PRICING
OBJECTIVES

chpt 15 in the Sommers book  chpt 17 in the Shapiro book
 
 

Chapter 15

Pricing Objectives
page 459
 

Chapter 17

.. You can't just say "we want a low price to sell a lot" - if your price is too low you will not cover your costs and you will go out of business. There are several different "Objectives" a company may orient themselves towards in order to obtain a profitable business situation.

WTGR


http://www.mcgrawhill.ca/college/shapiro9/olc/olc/graphics/shapiro9bm_s/ch17/slideshows/sld003.htm

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Chapter 15

Pricing Objectives

page 459

Profit Oriented: Target Return - sometimes the vendor specifies a specific dollar amount or percentage amount that the price will be offered at in order to make a profit which has been calculated for a specific purpose. Usually this amount is part of a larger plan involving several product units in a product line

Profit Oriented: Maximize Profits - if the Competitive Market is not intense you may charge the highest price the market will bear because sometimes you may have an advantage for reasons based on
your geographic advantage
special features not available on other competitors' products
very very famous brand.
etc..
Sales / Marketing Oriented: Increase Sales Volume
Sales / Marketing Oriented: Increase Market Share
Status Quo Goals: Just Meet the Competition - if the customer has many choices, and you barely have the resources to stay in the market, then just charge the same price. You don't have the resouces to survive a price war, and you don't have the ability to claim better quality to charge a higher price

Prof. Allen says
"Volume objectives include sales maximization and market-share goals, which are specified as a percentage of certain markets. In sales maximization, management sets an acceptable level of profitability and then tries to maximize sales.  This objective can lead to discounting or some other aggressive pricing strategy, such as rebates and sales. "
http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm
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Chapter 15

Skimming
page 472

Chapter 17

page 541

"Skim the cream” pricing involves  selling at a high price to those who are willing to pay before aiming at more price-sensitive consumers.
This expression comes from the farming practice of milking cows - the cream rises to the top and you skim it off.
The advantage of using a Skimming price policy is that you can theoretically get the maximum profit from each level of customer.
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Chapter 15

Pricing

Chapter 17

page 541

Skimming Pricing 

"A Skimming policy is more attractive if demand is inelastic" says the Shapiro text
- remember inelastic means there are no close substitutes
- products that people will pay a high price for because there is nothing else they can buy the is close to the item
 

Prof. Allen says
"A skimming pricing policy involves setting prices of products relatively high compared to those of similar products and then gradually lowering prices.  The skimming price is the highest price possible that buyers who most desire the product will pay (skim the cream off the top -- skim the innovators).  This market segment is more interested in quality, status, uniqueness, etc. This policy is effective in situations where a firm has a substantial lead over competition with a new product." http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm
.. A great example of Skimming is DVD players in the late 1990's and early 2000's - in the late 1990's DVD players sold for $500 and $400 when they first came out, then the price dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many different types of stores.

WTGR

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Chapter 15

Pricing

Chapter 17

page 542

Penetration Pricing 
- to make it too intimidating for competition to follow, 
- or to make sure you enter the market in a competitive environment
- or as part of a brand building strategy
 
Prof. Allen says
"A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance that will allow the company to later raise its prices.  Such a policy is often used when the firm expects competition from similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. The low price must help keep out the competition, and the company must maintain its low price position."
http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm


A variation of Penetration Pricing is Predatory Pricing 
Prof. Allen explains Predatory pricing is the illegal practice of setting unreasonably low prices to force competitors out of business. Many countries have rules and regulations trying to catch people doing this and there can be stiff penalties if the company is caught.

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Chapter 15

Pricing

Chapter 17

page 542

Discount Pricing 
- can be seasonal
- can be based on volume or amount bought
- can be used to attract a form of payment eg, CA$H
 
Prof. Allen says
"Discount and allowance pricing has the effect of reducing prices to reward customer responses such as paying early or promoting the product. A recent pricing issue is that of everyday low pricing, where the retailer charges a constant, lower price at all times, with no temporary price discounts. Wal-Mart has led the trend toward everyday low pricing." http://ollie.dcccd.edu/mrkt2370/book/mrktbook.htm


Allowances
- cutting customers a break due to their cost of advertising

- if they put on an advertising campaign, you will lower your wholesale price to them because it helps your promotion too
Trade-in allowance
 
Prof. Allen says
"Trade in allowances  are price reductions granted for turning in a used item when purchasing a new one.  Promotional allowances are money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.  In promotional pricing, the company must decide on loss-leader pricing (product priced lower to attract customers to the store in hopes that they will buy other items at normal markup), special-event pricing, cash rebates, low interest financing, longer payment terms, warranties and service contracts and psychological discounting."
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Chapter 15

Pricing
 

Chapter 17

page 542

Geographic Pricing
- F.O.B. - basically, this is the price out the door at our factory - you come and get it
- C.I.F. - the cost at our factory + the insurance and freight to ship it to you
- ZONE - if you live close, it is cheaper, if you live farther away, we add in shipping costs
ZONE pricing used for everything from Pizza delivery to clothing to grain shipments
- Basing-point pricing means that all customers are charged freight from a specified billing location. 
- Freight-absorption pricing, the seller pays all shipping costs to get the desired business.
 
Prof. Allen says
"Price is influenced by geography, where the company decides on how to price to distant customers.  Free On Board or FOB-origin pricing is a geographical pricing strategy in which goods are placed free on board a carrier; the customer pays the actual freight from the factory to the destination.  Because the customer picks up its own cost, supporters believe that this method is the fairest way to assess freight charges. "
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Chapter 15

Trade Discounts
page 475
Pricing Terms used in B2B
2/10 - net 30 
in a business to business (B2B) situation it is common to have to extend credit to customers who are buying parts, materials and supplies.
2 is the % discount
10 is the number of days
30 is the maximum number of days in which you HAVE to pay
2/10 net 30 means if you may before 10 days, you get a 2% discount

5/10 net 60
if I pay in 10 days I get a 5% discount and, I have to pay all of it before 60 days

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Markups Markup percent is based on selling price

In the clothing industry it is usually 100% - this means if your calculated mfg. cost price of a garment is $20 - it will wholesale at $40, the retailer will mark it up to $80, or even $90 depending on the category.

"Mark-up Chain"
- the sequence of mark ups that a product goes through from producer to retailer.
- in some industries, the amount of increase is small, in some, like clothing, jewelry, the increase is enormous

"High markups don't always mean big profits"
 
 

. Sometimes as the product passes from producer, to agent, to wholesaler, to retailer, there has to be a lot of advertising money spent at each level, which has to be recovered by the spender in a higher price passed on - this is particularly true for women's fashions, CD's, certain types of proceed foods and beverages, and specialty consumer products.

Sometimes the mark-up is very low cause there is not a lot of advertising needed and the competitive environment (particular international competition) keeps pressure ot have the final retail price low. This is true for certain types of products like building materials, some unprocessed food products (ie. bags of rice), and non-perishable items that are not sold with a lot of promotion. (ie. windshield washer fluid)

WTGR

It is also important to note that the level of the mark-up depends on whether the product is a consumer product/service or an industrial product/service - BECAUSE,,,, consumer products/services often have more money spent on promotional expenses - therefore the need to recover this in a higher mark-up.

level of the mark-up depends on whether the product is:

  • Consumer Product
    • softdrink 
  • Consumer Service
    • vacation
  • Industrial Product
    • screws, nuts and bolts
  • Industrial Service
    • advertising consulting fees
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Stockturn rate 

If you spend a lot of money to acquire inventory - it will cost you

  • cost you money you have to borrow from the bank to buy the materials to make the product
  • cost you money to pay the warehouse to store it
  • cost you money to pay your employees
which all means that as soon as you have created your inventory of product, you want to sell it as quickly as possible so you get money to pay back the people you borrowed from to get started, and pay your employees, and have some profit for moving forward.

One of the best things you can do is "turn over" your stock quickly. Once or twice a year is bad, four or five times a year is good. Cash flow is sometimes more important that an absolute profit. When you turn over the stock, you get cash flow.

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In this unit we also used material from the website of Prof. Gemmy Allen,  Mountain View College, Dallas, Texas
 http://ollie.dcccd.edu/mrkt2370/Default.htm
- used with permission,  and copy of May 2001 email giving permission is in Witiger's Permissions Binder
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witiger.com
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