E-Pricing and Credit Strategies

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Three potential forces of pricing strategies: Image/ competition/ value

• Price conveys image: policies communicate about brand (high/ low price)/ market possibilities/ product quality/ future ideas

  • establish prices that are compatible with what customers are willing to pay

  • lower cost doesn't always mean competitive advantage or a lower value/ service

  • willing to pay if value/ convenience/ service and quality are above others

  • companies can raise prices to improve financial results as long as they offer value(companies standards of doing business)+(Product/ service quality & performance) all divided by (customers doubt that detract value of comps. standards/ or product/ services) > (product/ services price) + (customers expectations of company or product/ services)

    • value customer gains must exceed the price paid and expectations about the company

  • How much is my target customers willing to pay? target market/ business image/ pricing strategy related

• Competition and Prices: dramatic impact on small companies sales (internet price transparency)

  • pricing policies/ taking competitors prices into consideration/ takes more than beating prices

  • more than covering expenses/ generating profit, tells market positioning/ extra value offered

  • small company must differentiate by creating brand/ superior service/ design/ quality/ convenience/ speed

  • must match competitor prices or risk losing sales but should consider their motives first

  • avoid head to head price competition that can be achieved by lower prices/ cost structures

  • nonprice competition can be effective yet dangerous for small companies/ fluctuating sales

  • Low cost advantages: low cost location/ minimum costs by max efficiency/ tight inventory/ restricting product lines/ providing little to no service (self serve)/ use bootstrapping techniques

  • undercutting prices may lead to price war (demolish margins)- less revenue= lower quality

  • cutting prices will result in lower margins/ discounts threaten company's image of quality

  • Best way is to stay out of a price war/ differentiate comp/ emphasize features, benefits, value

• Focus on Value: Objective V- Price willing to pay if understood benefits Perceived value- $ willing to pay

  • value does not always mean low price/ companies undermine value by cutting the price

  • offer coupons/rebates/ limited time only/ short term sales without long term damage to brand

  • Fighter Brand- less expensive version of comps flagship product that is designed to confront low priced competitors/ satisfy the value conscious customers/ preserve image of premium product

  • Shoppers price reference points- past purchased price/ competitors price/ cost to the company

    • set prices to communicate value to customer/ create desired image for the company

    • Calculate unit cost/ total cost (shipping/ labor)/ overhead costs (marketing/ insurance/ rent)

• Pricing strategies: communicate with customers/ include surcharge (instead of raising)/ eliminate discounts, coupons and promos/ off prods. similar size or quantities/ improve efficiency/ emphasize value/ raise prices incrementally and consistently rather than large jumps/ shift to less expensive raw material/ lock in prices early when anticipating cost rises/ consider absorbing cost increases/ lower cost of product/ different from competitors

• most products have an acceptable price range (between price ceiling (customers) and floor (costs structure))

Pricing Strategies and Tactics

• Introduce a new product- when pricing a new product, they should satisfy three objectives

  • Get the product accepted by customers: price range depends on three positions

    • Revolutionary Products- new and unique that they transform existing markets

    • Evolutionary Products- offer upgrades and enhancements to existing products

    • Me-too Products- offer same basic features as existing products on the market

  • Maintain Market Share as Competition Grows: reappraising price with ads/ promo techniques

  • Earn a Profit: find the median of low/ high pricing that is acceptable to generate a larger margin

    • easier to lower a price than it is to higher one, start off high and evaluate from there

    • trying to gain market share quickly by setting low prices will set customer expectations

Three basic strategies to establish a new products price

• Penetration- to gain quick acceptance/ extensive distribution by setting low price/ set price above total unit cost to achieve high volume of sales/ sales and discounts

• Skimming- introducing product with little to no completion or to establish company as unique/ superior. Marketing to an elite group able to pay for your product/ services. Emphasize intangible benefits to appeal to more people.

• Life cycle pricing- high price/ tech advances lead to low costs before competition. Assume competition will emerge over time/ always lower price to attract/ discourage competition contributing to rapid return of start up costs. Generates funds to finance expansion/ tech advantages

• Pricing established goods and services (pricing techniques)

  • Odd Pricing- set prices that end in odds to create psychological impression of low price

  • Price lining- simplifies pricing function by pricing different products at different prices (depending on their quality/ features/ expenses)

  • Freemium pricing- providing basic product free/ charging premium for upgraded version

  • Dynamic (customized) pricing- company sets different prices for same product/ service for diverse customers using the information they have collected about their customers

  • Leader Pricing- marking down the normal price of popular item to attract customers to purchasing other items at regular prices

  • Zone pricing- setting different prices for customers located in other areas (variable transport costs)

  • Delivery pricing- company charges all customers same price regardless of transport costs

  • F.O.B. factory- company sells merchandise to customers and they will pay shipping costs

  • Earned discounts- discounts customers earn by making repeat purchases at a business

  • Limited time offers- goal of creating a sense of urgency/ excitement among customers

  • Steadily decreasing discount- limited duration discount that declines over time

  • Multiple unit pricing- offering customers discounts if they purchase in quantity

  • Bundling- grouping together several product/ services into package offers extra value at special price

  • Optional prod. pricing- selling the base product for one price/ selling accessories at higher price

  • Captive product pricing- sell product for lower price/ charge higher for complimentary accessories

  • By-prod. pricing- company uses revenue from sales/ be more competitive in pricing main product

  • Suggested retail prices and Follow the leader pricing

Pricing strategies/ Retailer methods-------Markup (mark-on)- differences between the cost of a product and its selling price

• Dollar markup = retail price - cost of merch.

• % of retail price markup = dollar markup/ retail price

• % of cost markup = dollar markup/ cost of unit

• initial dollar markup = (operating costs + reductions + profit) / (net sales + reductions)

• Retail price = dollar cost / (1 - % of retail price markup)

• Price total costs p. hour = productive hour / (1 - net profit target as % of sales)

• Break even selling P$= (profit+(variable costs per unit X quant. produced) +total fixed costs/ all divided by quantity produced

Pricing Concepts for manufacturers

• Cost plus pricing- manufacturer sets price that covers cost of direct materials/ labor/ overhead/ administration costs

• Pocket Price- price of company receives for product after deducting all discounts and purchase incentives

• Direct Costing and pricing

  • Absorption costing- including manufacturing/ overhead costs are absorbed into product final cost

  • Variable (direct) costing- includes variable costs (materials/ labor) in the cost of the product

  • Contribution margin- amount remaining that contributes to covering fixed expenses/ profit

    • Contribution % = 1- (variable expenses/ revenues)

The impact of credit on pricing

• Credit cards (interchange fee)- banks collect from retailers whenever customer uses a debit/ credit card

• E-commerce (fraud)/ credit cards/ debit cards/ mobile wallets/ installments credit (financing/ trade credit (early payment discounts/ late fees)/ layaway