Transcript No Slide Title

Pricing for Success
Wen-fei Uva
Senior Extension Associate
Department of Applied Economics and Management
Cornell University
Ithaca, NY 14853
Modified by
Georgia
Agriculture
Education
Curriculum Office
June, 2002
August 2008
Marketing is:
• Marketing is EVERYTHING you do to promote
your business, from the moment you
conceive of it to the point at which
customers buy your product or service and
begin to patronize your business on a
regular basis.
»
Jay Conrad Levinson (“Guerrilla
Marketing”)
• The key words to remember are everything
and regular basis.
August 2008
Your Marketing 4 Ps
Quality
Service
Value
Information
August 2008
Price
Why Need a Pricing Strategy?
• Playing the game with the “big
guys”
• Price takers
• Smart pricing is good marketing
• Price cutting is a dead end for
everyone
August 2008
Consumers are Looking
for Value
“VALUE”
= Quality + Service + Information +
Price
August 2008
Pricing Questions
• How much do your competitors charge?
• How much are customers willing to
pay?
• Does your product or business have
additional value/image for which price
may be raised? - Differentiation
• Most Important: What is your cost to
produce and market the product? -Pricing for profit
August 2008
Cost Accounting 101
Price
(Revenue)
Contribution
Variable Costs
Break-even
Fixed Costs
Profit
August 2008
(variable cost are items that
vary with production )
(fixed costs are items that
do not vary with
production)
Costs of Production
• Fixed costs: cost items that do not
vary with production volume.
– Building and land rent
– Interest
– Depreciation
– Property taxes
– Insurance
– Family living expenses.
August 2008
Costs of Production
• Variable costs: cost items that vary
proportionately with production volume.
– Seeds and plants
– Fertilizer and spray
– Packaging Materials
– Hourly wages
– Potting soil
– Gas/Fuel
– *Advertising, utility
August 2008
Gross Margin Method
Gross Margin is the difference between the cost of
the product and its selling price
Cost of Goods Sold ($)
X 100
Retail Price ($) =
100(%) - Desired Gross Margin (%)
$ 2.857 =
August 2008
$2
100% - 30%
X 100
Mark-Up Method
Mark-up is adding on to the costs of good sold.
Retail Price ($)
=
Cost of Goods Sold ($)
Cost of Goods Sold ($)
$ 2.6 =
August 2008
+
X Desired Mark-up (%)
$2 + ($2 X 30%)
Gross Margin vs. Mark-Up
Mark-up (%)
Gross Margin (%)
=
100(%) + Mark-up(%)
60%
37.5% =
100% + 60%
Don’t Forget to Add the Fixed Costs!
August 2008
Profit Equation
Fixed Costs ($)
Unit Costs ($)
=
+
Variable Costs ($)
Units Produced (lbs, dozens, bag)
(Don’t forget to take into account shrinkage)
VOLUME (PRICE-COST)
August 2008
=
PROFIT
Reason for Changing Prices
Lower Prices to:
• Meet competition
• Attract customers to your place
• Get rid of excess inventory
or
Increase Prices to Reflect:
• the value of a unique product
• A special service a prestige image
August 2008
Sell for a Premium Ways to Differentiate Your
Business and Products
August 2008
4 Primary Motivators of Today’s
Consumers
 Convenience - On-the-go foods, meal
solutions, and functional packaging
 Wellness - Fear about aging, declining
health, and increasing medical costs; Look
for products offer health benefits
 Food Quality and Safety- Quality is the
basic
 Gratification - I am worth it, Help them
succeed
August 2008
Make Sense of Your Position
• Your strength and weakness
• Your competitors’ strength and weakness
• Find out your position in customers’ mind
– The Best Product
– The Best Total Costs
– The Best Solution - best product mix, best
service, convenience, customization
Choose Your Marketing Position and
Differentiate Yourself
August 2008
Ways to Differentiate Your Product
• Physical Characteristics: features, performance,
durability, packaging
Value-added, Convenient
Something
Bigger or Better
Something Unique
August 2008
• Availability: stores, by phone, fax or internet,
diversity
Product Diversification
7
6.0
6
5.6
5
# of retail activities
6.2
4.7
4.5
4.1
4
3.7
3.2
3
2
1
0
Less than $10,000$10,000
24.999
August 2008
$25,00049,999
$50,000- $100,000- $250,000- $500,000
99,999
249,999 499,999 and over
Total
• Service: delivery, installation, guarantee, training,
maintenance, repair
Think for your customers
- Caring
Think like your
customers
August 2008
Find the teachable moment
Share your knowledge You are the expert
August 2008
• Image: symbol, event, media, information
Make the image tangible, i.e.
display gardens
Have something for the
kids
August 2008
Make it close to
home - Buy Local
Make it fun
August 2008
Pricing Based on Product
Characteristics
A. Everyday Sale Items
August 2008
•
Items people know the prices
•
Start watching ads
•
Change the items as you find them
•
Promote your everyday sale prices
•
Never be the lowest price in the market
•
If you are not comfortable with the price,
don’t stock the item
August 2008
Pricing Based on Product
Characteristics - cont.
B. Promotional Price Items
• Used to attract customers to your place
• Items you got a good deal
• Encourage customers to try new products
• Budget for advertising/promotion
• Space your sales time out
• Don’t forget employee training
• Use direct mailing
Never forget a customer, and never let a customer
forget you.
August 2008
August 2008
Pricing Based on Product Characteristics cont.
C. Variable Price Items
•
•
•
•
August 2008
Customers are not sure about the price
What makes the most money for you?
Strategically increase prices to enhance your
overall margin
Reason for additional charges:
I am already here.
I am in a hurry.
It is a minimal price difference (10%).
The competition is too far.
The “Value Formula”.
August 2008
Pricing Based on Product
Characteristics -cont.
D. Blind Price Items
•
August 2008
Items customers have no idea how much they
are.
Evaluate Blind Price Items
•
•
•
•
•
•
•
•
•
August 2008
Does it take extra time to price?
Does it take extra handling?
Is it seldom used?
Is it a repair or replacement item?
Does it have a luxury or status appeal?
Is it seldom promoted?
Is it not seasonal?
Is it a recreational item?
Is it not sold in a mass merchant?
Some Pricing Strategies
Price-Lining
- Feature products
at limited prices
Single-pricing
- Charge same
price for all items
Everyday low price
- a value image
August 2008
Odd-ending pricing
• $.99, $.49 endings
• How about $.50 ending?
Not for
Farmer’s
Market
August 2008
Volume pricing
- 1 for $2.50; 2 for $4.99 (or $5.00)
- No real discount
August 2008
Quantity discount pricing
- One for $2.00 and three for $5.00
- Encourage people to buy more
August 2008
Cumulative pricing
- Base on the total volume purchased over
a period of time
- Incentive for return purchases
August 2008
Trade discount/Promotional
allowances
- Reduction in price for marketing
function buyers will perform
Cash discount
- Encourage buyers to pay their
bills early/on-time
Seasonal discount
August 2008
Additional Pricing Reminders
•
Price clearly
•
Having the “Lowest Price” in the town
image can’t get you higher prices for
higher quality.
•
Often lowing prices results in lower profits
(can’t compensate with volume)
August 2008