19 Pricing 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)

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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)

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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)

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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)

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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?

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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

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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)