Penetration Pricing

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					Ch. 26 – Pricing Strategies
   A major factor in determining the
profitability of any product is price. You
  need to find the right price for your
              target market.
1. Cost Oriented Pricing
Calculate the costs of acquiring or making the product, then add your projected
profit to arrive at a price

• Markup Pricing – the difference between the
  price of an item and its cost, generally
  expressed as a percent. (% is added).
• IE: Most retail sales (clothes, food, furniture, new vehicles, etc.)

• Cost-Plus Pricing – all costs and expenses are
  calculated, and then the desired profit is
  added to arrive at a price. ($ is added).
• IE: RHS Boosters concessions; used vehicles
2. Demand-Oriented Pricing
Determine what consumers are willing to pay for goods and service.

• Price is based on what customers will pay
        >Gasoline              >Education              >Houses

• This key to this method of pricing is the consumer’s perceived
  value of the item
        >Theater front row seat tickets                > Parking costs

• Demand-oriented pricing is effective when there are few
  substitutes for an item
        >Medical services                              >BART bus service in Bend

• Prices are created for different styles, based on demand
  differences that are not a reflection of the cost to make the item
        >White refrigerator vs stainless steel refrigerator that are identical except for color
3. Competition-Oriented Pricing
Price based on what competitors charge

• Study your competitors to see what they are
  charging and base your prices

• Can price one of three methods:
    – Above competitor
    – Below competitor
    – In line with competitor (going-rate)

EXAMPLES: Most small service businesses such as painting, roofing, hair cuts,
carpet cleaning, lawn services, dog grooming, etc.
 4. Combined-Pricing Considerations
• Most businesses combine all 3

  – Cost-Oriented Pricing
  – Demand-Oriented Pricing
  – Competition-Oriented Pricing
                PRICING POLICIES AND
                 PRODUCT LIFE CYCLES
            One-Price VS Flexible Price Policy
One Price:
• All customers are charged the same

• Products are marked with price tags, signs, labels that indicate price

• Examples (most retail stores): clothing, grocery, hardware, fast-food, etc.

Flexible Price:
• Some customers pay different prices

• Customers can bargain for the price

• Examples (“dicker days”; E-bay; Auctions; estate sales)
        Product Life Cycle Pricing
• Products move through 4 stages:
      Introduction, Growth, Maturity, Decline

• Pricing plays an important role in these stages
In the “Introduction” stage of the Product Life Cycle,
     Skimming and Penetration pricing are used
    Skimming Pricing:           Sets a very high price for a new product
       • Capitalizes on consumer high demand
       • Prices will be lowered once the demand slows
           Examples: Technology devices such as Cell-phones; HDTV; Digital cameras; etc.

    Penetration Pricing:            Price of the new product is set very low
       • Encourages people to buy and thus penetrate the market
       • Goal is to saturate the market with low priced item; get the product to
         take hold; lure customers away from competitors
          Examples: Toys, electronics, snack foods
               Psychological Pricing
 Refers to techniques to create an illusion for customers or that
                 make shopping easier for them

Odd Even Pricing             setting prices at odd or even numbers
                             IE: $.79 $9.95 $699.00
Prestige Pricing             set higher-than average price to suggest
                             status or prestige
                             IE: Rolls Royce; Waterford crystal; Lenox china
Multiple-Unit Pricing        suggests a bargain
                             IE: 3 for $.99 Vs. $.33 each
Bundle Pricing               includes complementary products in a package
                             that is sold at a single price
                             IE: Bundled software; Travel (hotel + airfare)
         Psychological Pricing (cont.)
• Promotional Pricing   Used in conjunction with sales promotions
                        when prices are lower than average
                        IE: special event sales; end-of-season
                        sales; any type of sales promotion

• Everyday Low Prices   Low prices that are consistent with no
  EDLP                  intention of raising them
                        IE: WalMart; Target

• Price Lining          Special pricing requires a store to offer all
                        merchandise in a given category at certain prices

                        IE: all shirts are $15, 25, or $50
                        The $12.00 Store in Sisters
                   Discount Pricing
     Involves the seller offering reductions from the usual prices

Cash Discounts
     Pay cash and save $$
     IE: Dental and Medical offices
Quantity Discounts
     The more you buy the lower the price
     IE: Buy 5 cords of wood rather than 2 cord of wood
Trade Discounts
     IE: Plumbing supply stores;       Building supply stores
Seasonal Discounts
     IE: Holiday prices (after Christmas or after Halloween prices)
     IE: Seasons or time of year prices (Mt. Bachelor in May; “White sales” in
     Spring; Camping supplies sales at end of Summer)
             Discount Pricing (cont.)
Seasonal Discounts
       IE: Holiday prices (after Christmas or after Halloween prices)
       IE: Seasons or time of year prices (Mt. Bachelor in May; “White
       sales” in Spring; Camping supplies sales at end of Summer)

Promotional Discounts and Allowances
Discounts offered to retailers willing to advertise or promote a
manufacturer’s products
       IE: Levis discounts the cost of jeans to Fred Meyer if they
       promote the jeans during the holiday season
       IE: Frigidaire discounts the cost of appliances to Home Depot
       if they promote the appliances during April & May

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