PRICING OBJECTIVES and STRATEGIES updated 2015 March 30

chpt 15 in the Sommers book  chpt 17 in the Shapiro book
 
 

Chapter 15 Pricing Objectives page 459   Chapter 17

.  .. You can't just say "we want a low price to sell a lot" - if your price is too low you will not cover your costs and you will go out of business. There are several different "Objectives" a company may orient themselves towards in order to obtain a profitable business situation. WTGR . .

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Chapter 15 Pricing Objectives page 459

Profit Oriented: Target Return - sometimes the vendor specifies a specific dollar amount or percentage amount that the price will be offered at in order to make a profit which has been calculated for a specific purpose. Usually this amount is part of a larger plan involving several product units in a product line Profit Oriented: Maximize Profits - if the Competitive Market is not intense you may charge the highest price the market will bear because sometimes you may have an advantage for reasons based on your geographic advantage special features not available on other competitors' products very very famous brand. etc.. Sales / Marketing Oriented: Increase Sales Volume Sales / Marketing Oriented: Increase Market Share Status Quo Goals: Just Meet the Competition - if the customer has many choices, and you barely have the resources to stay in the market, then just charge the same price. You don't have the resouces to survive a price war, and you don't have the ability to claim better quality to charge a higher price Prof. Allen says "Volume objectives include sales maximization and market-share goals, which are specified as a percentage of certain markets. In sales maximization, management sets an acceptable level of profitability and then tries to maximize sales.  This objective can lead to discounting or some other aggressive pricing strategy, such as rebates and sales. " http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm

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Chapter 15 Skimming page 472 Chapter 17 page 541

"Skim the cream” pricing involves  selling at a high price to those who are willing to pay before aiming at more price-sensitive consumers. This expression comes from the farming practice of milking cows - the cream rises to the top and you skim it off. The advantage of using a Skimming price policy is that you can theoretically get the maximum profit from each level of customer.

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Chapter 15 Pricing Chapter 17 page 541

Skimming Pricing  "A Skimming policy is more attractive if demand is inelastic" says the Shapiro text - remember inelastic means there are no close substitutes - products that people will pay a high price for because there is nothing else they can buy the is close to the item   Prof. Allen says "A skimming pricing policy involves setting prices of products relatively high compared to those of similar products and then gradually lowering prices.  The skimming price is the highest price possible that buyers who most desire the product will pay (skim the cream off the top -- skim the innovators).  This market segment is more interested in quality, status, uniqueness, etc. This policy is effective in situations where a firm has a substantial lead over competition with a new product." http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm .  .. A great example of Skimming is DVD players in the late 1990's and early 2000's - in the late 1990's DVD players sold for $500 and $400 when they first came out, then the price dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many different types of stores. WTGR .

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Chapter 15 Pricing Chapter 17 page 542

Penetration Pricing  - to make it too intimidating for competition to follow,  - or to make sure you enter the market in a competitive environment - or as part of a brand building strategy   Prof. Allen says "A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance that will allow the company to later raise its prices.  Such a policy is often used when the firm expects competition from similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. The low price must help keep out the competition, and the company must maintain its low price position." http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm A variation of Penetration Pricing is Predatory Pricing  Prof. Allen explains Predatory pricing is the illegal practice of setting unreasonably low prices to force competitors out of business. Many countries have rules and regulations trying to catch people doing this and there can be stiff penalties if the company is caught.

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Chapter 15 Pricing Chapter 17 page 542

Discount Pricing  - can be seasonal - can be based on volume or amount bought - can be used to attract a form of payment eg, CA$H   Prof. Allen says "Discount and allowance pricing has the effect of reducing prices to reward customer responses such as paying early or promoting the product. A recent pricing issue is that of everyday low pricing, where the retailer charges a constant, lower price at all times, with no temporary price discounts. Wal-Mart has led the trend toward everyday low pricing." http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm Allowances - cutting customers a break due to their cost of advertising - if they put on an advertising campaign, you will lower your wholesale price to them because it helps your promotion too Trade-in allowance   Prof. Allen says "Trade in allowances  are price reductions granted for turning in a used item when purchasing a new one.  Promotional allowances are money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.  In promotional pricing, the company must decide on loss-leader pricing (product priced lower to attract customers to the store in hopes that they will buy other items at normal markup), special-event pricing, cash rebates, low interest financing, longer payment terms, warranties and service contracts and psychological discounting."

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Chapter 15 Pricing   Chapter 17 page 542

Geographic Pricing - F.O.B. - basically, this is the price out the door at our factory - you come and get it - C.I.F. - the cost at our factory + the insurance and freight to ship it to you - ZONE - if you live close, it is cheaper, if you live farther away, we add in shipping costs ZONE pricing used for everything from Pizza delivery to clothing to grain shipments - Basing-point pricing means that all customers are charged freight from a specified billing location.  - Freight-absorption pricing, the seller pays all shipping costs to get the desired business.   Prof. Allen says "Price is influenced by geography, where the company decides on how to price to distant customers.  Free On Board or FOB-origin pricing is a geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the actual freight from the factory to the destination.  Because the customer picks up its own cost, supporters believe that this method is the fairest way to assess freight charges. "

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pricing considerations

Lisa Girard writing in entrepreneur.com compiled an article in June 2013 listing "10 Questions to Ask When Pricing Your Product " Girard based her article on talking to four "experts' originally at http://www.entrepreneur.com/article/227083   1 What is the customer willing to pay for my product? 2 What kind of customer do I want to target? 3 How should I react to my competitor's prices? 4 Can I offer different levels of products or services at different price points? 5 How can I adjust my prices?  6 Have I given the customer a reason to pay more for my product? 7 Can I base my price partly on intangible benefits? 8 Should I bundle my products for a single price? 9 Should I discount to get people to buy my product? 10 How does the customer want to buy my product or service?

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pricing considerations

1 What is the customer willing to pay for my product?   Lisa says "Pricing should only be based on what the customer is willing to pay. If the customer is willing to pay $1,000 for a product that costs you $10 or even $100 to make, you have a successful product." WTGR adds, "cost based pricing" is often at odds with going by the maxim that the customer is always correct. Sometimes you have to charge what your costs are, regardless of whatthe customer will pay... if it is the case that your customer will pay less than your costs then it becomes a  Supply Chain Management issue to lower your costs.

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pricing considerations

2 What kind of customer do I want to target? "If you target the mass market with a lower-priced product, you'll be making less per transaction but selling a lot more units. The ideal situation is to cut the market into segments with different price points" says Girard witiger.com/marketing/marketsegmentation.htm WTGR says a simple way of putting this would be to ask "do you want to sell like Rolex or Timex"

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pricing considerations

3 How should I react to my competitor's prices? In pricing strategy, there are three important questions:  Who provides an alternative to my product? Is mine better or worse?  And does the customer care?  says Girard quoting Tim J. Smith, managing principal of Chicago-based strategic pricing firm Wiglaf Pricing. Tim Smith added "...as your competitors' prices change, so should yours. But this strategy applies only when customers are very familiar with prices, he says, using tennis balls and tennis rackets as an example: "Stores advertise lower tennis ball prices to get people in because people are very aware of what tennis balls cost. But they can charge higher prices for tennis rackets because there is not this same type of awareness." WTGR adds  witiger.com/ecommerce/competition.htm  Business competitors are: Other organizations offering the same product or service now  Other organizations offering similar products or services now  Other organizations offering a variation on a product or service, that you cannot which could be because 3rd party vendors make accessory items, or "apps" for you, or your competition which could be because you did not update your software to follow trends Organizations that could offer the same or similar products or services in the future  Organizations that could remove the need for a product or service we sell

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pricing considerations

4 Can I offer different levels of products or services at different price points? "It's always better to give customers a choice, says Jean-Manuel Izaret, a partner with Boston Consulting Group, a management-consulting firm, who is based in San Francisco." Izaret suggests  offering at least three price levels on any product basic upgraded  and premium.  Izaret notes that Apple entered the market with 16, 32 and 64-gigabyte laptops "If they only offered the 16 gigabyte, they would have sold a lot but would have missed out on the 64 gig customer willing to pay more to buy the best of the best. Or if they were only at the high end, they would miss out on the bulk of the market." WTGR adds there is sometimes a price level below basic which could be called "discounted" - examples could apply to products such as small accessory items for notebooks, printers etc.

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pricing considerations

5 How can I adjust my prices?  Girard says "Companies can often achieve a 1 percent to 7 percent margin improvement by adjusting prices to fit specific consumers, Smith says. "Different customers have a different willingness to pay, and even the same customer will vary in their willingness to pay based upon the purchasing occasion." To determine for whom and when to adjust prices, you can observe customer buying habits and do consumer research through interviews and focus groups." WTGR adds "...based upon the purchasing occasion" When/where people buy, either time of day, or location, can have a big influence on their decision. Example, paying $10 for a 4 GIG USB at the airport cause you really need to back-up some files, versus paying $2 for a 4 GIG USB at the flea market cause they are in a bin on sale.

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pricing considerations

6 Have I given the customer a reason to pay more for my product? Stiving says. There are real differences in products, and then there are perceived differences.  Real differentiation comes in product development;  Perceived differentiation in marketing and sales.  "Ideally, you've created real differentiation and communicated it to the customer so it becomes perceived as well," Stiving says. "In Del Monte's case, they add real differentiation through strict quality-control measures, and perceived differentiation by advertising quality to their customers."

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pricing considerations

7 Can I base my price partly on intangible benefits? Take a lawn service, for example. "If you tell your customer you have the most modern mower with the sharpest blade, that's not going to mean anything to them," says Matt Johnson, a pricing strategy expert with the San Francisco office of Simon-Kucher & Partners  "But if you show them you're freeing up two to three hours of their time on the weekend and allowing them to impress the neighbors that might mean a lot more."  WTGR adds Ask someone to pay $969 for a iPhone 6Plus with 64 GB and they'll probably think your crazy, put if you take time to describe the high quality camera in the iPhone 6 and explain that it has 1080p HD at 60 fps, 240-fps slo-mo and time-lapse video - which.... allows you to take the most kewl photos for Facebook and YouTube.. then that is a factor in the purchase decision.

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pricing considerations

8 Should I bundle my products for a single price? "Microsoft, which has bundled Excel, Word and Outlook into one product -- Microsoft Office. "By attaching to the main sale you made, you're giving up a little bit on each product, but they're buying all three, so it's a good deal for both seller and buyer," WTGR adds There is lots of writing on price bundling Forbes has a 2013 article  www.forbes.com/sites/hbsworkingknowledge/2013/01/18/product-bundling-is-a-smart-strategy-but-theres-a-catch/  "All kinds of products are sold in bundles. Microsoft Office is sold as a bundle of computer software, including Word, Excel, and PowerPoint. Cable companies offer their channels in bundle packages. Even a music CD is essentially a bundle of songs. And yet research on how consumers view bundles has been thin. Do shoppers prefer them? Do sales increase when companies bundle their offerings? Or, would a bundle cannibalize sales from its existing products leading to lower overall revenues?"

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pricing considerations

9 Should I discount to get people to buy my product? "Promotions are fine from time to time, but the full price should remain the standard. If you regularly have to discount to sell your product, you've either overstocked the product with features that people don't want to pay for or you're trying to sell it to the wrong type of customer, Johnson says. And once people start paying a lower price, it's tough to raise it back to the level you need to make a good profit."

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pricing considerations

10 How does the customer want to buy my product or service?  "Is it something I should sell for a one-time fee? On an annual basis? On a monthly basis? There's no answer that fits all situations. But what's important is that you "create a model that fits with how people want to buy your product,"

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2/10 - net 30

Pricing Terms used in B2B 2/10 - net 30  in a business to business (B2B) situation it is common to have to extend credit to customers who are buying parts, materials and supplies. 2 is the % discount 10 is the number of days 30 is the maximum number of days in which you HAVE to pay 2/10 net 30 means if you may before 10 days, you get a 2% discount 5/10 net 60 if I pay in 10 days I get a 5% discount and, I have to pay all of it before 60 days

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Markups

Markup percent is based on selling price In the clothing industry it is usually 100% - this means if your calculated mfg. cost price of a garment is $20 - it will wholesale at $40, the retailer will mark it up to $80, or even $90 depending on the category. "Mark-up Chain" - the sequence of mark ups that a product goes through from producer to retailer. - in some industries, the amount of increase is small, in some, like clothing, jewelry, the increase is enormous "High markups don't always mean big profits"     . Sometimes as the product passes from producer, to agent, to wholesaler, to retailer, there has to be a lot of advertising money spent at each level, which has to be recovered by the spender in a higher price passed on - this is particularly true for women's fashions, CD's, certain types of proceed foods and beverages, and specialty consumer products. Sometimes the mark-up is very low cause there is not a lot of advertising needed and the competitive environment (particular international competition) keeps pressure ot have the final retail price low. This is true for certain types of products like building materials, some unprocessed food products (ie. bags of rice), and non-perishable items that are not sold with a lot of promotion. (ie. windshield washer fluid) WTGR .  It is also important to note that the level of the mark-up depends on whether the product is a consumer product/service or an industrial product/service - BECAUSE,,,, consumer products/services often have more money spent on promotional expenses - therefore the need to recover this in a higher mark-up. level of the mark-up depends on whether the product is: Consumer Product softdrink  Consumer Service vacation Industrial Product screws, nuts and bolts Industrial Service advertising consulting fees

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Stockturn rate  If you spend a lot of money to acquire inventory - it will cost you cost you money you have to borrow from the bank to buy the materials to make the product cost you money to pay the warehouse to store it cost you money to pay your employees which all means that as soon as you have created your inventory of product, you want to sell it as quickly as possible so you get money to pay back the people you borrowed from to get started, and pay your employees, and have some profit for moving forward. One of the best things you can do is "turn over" your stock quickly. Once or twice a year is bad, four or five times a year is good. Cash flow is sometimes more important that an absolute profit. When you turn over the stock, you get cash flow.

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In this unit we also used material from the website of Prof. Gemmy Allen,  Mountain View College, Dallas, Texas
 http://ollie.dcccd.edu/mrkt2370/Default.htm
- used with permission,  and copy of May 2001 email giving permission is in Witiger's Permissions Binder
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