Marketing Essentials

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Marketing Essentials
n Chapter 26 Pricing Strategies
Section 26.1 Pricing Concepts
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SECTION 26.1
Pricing Concepts
What You'll Learn

• 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

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SECTION 26.1
Pricing Concepts
Why 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.
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SECTION 26.1
Pricing Concepts
Key Terms

• markup
• cost-plus pricing
• one-price policy
• flexible-price policy
• skimming pricing
• penetration pricing

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SECTION 26.1
Pricing Concepts
Basic Pricing Concepts

• 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

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SECTION 26.1
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
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SECTION 26.1
Pricing Concepts
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 businesss
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
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SECTION 26.1
Pricing Concepts
Cost-Plus Pricing
Suburban Research Consultants
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?
Questionnaire Design and 3,500 Printing Postag
e 400 Labor (40 hours at 30)
1,200 Refreshments 100 Expenses
350 Profit 950 Final Price to
customer 6,500
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SECTION 26.1
Pricing Concepts
Demand-Oriented Pricing

• 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

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SECTION 26.1
Pricing Concepts
Competition-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)

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SECTION 26.1
Pricing Concepts
Combining Pricing Considerations

• 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 companys pricing
  policies.

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SECTION 26.1
Pricing Concepts
Pricing Backward from Retail Price
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?
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)
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SECTION 26.1
Pricing Concepts
Pricing Forward from Manufacturers Cost
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?
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
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SECTION 26.1
Pricing Concepts
Pricing Policies and Product Life Cycle

• 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.

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SECTION 26.1
Pricing Concepts
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

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SECTION 26.1
Pricing Concepts
New Product Introduction

• 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

Slide 1 of 3
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SECTION 26.1
Pricing Concepts
New Product Introduction

• 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
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SECTION 26.1
Pricing Concepts
New Product Introduction
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
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SECTION 26.1
Pricing Concepts
Other Product States
Pricing during subsequent periods in a product's
life cycle will be determined by which pricing
method was originally usedskimming or
penetration. At each phase of the life cycle,
pricing strategies will work to extend the
product's life cycle.
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ASSESSMENT
26.1
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
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ASSESSMENT
26.1
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
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ASSESSMENT
26.1
Thinking Critically
Would you use skimming pricing or penetration
pricing to introduce a new cookie called Coconut
Surprise? Why?
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Marketing Essentials
End of Section 26.1