19Pricing Concepts

Professor Close

Introduction to Pricing (1)

• Pricing strategy (nothing you buy is priced too high)– Definition: value given up for benefits firm

offers (fuzzy: good deal varies; real estate)• Positive: easiest “p” to change; determines

revenues• Negative: difficult to evaluate; different to gain

advantage

Introduction to Pricing (2)

• Pricing Strategy (cont…)– Reference price: consumers’ ideas of what

price “should” be (What for gallon gas? CD? Movie?)

– Flexibility

• Administered prices– Firms decide on price vs mkt. (fluctuation is relatively

uncommon)– Channel conflict (MSRP)

Introduction to Pricing (3)• Pricing Strategy (cont…)

– Flexibility• One price: same price to all under same conditions• Flexibility: price differs by customer; negotiation• Problem: dissatisfaction; searching for deals (texts) • Easier now – tech (freq. Shopper)• “Name your price” (PriceLine) • (-)

– Some dislike (autos)

– Customer satisfaction

– “Habit” forming (U.S. autos)

Priceline Commercial

Pricing Objectives (1)

• Sales Oriented: amount sold in units, dollars, mkt share – no ref. to profit

• Market share: part of industry/area sales • Measurement is easy• Problem: must have some profit (large sales

profits; Eastern airlines; dot-coms)

Pricing Objectives (2)

• Status Quo Oriented:• Happy where we are (problem: not strategic; Taco

Bell)• Form: non price competition; meet competition

– Ex. avoid price war– Focus on other p’s– Why? (emphasize quality; & only one low price)– What products can you think of??

Taco Bell Commercial

Pricing Objectives (3)

• Profit Oriented• Target return

– Profit rel. to financial yardstick (sales, invest, industry avg.)

– (+) objective (driven by quarterly earnings)– Satisfactory profits: lifestyle, utilities

• Profit maximization: most earnings possible… – Not necessarily high price (W-Mart; mass merch.

Concept)– Should be goal of business– Trick: how do you know?

Pricing Objectives (4)• Allowances and Discounts

• Awarded for giving something up or doing it yourself• Forms

– Sale (500) temporary reduction in list price; adjust inventory quickly (excitement)

– Quantity disct: decrease for buying more» May be price cuts or additional goods (movie rentals;

freq. Flier) – Cumulative:

» For buying over time (Subway; buy ten, one free)» Loyalty

– Non-cumulative: » For one purchase» Decrease storage

Pricing Objectives (5)• Allowances and Discounts (cont…)

• ad allowance: price reduction for downstream ads

• stocking allowance– pay for retail space (Wal-Mart)– mainly for new (justify: costs)

Pricing Objectives (6)

• Allowances and Discounts (cont…)– Push money/spiffs/p.m.

– Retailer incentives for aggressive selling (target: sales force)

– Question: incentives

– Trade-in: price reduction for old items– Seasonal: buy @ unpopular times (storage;

heating oil)

Payment Terms

• Net: full amount

• Cash Discount: reduction to pay early

• 2/10, net 30: – 2% discount if paid w/in 10 days;

– full payment due in 30 (BIG take anyway)

Summary

• Objectives: sales – status quo - profit

• Allowances & discounts

• Administered vs. flexible

• Read: – Robinson-Patman Act (pg. 509-510)– Skimming/Penetration Pricing (pg. 493-495)