Published on July 31, 2009
Developing Pricing Strategies : Developing Pricing Strategies Slide 2: If you get your customers because of price, you are going to Loose them because of price. Developing Pricing Strategies : Developing Pricing Strategies Price: is only element in marketing mix produces revenues, all other elements represent cost determines the amount of income generated from sales of product differentiate product from competitors If too much generate fewer sales If too little sacrifice profits Break-even Analysis : Break-even Analysis Break-even analysis: method of calculating the minimum volume of sales needed at a given price to cover all costs Variable costs: business costs that increase with the number of units produced Fixed Costs: business costs that remain constant regardless of the number of units Break-even point: sales volume at a given price that will cover all of a company costs Break Even Analysis (cont.) : Break Even Analysis (cont.) Doesn’t dictate price to charge Provides some insight into number of units to sell at a given price to make profit Useful when calculating the effect of special pricing promotion Allows to try different prices & see results by using spreadsheet software Break-even Point : Break-even Point Break-even point= fixed costs selling price per unit – variable costs per unit Factors Affecting Pricing Decisions : Factors Affecting Pricing Decisions Pricing determined by: Merchandise Location Promotion Credit Customer service Store image Legal constraints External Influences on Pricing Strategy : External Influences on Pricing Strategy Pricing strategy Customers Competitors Suppliers Government Price & Marketing objectives : Price & Marketing objectives Match price to objectives in strategic marketing plan Common objectives increase market share increase sales improve profits project a particular image combat competition Slashed prices boost sales & fend-off lower-priced rival brands Premium pricing with other marketing mix give luxury position Price & Government regulations : Price & Government regulations To protect consumers & encourage fair competition Classes of pricing regulated: Price fixing (agreement among companies supplying the same products as to prices they will charge) Price discrimination (unfairly offering attractive discounts to some customers not to others) Deceptive pricing (pricing schemes consider misleading) Pricing & Consumer perceptions : Pricing & Consumer perceptions Customers will elicit perception of quality from price Rough price range usually in customers mind Unexpectedly low price triggers fear the item is low quality Unexpectedly high price make buyers question is product worth Pricing & Consumer demand : Pricing & Consumer demand Costs establish floor for price Demand establish ceiling for price Theoretically: if price too high demand fall & Producers reduce prices to stimulate demand if price too low demand increases & producers motivated to raise prices When prices climb & profits improve producers boost output until supply & demand balance Price elasticity : Price elasticity Some products insensitive to changes in price & Some products highly responsive Price elasticity: a measure of the sensitivity of demand to changes in price Pricing Methods : Pricing Methods Cost-based Demand Based Competition-based pricing Price skimming Penetration pricing Cost-based Pricing : Cost-based Pricing Cost-based pricing (cost plus pricing): Starting with cost of production Then add markup to the cost of product Simple but little sense Ignores demand & competitors prices, & not lead to best price Ensure certain profit but sacrifice profit opportunity Slide 16: In demand based pricing: Price is set on the basis of consumer demands. It determines the range of price acceptable to the target market. Demand oriented pricing takes into account two psychological aspects of pricing Price quality Prestige pricing Competition -based Pricing : Competition -based Pricing Maximize profit by establishing optimal price for product How to optimize the price? Based on analysis of product’s competitive advantage User’s perception of item Market targeted When price established, focus on keeping costs at level allows healthy profit Few businesses fail from over pricing Many businesses fail from underpricing Price Skimming : Price Skimming Skimming: charging a high price for a new product during the introductory stage & lowering the price later Price vary depending on stage in product life cycle During introductory phase objective to recover development costs ASAP, so price is high & the drop later when product no longer novelty & competition heats up Makes sense under 2 conditions: Product quality & image support higher price Competitors cannot enter market with competing products & undercut price Penetration Pricing : Penetration Pricing Penetration Pricing: introducing a new product at a low price in hopes of building sales volume quickly Advantages: discouraging competition because the low price Limits profit for everyone Helps expanding entire product category by attracting customers who don’t buy at higher, skim-pricing levels If you compete pioneers in category, this strategy helps in taking customers away from pioneer Makes sense when market highly price sensitive, so low price generates additional sales & company maintain low-price position long to keep out competition Price Adjustment Strategies : Price Adjustment Strategies Price discounts Bundling Dynamic Pricing Price Discounts : Price Discounts Discount Pricing: offering a reduction in price Depend on type of customer targeted & type of item offered Discount boost sales but can touch off price wars between competitors Price war encourage customers to focus only on pricing not on value or benefits Price war can hurt entire industry for years To offset loss of revenue stock shelves with more profitable items otherwise if you couldn't compete you close up business Examples : Examples Wholesaler or retailer Discount: to encourage orders Customer cash discount: to reward customers who pay cash or pay promptly Quantity discount: to Large volumes buyer Seasonal discount: to who buy out of season Value pricing: charging affordable price for high quality offering (for certain times or certain customer segment) Bundling : Bundling Definition: Combining several products & offering the bundle at a reduced price Promote sales of products consumers might not otherwise buy Make products harder for consumers to make price comparison Dynamic Pricing : Dynamic Pricing Definition: Charging different prices depending on individual customers & situations By using internet technology Enables to move slow-selling merchandise instantly Allows to experiment with different pricing levels Tactics: Auction pricing (buyers bid against each other & the highest bid buy) Group buying (buyers obtain volume discount by joining buying groups) Name-your-price (buyers specify how much to pay & sellers choose whether to sell) Basic Pricing Strategies : Basic Pricing Strategies Mark-up Pricing Markup on cost can be calculated by adding a pre-set (often industry standard) profit margin, or percentage, to the cost of the merchandise. Markup on retail is determined by dividing the dollar markup by retail. Be sure to keep the initial mark-up high enough to cover price reductions, discounts, shrinkage and other anticipated expenses, and still achieve a satisfactory profit. Retailers with a varied product selection can use different mark-ups on each product line. Vendor Pricing Manufacturer suggested retail price (MSRP) is a common strategy used by the smaller retail shops to avoid price wars and still maintain a decent profit. By pricing products with the suggested retail prices supplied by the vendor, the retailer is out of the decision-making process. Another issue with using pre-set prices is that it doesn't allow a retailer to have an advantage over the competition. Competitive Pricing Consumers have many choices and are generally willing to shop around to receive the best price. Retailers considering a competitive pricing strategy will need to provide outstanding customer service to stand above the competition. Pricing below competition simply means pricing products lower than the competitor's price. This strategy works well if the retailer negotiates the best prices, reduces costs and develops a marketing strategy to focus on price specials. Prestige pricing, or pricing above competition, may be considered when location, exclusivity or unique customer service can justify higher prices. Retailers that stock high-quality merchandise that isn't available at any other location may be quite successful in pricing their products above competitors. Psychological Pricing Psychological pricing is used when prices are set to a certain level where the consumer perceives the price to be fair. The most common method is odd-pricing using figures that end in 5, 7 or 9. It is believed that consumers tend to round down a price of $9.95 to $9, rather than $10. Other Pricing Strategies : Other Pricing Strategies Keystone pricing is not used as often as it once was. Doubling the cost paid for merchandise was once the rule of pricing products, but very few products these days allow a retailer to keystone the product price. Putney Pricing strategy is being used by some retailers to increase margins. Multiple pricing is a method which involves selling more than one product for one price, such as three items for $1.00. Not only is this strategy great for markdowns or sales events, but retailers have noticed consumers tend to purchase in larger amounts where the multiple pricing strategy is used. Discount pricing and price reductions are a natural part of retailing. Discounting can include coupons, rebates, seasonal prices and other promotional Markdowns. Merchandise priced below cost is referred to as loss leaders. Although retailers make no profit on these discounted items, the hope is consumers will purchase other products at higher margins during their visit to the store. It is important to understand the concept of Known value items or KVI’ s If th retailer wishes to increase the footfalls with the help of loss leaders As you develop the best pricing model for your retail business, understand the ideal pricing strategy will depend on more than costs. It is difficult to say which component of pricing is more important than another. Just keep in mind, the right product price is the price the consumer is willing to pay, while providing a profit to the retailer. EDLP vs. High Low Pricing : EDLP vs. High Low Pricing There are two kinds of retailers in the industry: HILO and EDLP. HILO means grocery stores that normally have high prices (HI) that run rotating super-cheap loss-leaders (LO). The EDLP stores specialize in Everyday Low Prices–so their sales are rarely as good, but their standard prices are considerably lower. There are three kinds of typical shopper. Some are store-faithful. The amount that they buy in a particular week depends heavily upon the sales offered. Others choose the store by the sale. The amount they buy is fairly consistent, but where they spend it varies. The third type is very rare–people who go to multiple stores every week. These people far more time than money and are sometimes labelled as ‘Cherry Pickers’ EDLP pricing is more suitable for Hypermarkets, Supermarkets and Price clubs such as Wal Mart, Costco, Kmart etc. They promise the customers to save not on individual items but on a basket of items.So you are more likely to save at Wal Mart if you buy from them on a daily basis items of regular and repeat use rather than pick and choose from time to time. One important condition that drives EDLP pricing is the “Low Price” image of the retailer is the consumer’s mind. HILO Pricing is more suited for Departmental Stores who face obsolescence and tempt customers to peg up their buying during the SALE period. They make money during the HI phase when the products are not on discount but they also make sure that they do not loose as much when they are on SALE. A HILO pricing is supported by ‘Premium’ image of the retailer as it helps the retailer to up charge the customer during the HI phase. The HI LO pricing will fail in a scenario if the customers do not find enough value when the products are put on sale. Retail Pricing Approaches and other Elements of the Retail Marketing : Retail Pricing Approaches and other Elements of the Retail Marketing Exercise : Exercise Think of yourself as a person who has to arrive at the price for An Economy all purpose soap (75g) A car in the mid segment Orange Cream Biscuits (100g) Formulate your price strategy and justify the same Choose a grocery store, a branded store, and a mall and visit each store thrice in a month with a gap of one week. Observe the price changes in each store.