Pricing terminology
Can be known as one of the biggest problems faced by small business owners in setting the right price for new product or service. The price needs to cover costs to generate a profit, but must also take account of what competitors are charging and how much customers are willing and able to pay.
Many new business owners are not really clear about costing and pricing terminology and what the definitions mean. This uncertainty can make it difficult to set a price and can affect the preparation of accurate cash flow forecasts and meaningful business plans.
Factors that influence pricing strategies in consumers and government sectors
1) Price Sensitivity
2) Legal Constraint
3) Competition
4) Cost
1) Price Sensitivity
Generally, as the price of a product increase, the sales for the product will decrease because fewer customers feel the product is a good value. Such inflation in current situation, price sensitivity become more important and big issues among the customers. This can be happen because increasing in price and fall in the purchasing power of money. So, retailer must be alert about this situation to maintain in market.
2) Legal Constraint
The rules have been set up by government and must be followed by retailers. The rules is come out to protect customer or maintaining relation in market between retailers and customers. The retailers can be punished if break the rules.
Example of legal like :
1) Such the maximum price of basic food such rice, oil, flour, sugar and salt are determined by
government.
2) The policy market penetration of new product by retailers.
3) Ethical pricing issues
3) Competition
It is the rival in setting price by retailers to attract more customers and become leader pricing in market competition. Retailers can set price above, below or parity with the competition. The chosen pricing policy must be consistent with the retailer’s overall strategy and its relative market position. It is closely related with price sensitivity. Customers will make purchase at other retailers if our price product is more than competitors.
In this case retailers attempt to be low-cost retailer for merchandise it sells. Retailers try to price the products it sells below its competitors. It is more valuable for customers if the product sales in very good quality then can be satisfied customers expectation.
4) Cost
Each retailers want to generate profit from their run business. In setting price, retailers need to be consider about cost before make a pricing. Fixed cost and variable cost are the cost that must be known by retailers. They need to cover these cost and make markup price as not loss in long term.
1.0 State factors influencing pricing strategies of:
Manufacturers
a) Manufacturer set their prices to retailers by estimating final retail prices and then subtracting required retailer and wholesaler profit margin.
b) Usually want a certain image and to enable all retailers, even inefficient ones, to earn profit.
c) Manufacturers dislike gray markets goods since they are often sold at low price by unauthorized dealers.
d) On other hand with EDLP (everyday low price), manufacturer tent to eliminate the special trade allowance designed to encourage retailer to offer price promotion during the year. Wal-Mart and IKEA are among the retailer successfully utilizing.
e) Example cases- in the men’s, apparel industry, the common retail markup is 50 percent of the final price. Thus, man’s shirt retailing at $50 can be sold to the retailer for no more than $25. If a wholesaler is involved, the manufacturer’s wholesale price must be far less than $25.
Wholesalers
a) Wholesale" is the resale (sale without transformation) of new and used goods to retailers, to industrial, commercial, institutional or professional users, or to other wholesalers, or involves acting as an agent or broker in buying merchandise for, or selling merchandise to, such persons or companies.
b) Wholesalers frequently physically assemble, sort and grade goods in large lots, break bulk, repack and redistribute in smaller lots.
c) Example retailers (MYDIN)- buy bundle and sell the product in quantity that the retail needs.
Suppliers
a) Can control prices by using exclusive distribution, not selling to price-cutting retails on being its own retailers.
b) Other supplier : employees, fixtures manufacturers, land-lords, and outside parties.
c) Example cases - to get its radios stocked, a new supplier might have to guarantee the $30 suggested retail price. If the retailers cannot sell the radios for $30, the manufacturer pays a refund. Should the retailer have to sell the radios at $25, the manufacturer gives back $5.
Current and potential competitors
a) For competition-oriented pricing a retailer sets its prices in accordance with competitors. The price level of key competitors are studied and applied.
b) Does not required calculation of demand curves or price elasticity. The average market price is assumed t be fair for both the consumer and the retailer. Pricing at the market level does not disrupt competition and therefore does not usually lead to retaliation.
c) Example- retail like supermarkets, fast-food firms, and gas stations may use market pricing due to their competitive industries.
Customary pricing
Excludes all prices alternatives except a single point. The traditional example has been the five-cent candy bar or package of gum with customary prices, sellers adapt the changes in costs, market condition by adjusting product size or quality assuming the buyer would consider paying only one price.
Variable pricing
Marketing strategy that allows a different price to be charged to different customers or at different times. This type of pricing is common among street vendors, antique dealers, and other small, independently owned businesses but is not practical for direct marketers, who rely upon preprinted promotion forms.
One price policy
A policy of offering the same price to every customer
Flexible pricing
A pricing method in which the price charged for some consumer shopping goods and specialty goods and for many industrial products is open to negotiation between buyer and seller; also known as Multiple Pricing and Variable Pricing.
Odd Pricing
Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £6.95 (but not necessarily mathematically odd, it could also be $2.98 or $3.90). The theory is this drives demand greater than would be expected if consumers were perfectly rational. Psychological pricing is one cause of price points.
Leader Pricing
Reduction in the price of a high-demand item to get people to come into a retail store or to encourage a direct mail purchase that may inspire additional purchases; also called loss leader pricing. It is believed that once a decision to purchase an item is made, the customer's resistance to purchasing additional items at full price will be lower. Leader pricing can be at or below the seller's own cost. The loss leader is usually a moderately priced item that most people can afford and that has a well-known normal selling price. Supermarkets usually use a staple item such as soap or coffee as a loss leader. Leader pricing may involve a single product or a complete product line.
PRICING TACTICS
Price Lining - Offer a limited number of predetermined price within a merchandise category.
- Example:
A tire store may offer at $69.99, $89.99 and $129.99 that reflect good, better, and best quality
- Customer and retailer can benefit from such as a strategy for several reasons:
. Confusion that often arises from multiple price choices is essentially eliminated. The customer can choose the tire with the low, medium, or high price.
. From the retailer’s perspective, the merchandising task is simplified. That is all product within a certain price line are merchandise together. Furthermore, when going to market, the firm buyer can select their purchase with the predetermined price lines in mind.
. price lining can also give buyers greater flexibility. If a strict formula is used to establish the initial retail price (initial markup), there could be numerous price point.
Multiple unit - Multiple-unit pricing or quantity discounts refer to the practice of offering two or more similar products or services for sale at one lower total price.
- Multiunit pricing is an example of second-degree price discrimination because customer who buy and consume more of a product are presumably more price sensitive and thus attracted by the lower prices if they buy more units.
Markup
Markup is the difference between the retail price and the cost of an item. Appropriate markup is determined to cover all of the retailers operating expenses needed to sell the merchandise and produce a profit for the retailer. For example, sporting goods retailers buy a tennis racket for $75 and sets the retail price at $125, the markup is $50.
The markup percentage:-
Markup percentage = Retail price-Cost of merchandise
Retail price Markdown
Markdown is inevitable to retailers. It is impossible to sell everything that the retailers have purchased.
When to Markdown?
There are two seasons for markdown:-
• Early markdown – early markdown are initiated when either there is a noticeable slow-moving merchandise or a product has been around in the shop for a long time, for example, more than six weeks.
• Late markdown – it will occur when retailers hold a major clearance at the late selling season. The small or prestigious retailers commonly practice late markdowns because they want to preserve the exclusive image of the shop.
How much to markdown? i. Merchandise life cycle
Highly perishable merchandise such as fashion and seasonal product require a larger markdown
ii. The original selling price
Bigger markdown promote more insensitive for customers to visit the shop.
iii. The timing of markdowns
Markdowns are simple because retailers know that they still have time to increase the size of markdown later.
iv. Overstock condition
When the quantity of a product is too huge, and demand for it is clearly slowly, retailers have to increase the size of the markdown in order to enhance the sale.
v. Needs for fund
Inventory represents a major source of funds for retailers.
What types of Markdown to implement?
- Sales
- Coupons
- Premiums
How to avoid and delay markdowns?
- Shift merchandise locations
- Train staff to use innovative selling approaches
Consumers’ Sales promotion techniques
■Price deal: A temporary reduction in the price, such as happy hour
■Loyal Reward Program: Consumers collect points, miles, or credits for purchases and redeem them for rewards. Two famous examples are Pepsi Stuff and Advantage.
■Cents-off deal: Offers a brand at a lower price. Price reduction may be a percentage marked on the package.
■Price-pack deal: The packaging offers a consumer a certain percentage more of the product for the same price (for example, 25 percent extra).
■Coupons: coupons have become a standard mechanism for sales promotions.
■Loss leader: the price of a popular product is temporarily reduced in order to stimulate other profitable sales
■Free-standing insert (FSI): A coupon booklet is inserted into the local newspaper for delivery.
■On-shelf couponing: Coupons are present at the shelf where the product is available.
■Checkout dispensers: On checkout the customer is given a coupon based on products purchased.
■On-line couponing: Coupons are available on line. Consumers print them out and take them to the store.
■Mobile couponing: Coupons are available on a mobile phone. Consumers show the offer on a mobile phone to a salesperson for redemption.
■Online interactive promotion game: Consumers play an interactive game associated with the promoted product. See an example of the Interactive Internet Ad for tomato ketchup.
■Rebates: Consumers are offered money back if the receipt and barcode are mailed to the producer.
■Contests/sweepstakes/games: The consumer is automatically entered into the event by purchasing the product.
Point-of-sale displays:-
■Aisle interrupter: A sign that juts into the aisle from the shelf.
■Dangler: A sign that sways when a consumer walks by it.
■Dump bin: A bin full of products dumped inside.
■Glorifier: A small stage that elevates a product above other products.
■Wobblers: A sign that jiggles.
■Lipstick Board: A board on which messages are written in crayon.
■Necker: A coupon placed on the 'neck' of a bottle.
■YES unit: "your extra salesperson" is a pull-out fact sheet.
■Kids eat free specials: Offers a discount on the total dining bill by offering 1 free kids meal with each regular meal purchased
Trade promotion
Discount
A straight reduction in price on purchases during a stated period of time
• Also called a price-off, off-invoice or off-list
• The offer encourage dealers to buy in large quantity or carry a new item
• Dealers can use the discount for advertising or for price reductions to their customer
Allowance
Promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way
• An advertising allowance compensates retailers for advertising the product
• A display allowance compensates them for using special displays
• Manufacturer may offer free goods, push money(cash or gifts) or free specialty advertising items
Business promotion tools
• Used to generate business leads, stimulate purchase, reward customers and motivate salespeople.
Conventions and trade shows
• Use to promote the products
• Vendors receive many benefits such as opportunities to find new sales leads ,contact customer, introduce new products, meets new customers ,sells more to present customers and educate customers with publications and educate customers with publications and visual materials
Sales contest
• Contest for salesperson or dealers to motivate them to increase their sales performance over a given period
• Sales contest motivate and recognize good company performance ,who may receive trips, cash prizes or other gifts
Rationales Sales Promotion
Consumer Promotion
• To increase short term sales
• Help to build long – term market share
Trade Promotion
• Getting retailers to carry new items and more inventory
• Getting them to advertise the product and give more shelf space
• Getting them to buy ahead
Sales Force
• Getting more sales force support for current or news products
• Getting salespeople to sign up new accounts
• Sales promotions are usually used together with advertising or personal selling
• Consumers promotions must usually be advertised and can add excitement and pulling power to ads
• Trade and sales force promotion support the firm’s personal selling process
• In general, sales promotion should be consumer relationship building
• Rather than creating only short-term sales or contemporary brand switching, they should help to reinforce the product’s position and build long-term relationships with consumers
SALES PROMOTION
Sales promotion is one of the four aspects of promotional mix. (The other three parts of the promotional mix are advertising, personal selling, and publicity/public relations.) Media and non-media marketing communication are employed for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability. Examples include:
■contests
■point of purchase displays
■rebates
■free travel, such as free flights
Sales promotions can be directed at the customer, sales staff, or distribution channel members (such as retailers). Sales promotions targeted at the consumer are called consumer sales promotions. Sales promotions targeted at retailers and wholesale are called trade sales promotions. Some sale promotions, particularly ones with unusual methods, are considered gimmick by many.
Political issues
Sales promotions have traditionally been heavily regulated in many advanced industrial nations, with the notable exception of the United States. For example, the United Kingdom formerly operated under a resale price maintenance regime in which manufacturers could legally dictate the minimum resale price for virtually all goods; this practice was abolished in 1964.
Most European countries also have controls on the scheduling and permissible types of sales promotions, as they are regarded in those countries as bordering upon unfair business practices. Germany is notorious for having the strictest regulations. Famous examples include the car wash that was barred from giving free car washes to regular customers and a baker who could not give a free cloth bag to customers who bought more than 10 rolls
Price deal
Loyal Reward Program
Cents-off deal
Price-pack deal
coupons
rebate
Advertising:
Is often thought of as the paid, non-personal promotion of a cause, idea, product, or service by an identified sponsor attempting to inform or persuade a particular target audience. Advertising has taken many different forms since the beginning of time. For instance, archaeologists have uncovered walls painted in Rome announcing gladiator fights as well as rock paintings along Phoenician trade routes used to advertise wares. From this early beginning, advertising has evolved to take a variety of forms and to permeate nearly every aspect of modern society. The various delivery mechanisms for advertising include banners at sporting events, billboards, Internet Web sites, logos on clothing, magazines, newspapers, radio spots, and television commercials. Advertising has so permeated everyday life that individuals can expect to be exposed to more than 1,200 different messages each day. While advertising may seem like the perfect way to get a message out, it does have several limitations, the most commonly noted ones being its inability to (1) focus on an individual consumer's specific needs, (2) provide in-depth information about a product, and (3) be cost-effective for small companies.
Institutional advertising
Definition 1:
Promotional message aimed at creating an image, enhancing reputation, building goodwill, or advocating an idea or the philosophy of an organization, instead of sales promotion. When employed by a firm to market itself (instead of its products), it is called corporate advertising. Cth: One example of institutional advertising would be Philip and Morris where they promote quitting smoking and a site for support and help on television.
Another example would be alcoholic advertisements encouraging drinkers to not drive drunk.
Definition 2:
Institutional advertising takes a much broader approach, concentrating on the benefits, concept, idea, or philosophy of a particular industry. Companies often use it to promote image-building activities, such an environmentally friendly business practices or new community-based programs that it sponsors. Institutional advertising is closely related to public relations, since both are interested in promoting a positive image of the company to the public. As an example, a large lumber company may develop an advertising theme around its practice of planting trees in areas where they have just been harvested. A theme of this nature keeps the company's name in a positive light with the general public because the replanting of trees is viewed positively by most people.
Promotional advertising
Definition 1:
That is aimed at informing the prospects about special discounts, sale, or schemes.cth: One example of promotion advertising is to advertise the business or cause on an item. Some popular items used are sticky note pads, bags, business card magnets, key chains etc.
this is an excellent form of advertising and creates good branding. You see the company information all over the place, depending on what the item is that was used.
Definition 2:
Cooperative advertising is a system that allows two parties to share advertising costs. Manufacturers and distributors, because of their shared interest in selling the product, usually use this cooperative advertising technique. An example might be when a soft-drink manufacturer and a local grocery store split the cost of advertising the manufacturer's soft drinks; both the manufacturer and the store benefit from increased store traffic and its associated sales. Cooperative advertising is especially appealing to small storeowners who, on their own, could not afford to advertise the product adequately.
Cooperative advertising
Definition 1
Agreement between a manufacturer and a member of distribution chain (distributor, wholesaler, or retailer) under which the manufacturer shares a certain percentage of the member's advertising and promotion costs, or contributes a fixed sum.
Definition 2
Agreement between two or more marketers with complementary products (such as cosmetics and toiletries) or different seasonal sales cycles (such as raincoats and winter coats) to promote or sell each other's products with their own. Also called cooperative marketing or co-marketing.
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