option for
cybershoppers.

12
New Product Pricing
Strategies
Market Skimming           Use Under These
Conditions:
 Setting a High Price for      Product’s Quality and
a New Product to               Image Must Support Its
“Skim” Maximum                 Higher Price.
Revenues from the             Costs Can’t be so High that
Target Market.                 They Cancel the Advantage
 Results in Fewer, But          of Charging More.
More Profitable Sales.        Competitors Shouldn’t be
Able to Enter Market Easily
and Undercut the High
Price.
13
New Product Pricing
Strategies
Use Under These                   Market Penetration
Conditions:
   Market Must be Highly        Setting a Low Price for a
Price-Sensitive so a Low      New Product in Order to
Price Produces More           “Penetrate” the Market
Market Growth.                Quickly and Deeply.
   Production/ Distribution
Costs Must Fall as Sales     Attract a Large Number of
Volume Increases.             Buyers and Win a Larger
   Must Keep Out Competition     Market Share.
& Maintain Its Low Price
Position or Benefits May
Only be Temporary.
14
Product Mix-Pricing Strategies:
Product Line Pricing
Involves setting price
steps between various
products in a product
line based on:
   Cost differences between
products,
   Customer evaluations of
different features, and
   competitors’ prices.

15
Product Mix- Pricing
Strategies
Optional-Product
   Pricing optional or
accessory products sold
with the main product.
i.e camera bag.
Captive-Product
   Pricing products that
must be used with the
main product. i.e. film.

16
Product Mix- Pricing
Strategies

By-Product            Product-
   Pricing low-      Bundling
value by-
Combining
products to get   

rid of them and       several products
make the main         and offering the
product’s price       bundle at a
more                  reduced price.
competitive.         i.e. Iftar
   i.e. sawdust,         Package.
Zoo Doo
17
Discount and Allowance
Pricing
Adjusting Basic Price to Reward Customers
For Certain Responses

Cash Discount         Seasonal Discount

Functional Discount   Promotional Allowance
18
Segmented Pricing

Selling Products At Different Prices Even
Though There is No Difference in Cost

Customer - Segment      Location Pricing

Product - Form         Time Pricing

19
Psychological Pricing
Considers the psychology of
prices and not simply the
economics.
Customers use price less
when they can judge quality
of a product.
Price becomes an important
quality signal when
customers can’t judge
quality; price is used to say
20
This Sprint ad offers f ree long distance on Fridays.

Promotional Pricing                                                               motion on Fridays ra her
WhycanSprint affordt ooffer this pro
than onanother day (like Mo
nday)?
t

Products Below List
Special-Event Pricing                     Price to Increase
Short-Term Sales
Cash Rebates
Through:
Low-Interest Financing

Longer Warranties
Free Merchandise
Discounts
21
Strategies
for the Geographical Location
Geographical Pricing      of Customers.
• i.e. FOB-Origin, Uniform-
Delivery, Zone Pricing, Basing
Point, & Freight-Absorption.

International Pricing     International Markets.
• Price Depends on Costs,
Consumers, Economic
Conditions, Competitive
Situations & Other Factors.
22
Initiating Price Changes

Why?                   Why?
Excess Capacity         Cost Inflation
Falling Market Share       Overdemand:
Dominate Market         Company Can’t
Through Lower Costs    Supply All Customer’s
Needs

23
Reactions to Price Changes
Price Cuts Are Seen by Buyers As: Competitors Reactions When:

Being Replaced by              Number of Firms is

Current Models Are Not           Product is Uniform
Selling Well
Company is in Financial            Buyers are Well
Trouble                         Informed
Quality Has Been
Reduced
Price Comes Down
Further
24
Assessing/Responding to
Competitor’s Price Changes

25
Public Policy Issues in Pricing

Manufacturer A                       Retailer 1

Retail price
maintenance.                         Deceptive   Consumers
Pricing
Price-fixing        Discriminatory   Price-fixing
Predatory pricing   Pricing          Predatory Pricing

Retailer 2
Manufacturer B

Deceptive
Pricing
26
Public Policy Issues in Pricing

Pricing Within Channel Levels

Price                    Predatory
Fixing                     Pricing

27
Pricing Across Channel Levels

Price        Resale Price         Deceptive
Discrimination    Maintenance           Pricing

Ensure Sellers    Manufacturer      Occurs When a
Offers the     Can’t Require       Seller States
Same Price        Dealers to       Prices or Prices
Terms to a         Charge a         Savings that
Given Level     Specified Retail      Available
Of Trade        Price for Its     To Consumers
Product

28

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 views: 6 posted: 3/8/2012 language: pages: 28