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Lecture 9

BUS 201 Lecture Notes - Lecture 9: Price Skimming, Dynamic Pricing, Psychological Pricing


Department
Business Administration
Course Code
BUS 201
Professor
Peter Tingling
Lecture
9

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Chapter 13: Pricing, promoting,
and distributing products
Week 11
1)Pricing Objectives and Tools
Pricing to Meet Business Objectives
oPricing
Determining what the customer pays and the seller receives in
exchange for a product
oPricing objectives
The goal that the seller hopes to achieve in the pricing products
for sale
oRevenue = Selling price x Units sold.
oProfit-maximizing
pricing to maximize profit (bottom line)
may sacrifice unit sales to maximize profit
Companies set their prices to maximize profits
If prices too low, then miss out additional profits for each
unit.
If prices too high, then will make larger profit on each unit
but less units sold
oMarket-share
pricing to gain the greatest possible market percentage
long-run business must make a profit to survive
companies set initial prices low to establish market share
market share (market penetration)
a company’s percentage of the total industry sales for a
specific product type
Price-Setting Tools
oCost-oriented pricing
considers the cost of the product and adds a “markup” to arrive
at a final cost
a light bulb costs $0.45 to the retailer
the retailer sells it for $0.75 (a markup of $0.30)
Markup / Sales Price x 100 = Markup Percentage
Selling price = seller’s costs + profit
Markup
Amount added to an item’s purchase cost to sell it at a
profit
Variable costs
Cost that changes with the quantity of a product produced
and sold
Fixed costs
Cost that is incurred regardless of the quantity of a
product produced and sold

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Break-Even Analysis: Cost–Volume–Profit Relationships
oFor a particular selling price, assessment of the seller’s costs versus
revenues at various sales volumes
Total fixed cost / (selling price – variable cost) = breakeven point
Profits = total revenue – (Total fixed cost + total variable costs)
2)Pricing Strategies and Tactics
Pricing Strategy
Pricing is an extremely important element in the marketing mix,
as well as a flexible marketing tool – easier to change prices
than to change products of distribution channels
the pricing plan based on the marketing mix
oPricing Existing Products
Pricing above
prevailing market prices for similar products to take
advantage of the common assumption that higher prices
mean higher quality
Pricing below
Market prices while offering a product of comparable
quality to higher-priced competitors
Pricing at or near market prices
oPricing New Products
skim vs. penetration
price skimming
setting initial high prices to cover new product costs and
generate profit
works only if marketers can convince customers that a
new product is truly different from existing products and
there is no foreseeable major competition in the horizon
penetration pricing
setting initial low price to establish a new product in the
market
seek to create customers interest and stimulate trial
purchases.
Best strategy to introducing a product which has or
expects to have competitors very quickly
oFixed vs. Dynamic Pricing for Online Business
Fixed pricing
Most common option for cybershoppers
oE.g. amazon
Dynamic pricing
Flexibility between buyers and seller in setting a price and
use the web to instantly notify millions of buyers of a
product availability and price changes
oE.g. eBay auction bidding
Pricing Tactics
oPrice lining
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Offering all items in certain categories at a limited number of
prices. $199.99 instead of $200
Allows the store to have a suit for all of the different segments it
hopes to attract
oPsychological pricing
Takes advantage of the fact that the customers are not
completely rational when making buying decisions
Odd–even pricing
A psychological pricing tactic based on the premise that
customers prefer prices not stated in even dollar amounts
oDiscounting
price reduction offered as an incentive to purchase
stimulates sales
3)Promoting Products and Services
Promotion
otechniques to communicate information about products (help sales)
okey objectives:
increase product awareness & knowledge
increase product preference
help position products and add value
help control/stabilize sales volume
Promotion Strategies
oPush strategy
firm promotes aggressively to intermediaries
push products through wholesalers and retailers, which will
persuade customers to buy them
oPull strategy
firm promotes directly to consumers, who demand the product
from intermediaries (wholesalers and retailers)
oMany firms use a combination of both strategies
Promotional Mix
oThat portion of marketing concerned with choosing the best
combination of advertising, personal selling, sales promotions and
publicity to sell a product
Advertising and publicity to make sure buyers are aware
personal selling to give information to consumers and can
demonstrate and represent product quality, features, benefits
and performance in comparison to competitors
sales promotions give customer incentive to buy
publicity
public relations
after customer buy product, they evaluate products and note
their strengths and deficiencies (lack of). Advertising and
personal selling can remind customers that they made the right
choice.
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