SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
Price Strategy
Considerations
Factors Affecting Price
Th Main
The
M i Idea
Id
C t and
Cost
d Expenses
E
Developing an effective price strategy is an important part of
a marketing plan
plan.
costs and
expenses
It enables you to set prices consistent with your objectives
and appropriate for your target market.
technological
trends
supply and
demand
$
government
regulations
g
Fixed costs and
expenses, such as
rent, utilities, and
insurance premiums,
affect price.
consumer
perceptions
fixed
costs and expenses
p
that are
not subject to change
depending on the number of
units sold
competition
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
2
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Glencoe Entrepreneurship: Building a Business
Price Strategy
Considerations
C t and
Cost
d Expenses
E
Variable costs and
expenses, such as the
cost of goods or
services, sales
commissions, delivery
charges, and
advertising, also affect
price
price.
SECTION
11.1
Price Strategy
Considerations
C t and
Cost
d Expenses
E
variable
costs and expenses
p
that are
subject to change depending
on the number of units sold
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.
SECTION
11.1
Price Strategy
Considerations
S
Supply
l and
d Demand
D
d
The law of supply and demand also affects price.
Wh th
When
the d
demand
d ffor a product
d t iis hi
high
h and
d supply
l iis llow,
you can command a high price.
When the demand for a product is low and supply is high,
you must set lower prices.
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Price Strategy
Considerations
C
Consumer
P
Perceptions
ti
The price of your products helps create your image in the
minds of customers.
customers
If your prices are too low
low, customers may consider your
products inferior.
If your prices are too high, you may turn some customers
away.
SECTION
11.1
Price Strategy
Considerations
C
Competition
titi
Competition can affect pricing when the target market is
price conscious because competitors’
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.
warranties
SECTION
11.1
Price Strategy
Considerations
G
Government
t Regulations
R
l ti
Be fair to customers and familiarize yourself with federal
and state laws that address pricing,
pricing including:
•
•
•
•
•
price gouging
price fixing
resale price maintenance
unit pricing
bait-and switch advertising
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Price Strategy
Considerations
SECTION
G
Government
t Regulations
R
l ti
11.1
Price Strategy
Considerations
G
Government
t Regulations
R
l ti
price gouging
11.1
Price Strategy
Considerations
G
Government
t Regulations
R
l ti
resale price maintenance
p
pricing
g above the market when no
alternative retailer is available
A company that
engages in price
gouging or price
fixing is violating
federal and state laws.
SECTION
Resale price
maintenance is illegal.
price fixing
Unit pricing is
required by law
law.
an illegal
ill
l practice
ti iin which
hi h competing
ti
companies agree, formally or
informally, to restrict prices within a
specified range
price fixing imposed by a
manufacturer on wholesale or retail
resellers of its products to deter pricebased competition
unit pricing
bait and switch
Unethical practices,
such as bait and
switch, are not only
illegal but also unfair to
customers.
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
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
a deceptive method of selling
in which a customer, attracted
to a store by a sale
sale-priced
priced
item, is told either that the
advertised item is unavailable
or that it is inferior to a higherhigher
priced item that is available
Price Strategy
Considerations
Pricing Strategy Decisions
T h l i l Trends
Technological
T d
T h l i l Trends
Technological
T d
The Internet and technological trends affect price
strategy.
t t
Consider your target market as you make these pricing
strategy decisions:
Before setting prices, consider the following objectives:
•
•
•
•
•
•
Adapting to technological changes can give an
entrepreneur a competitive edge; not adapting can cause
some businesses to become obsolete.
obtaining a target return on investment
obtaining market share
social and ethical concerns
meeting the competition’s prices
establishing
t bli hi an iimage
survival
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Select a basic
approach to
pricing.
Determine your
pricing policy.
Set a p
price based
on the stage of the
product life cycle.
15
SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
Price Strategy
Considerations
Setting a Basic Price
R di h d “In
Radiohead
“I Rainbows”
R i b
” Experiment
E
i
There are three basic approaches to pricing:
•
I Having
Is
H i
the
h Lowest
L
Prices
Pi
a Bad
B d Move?
M
?
http://www.npr.org/2009/12/30/122006767/in-rainbows-a-pragmaticexperiment
• Reducing prices to increase selling
cost based
cost-based
pricing
demand based
demand-based
pricing
Why would
Radiohead do this?
competition based
competition-based
pricing
What was the
impact to
Radiohead?
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
16
SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
Price Strategy
Considerations
Product Life Cycle Pricing
P i i Policies
Pricing
P li i
P d t Life
Product
Lif Cycle
C l Pricing
Pi i
All products move through the four-stage life cycle:
Establishing
gap
pricing
gp
policy
y frees yyou from making
g 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
sale.
1
price skimming
Introduction
2
Growth
3
Maturity
y
4
Decline
Price skimming is
commonly used when
introducing a product.
Chapter 11 The Price Strategy
the practice of charging a high
price on a new product or
service
i iin order
d tto recover
costs and maximize profits as
quickly as possible; the price is
then dropped when the product
or service is no longer unique
Chapter 11 The Price Strategy
20
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Glencoe Entrepreneurship: Building a Business
Price Strategy
Considerations
SECTION
11.1
Price Strategy
Considerations
Psychological Pricing Techniques
P d t Life
Product
Lif Cycle
C l Pricing
Pi i
Penetration pricing is
also commonly used
when introducing a
product.
P i i Techniques
Pricing
T h i
penetration pricing
a method used to build sales
by charging a low initial price
to keep unit costs to
customers as low as possible
Once you have introduced
your new product through
penetration pricing or price
skimming,
ki
i
you need
d tto
adjust your prices so they
are more attractive to
customers by using
psychological pricing.
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
psychological pricing
prestige
pricing
a pricing technique, most often
used by retail businesses, that is
based on the belief that
customers’
t
’ perceptions
ti
off a
product are strongly influenced
by price; it includes prestige
pricing odd/even pricing,
pricing,
pricing price
lining, promotional pricing,
multiple-unit pricing, and bundle
pricing
odd/even
pricing
Psychological
Pricing
Techniques
bundle
pricing
multiple-unit
p
pricing
g
price
lining
promotional
pricing
24
SECTION
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
SECTION
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
prestige pricing
A business may use
prestige pricing to
foster a high-end
image.
a pricing technique in which
higher-than-average
g
g p
prices
are used to suggest status
and prestige to the customer
When a business uses
odd/even pricing,
customers may think
they are getting a
bargain.
SECTION
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
odd/even pricing
a pricing technique in which
odd-numbered
odd
numbered prices are
used to suggest bargains,
such as $19.99
A store that sells all its
jeans at $20, $40, and
$60 is using price
lining.
Even prices suggest a higher
quality – prestige.
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
price lining
ap
pricing
g technique
q in which
items in a certain quality
category are priced the same
SECTION
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
A new restaurant that
offers “1950s prices for
three days only” is
using promotional
pricing, a temporary
pricing technique.
SECTION
11.1
Price Strategy
Considerations
SECTION
P i i Techniques
Pricing
T h i
promotional pricing
ap
pricing
g technique
q in which
lower prices are offered for a
limited period of time to
stimulate sales
When a store sells
three pairs of socks for
$10, it is using
multiple-unit pricing.
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
Businesses that sell
computer hardware
often use bundle
pricing to sell software
that may not have sold
otherwise.
multiple-unit pricing
ap
pricing
g technique
q in which
items are priced in multiples,
such as 3 items for 99 cents
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
Price Strategy
Considerations
SECTION
11.1
bundle pricing
ap
pricing
g technique
q 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
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
Discount pricing is
used by all types of
businesses to
encourage customers
to buy.
discount pricing
prestige
pricing
Of these 6, which pricing
strategies
t t i will
ill you use ffor
your business and why?
ap
pricing
g technique
q that offers
customers reductions from
the regular price; some
reductions are basic
percentage-off discounts and
others are specialized
discounts
bundle
b
dl
pricing
Psychological
y
g
Pricing
Techniques
multiple-unit
pricing
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
How do discounts and coupons impact your profits?
odd/even
pricing
price
i
lining
promotional
pricing
Chapter 11 The Price Strategy
32
SECTION
11.1
Price Strategy
Considerations
P i i Techniques
Pricing
T h i
SECTION
11.2
Calculating and
Changing Prices
Th Main
The
M i Idea
Id
Implementation of the price strategy requires an
understanding of pricing formulas
formulas.
Discount pricing is
used by all types of
businesses to
encourage customers
to buy.
Coupon Shopping Video
Coupon Shopping List
Keeping your price strategy in tune with your market
requires ongoing review and revision.
33
Glencoe Entrepreneurship: Building a Business
SECTION
11.2
Calculating and
Changing Prices
B
Break-Even
kE
A
Analysis
l i
To calculate the breakeven point,
i you divide
di id
fixed costs by the
gp
price minus
selling
your variable costs.
break-even point
the point at which the gain
from an economic activity
equals
q
the costs involved in
pursuing it
Break-even
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
profit.
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
SECTION
11.2
Calculating and
Changing Prices
SECTION
M k
Markup
11.2
Calculating and
Changing Prices
M kd
Markdown
SECTION
11.2
Calculating and
Changing Prices
Di
Discounts
t
A discount is a reduction in price to the customer.
Businesses that
purchase or
manufacture
f t
goods
d for
f
resale use markup
pricing
p
g based on the
cost of the item.
Entrepreneurs may
use markdown pricing
to tempt shoppers to
buy in order to reduce
inventory.
markup
the amount added to the cost
of an item to cover expenses
and ensure a profit
markdown
the amount of moneyy taken
from the original price
1. Multiply the item price by the discount
percentage.
2. Subtract the discount dollars from the price.
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Chapter 11 The Price Strategy
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Glencoe Entrepreneurship: Building a Business
Possible Changes to Pricing Strategy
Adjusting prices to maximize profit
Reacting to market prices
Altering terms of sale
Revising
You may need to adjust based on competitor’s
competitor s prices
40