chapter 26 pricing strategies 1 marketing essentials chapter 26 pricing strategies section 26.1...

Chapter 26 Pricing Strategies 1

Marketing EssentialsMarketing Essentials

Chapter 26 Pricing Strategies

Section 26.1 Pricing Concepts


SECTION 26.1SECTION 26.1

What You'll LearnWhat You'll Learn

Pricing ConceptsPricing Concepts

The three basic pricing concepts involving cost, demand, and competition

The concepts of pricing forward vs. pricing backward

The idea of one-price policy vs. a flexible-price policy

The two polar pricing policies for introducing a new product


SECTION 26.1SECTION 26.1 Pricing ConceptsPricing Concepts

Why It's ImportantWhy It's Important

After deciding on pricing goals, marketers must establish pricing strategies that are compatible with the rest of the marketing mix. Understanding the various options helps businesses effectively execute the difficult task of pricing products.



Key TermsKey Terms

markup

cost-plus pricing

one-price policy

flexible-price policy

skimming pricing

penetration pricing



There are three basic pricing concepts that you will want to consider in determining the price for any given product:

cost-oriented pricing

demand-oriented pricing

competition-oriented pricing

Basic Pricing Concepts



Cost-Oriented Pricing

In cost-oriented pricing, marketers first calculate the costs of acquiring or making a product and their expenses of doing business; then they add their projected profit margin to these figures to arrive at a price. Two common methods are:

markup pricing

cost-plus pricing

Slide 1 of 2



Cost-Oriented Pricing

Markup pricing is used primarily by wholesalers and retailers who are involved in acquiring goods for resale. The markup must cover the business’s expenses.

Price = cost + markup (as percentage)

Cost-plus pricing is used by manufacturers and service companies.

Price = all costs + all expenses (fixed and variable) + desired profit

Slide 2 of 2



Cost-plus pricing breaks a price down into its component parts. How might you relabel these entries shown here to show the similarity between markup pricing and cost-plus pricing?

Suburban Research Consultants

Cost-Plus Pricing

Questionnaire Design and $3,500Printing

Postage 400

Labor (40 hours at $30) 1,200

Refreshments 100

Expenses 350

Profit 950

Final Price to customer $6,500



Marketers who use demand-oriented pricing attempt to determine what consumers are willing to pay for given goods and services. Demand-oriented pricing is effective when:

there are few substitutes for an item

there is demand inelasticity

Demand-Oriented Pricing



Marketers who study their competitors to determine the prices of their products are using competition-oriented pricing. These marketers may elect to take one of three actions:

price above the competition

price below the competition

price in line with the competition (going-rate pricing)

Competition-Oriented Pricing



Most marketers use all three pricing policies to determine prices.

Cost-oriented pricing helps determine the price floor (lowest selling price) for a product.

Demand-oriented pricing helps determine a price range for the product.

Competition-oriented pricing ensures that the final price is in line with the company’s pricing policies.

Combining Pricing Considerations



To arrive at a wholesale price, a manufacturer can subtract all markups for channel members from the suggested retail price. What problem would the above manufacturer have if its costs and expenses totaled $22? What might the manufacturer have to do?

Pricing Backward from Retail Price

Estimated retail price $50

Retailer's markup(40% of retail ) - $20

Wholesaler's price to retailer $30

Wholesaler's markup(30% of wholesale) - $9

Manufacturer's price to wholesaler $21(must cover costs, expenses, and profit)



Adding markups to cost is another way manufacturers can price their goods. Suppose in the example given here market research had shown that consumers would pay as much as $60 for the item. What would the manufacturer's options be?

Pricing Forward from Manufacturer’s Cost

Cost of producing item $15.75

Manufacturer's expenses and profit(25% of cost) + $5.25

Manufacturer's price to wholesaler $21.00

Wholesaler's markup(42.9% of cost) + $9.00

Wholesaler's price to retailer $30.00

Retailer's markup(66.67% of cost) + $20.00

Retailer's price to consumer $50.00



A basic pricing decision every business must make is to choose between a one-price policy and a flexible-price policy.

A one-price policy is one in which all customers are charged the same price for the goods and services offered for sale.

A flexible-price policy permits customers to bargain for merchandise.

Pricing Policies and Product Life Cycle



Pricing plays an important role in the product life cycle. In this sequence of events, products move through four stages:

introduction

growth

maturity

decline

Product Life Cycle



A business may elect to price a new product above, in-line, or below its competitors. When a going-rate strategy is not used, two polar methods may be used:

skimming pricing

penetration pricing

New Product Introduction

Slide 1 of 3



Skimming pricing is a pricing policy that sets a very high price for a new product to capitalize on the initial high demand for a new product.

Advantages: High profit margin; may cover research and development costs.

Disadvantages: Cost must eventually be lowered; attracts competition; if price is too high no one buys.


Slide 2 of 3



Penetration pricing sets the initial price for a product very low to encourage as many people as possible to buy the product.

Advantages: Quick market penetration; can capture a large market; blocks competition.

Disadvantages: Low demand leads to big losses.


Slide 3 of 3



Pricing during subsequent periods in a product's life cycle will be determined by which pricing method was originally used—skimming or penetration. At each phase of the life cycle, pricing strategies will work to extend the product's life cycle.

Other Product States


26.1 ASSESSMENTASSESSMENT

Reviewing Key Terms and Concepts

1. Name the two most common methods of cost-oriented pricing.

2. Explain how cost-oriented, demand-oriented, and competition-oriented pricing concepts can be combined to determine price.

3. What two methods may manufacturers use when considering the price to charge wholesalers and retailers? How do they differ?

Slide 1 of 2



Reviewing Key Terms and Concepts

4. What is the difference between a one-price policy and a flexible-price policy?

5. Name and explain two polar pricing methods that may be used when a new product is introduced into the market.

Slide 2 of 2



Thinking Critically

Would you use skimming pricing or penetration pricing to introduce a new cookie called Coconut Surprise? Why?


Marketing EssentialsMarketing Essentials

End of Section 26.1

chapter 26 pricing strategies 1 marketing essentials chapter 26 pricing strategies section 26.1...

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