Core Concepts of Marketing

242 CHAPTER 9 PRICINGTHEPRODUCT

MARKETING CAPSULE •

1.Developinga pricingstrategy

a. Nonpricecompetition

b. Competitivepricing

2,Newproductpricing

a. Penetration

b. Skimming

3,Priceliningmeansa numberofsequentialpricepointsare

offeredwithina productcategory.

4.Priceflexibilityallowsfordifferentpriceschargedfordif-

ferentcustomersand/orunderdifferentsituations.

5.Pricebundlinggroupssimilarorcomplementaryproducts

andchargesa totalpricethatislowerthaniftheywere

soldseparately.

6.Certainpricingstrategies, suchasprestigepricing,cus-

tomarypJ1cing,oroddpricing,playonthepsychological

perspectivesoftheconsumer.

AlternativeApproachestoDeterminingPrice

Pricedeteoninationdecisionscanbebasedona numberoffactors,includingcost,demand,

competition,value,orsomecombinationoffactors.However,whilemanymarketer~are

awarethattheyshouldconsiderthesefactors,pricingremainssomewhatofanart.Forpur-

posesofdiscussion,wecategorizethealternativeapproachestodetenniningpriceasfollows:

(1)cost-orientedpricing;(2)demand-orientedpricing; and(3)value-basedapproaches.

Cost-OrientedPricing:Cost-PlusandMark-Ups

Thecost-plusmethod,sometimescalledgrossmarginpricing,isperhapsmostwidelyused

bymarketerstosetprice.Themanagerselectsasa goala particulargrossmarginthatwill

producea desirableprofitlevel.Grossmarginisthedifferencebetweenhowmuchthegoods

costandtheactualpriceforwhichit sells.Thisgrossmarginisdesignatedbya percentof

netsales.Thepercentselectedvariesamongtypesofmerchandise.Thatmeansthatone

productmayhavea goalof48%grossmarginwhileanotherhasa targetof 33 YJ%or7.%.

Aprimaryreasonthatthecost-plusmethodisattractivetomarketersis thattheydo

nothavetoforecastgeneralbusinessconditionsorcustomerdemand.Ifsalesvolumepro-

jectionsarereasonablyaccurate,profitswillbeontarget.Consumersmayalsoviewthis

methodasfair,sincethepricetheypayisrelatedtothecostofproducingtheitem.Like-

wise,themarketeris surethatcostsarecovered.

Amajordisadvantageofcost-pluspricingis itsinherentinflexibility. Forexample,

departmentstoreshaveoftenfounddifficultyinmeetingcompetitionfromdiscountstores,

catalogretailers,orfurniturewarehousesbecauseoftheircommitmenttocost-piuspric-

ing.Anotherdisadvantageis thatit doesnottakeintoaccountconsumers' perceptionsofa

product's value. Finally,a company's costsmayfluctuatesoconstantpricechangingis not

a viablestrategy.

Whenmiddlemenusetheteonmark-Up,theyarereferringtothedifferencebetween

theaveragecostandpriceofallmerchandiseinstock,fora particulardepartment,orfor

anindividualitem. Thedifferencemaybeexpressedindollarsorasa percentage.Forexam-

ple, a man's tiecosts$4.60andis soldfor$8. Thedollarmark-upis $3.40.Themark-up

maybedesignatedasa percentofsellingprice0;asa percentofcostofthemerchandise.

Inthisexample,themark-upis74%ofcost($3.40/$4.60)or 42 .5%oftheretailprice

($3.40/$8).