Mar-3023 Lecture Notes - Lecture 20: Romaine Lettuce, Clorox, Vending Machine
Day 20: Setting Prices
Pricing Fundamentals
Markup: can be thought of as a % of cost or a % of selling price
Markup as a = markup = $15 = 33.3%
% of cost cost $45
Markup as a = markup = $15 = 25%
% of selling price selling price $60
Perceived Price
There’s a big difference between the objective price (the price you actually pay) and the
perceived price (the price you think you should pay)
• How much would you pay for a 12 oz. soft drink? It depends…
o Supermarket - $.40
o Vending machine - $.75
o Convenience store - $1
o Fast food - $1.50
o Movies - $4.50
Perceptions of Product Value
1 head of romaine lettuce $1.99 v. bag of lettuce $2.99
24oz of Clorox bleach & roll of paper towels $2.69 v. Clorox Wipes $3.49
1 homemade PB&J $.46 v. Smuckers Uncrustables PB&J $.82
Pricing Methods
Pricing New Products
• Pricing Skimming – set a relatively high price at first and then lower it over time
o Popular in electronics category (play station was originally $600)
o Allows for sunk cost recovery (Research & Development)
o Good for inelastic demand – so people buy regardless of high price
o Encourages competition
• Penetration Pricing – set a relatively low price to drive market share/value perceptions
o Designed for high market share (you want to penetrate the market and capture
as much market share as possible right out the gate)
o Good for brand loyalty – people become routinized with common packaged
goods. Once the brand has a loyal customer base they gradually increase price
o Drive volume first and then drive margin later
o Discourages competition, so you have a window of opportunity to capture
customers
o Good for companies that don’t need a lot of R&D for their products
o Good for elastic products
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Markup: can be thought of as a % of cost or a % of selling price. Markup as a = markup = = 33. 3% Markup as a = markup = = 25% It depends : supermarket - $. 40, vending machine - $. 75, convenience store - , fast food - . 50, movies - . 50. 1 head of romaine lettuce . 99 v. bag of lettuce . 99. 24oz of clorox bleach & roll of paper towels . 69 v. clorox wipes . 49. 1 homemade pb&j $. 46 v. smuckers uncrustables pb&j $. 82. Product line pricing: captive pricing the basic product is sold low, but the ancillaries are sold high. Razor / cartridges: price lining pricing products at several levels; prices are relatively inelastic within the different ranges, companies will price their product at the top of the inelastic price range. Old navy, gap, banana republic: bait pricing (a. k. a.
