Here are some demand-oriented
approaches to pricing:
Skimming pricing. When you
are offering a new or innovative product you can initially charge a high price,
since the "early adopters" aren't very price sensitive. Then you
lower prices to "skim" off the next layer of buyers, etc. Eventually,
the price will drop as the product matures and competitors offer lower prices.
Penetration pricing. You
set a low initial price in order to penetrate quickly into the mass market. A
low initial price discourages competitors from entering the market, and is the
best approach when many segments of the market are price sensitive. Amazon.com,
for example, offers a discount price and may lose money on the first sale, but
this way they gain more customers who will purchase products later at a lower
marketing cost (since it costs much less to attract them back for the second or
third sale if they are happy with their first purchase experience).
Prestige pricing. Cheap
products are not taken seriously by some buyers unless they are priced at a
particular level. For example, you can sometimes find clothing of the same
quality brand at Nordstrom as you do at the Men's Warehouse. But because it is
priced higher, Nordstrom's clientele believes it to be of higher quality.
Odd-even pricing takes
advantage of human psychology that feels like $499.95 is less than $500.
Studies of price points by direct marketers have found that products sell best
at certain price points, such as $197, $297, $397, compared to other prices
slightly higher or lower. Strange, we humans!
Demand-backward pricing is
sometimes used by manufacturers. First, they determine the price consumers are
willing to pay for a product using an approach such as Make Your Price Sell!
(http://sales.sitesell.com/myps ) automates. Then they work backward through
the standard markups taken by retailers and wholesalers to come up with the
price they can charge wholesalers for the product.
Bundle pricing is offering
two or more products together in a single package price. This can offer savings
to both the buyer and to the seller, who saves the cost of marketing both
products separately. And the customer is willing to pay more because he
perceives that he is getting a lot more, even though the cost to the seller may
not really be that much more.
Here are some cost-oriented
approaches to pricing that I'm sure you are familiar with:
Standard mark-up pricing.
Typically a manufacturer marks his price up 15% over his costs, a wholesaler
20% over his costs, and a retailer 40% over his costs. The retailer gets a
larger markup based on the idea that, since he is closest to the end user, he
is required to spend more services and individual attention meeting the buyer's
needs.
Cost-plus pricing adds a
small percentage to the retailer's costs -- and "cost plus 5%" sounds
so modest in ads for new cars! Ah! If only it were that simple. :-)
Experience curve pricing
assumes that it costs a company less to produce a product or provide a service
over time, since learning will make them more efficient.
Then there are
competition-oriented approaches to pricing that you'll recognize:
Customary pricing is where
the product "traditionally" sells for a certain price. Candy bars of
a certain weight all cost a predictable amount -- unless you purchase them in
an airport shop.
Above-, at-, or below-market
pricing. Certain stores advertise "low cost" or
"discount" pricing. Others price at the market, while others
deliberately price above-the-market at premium prices to attract prestige
buyers.
Loss-leader pricing works
on the basis of losing money on certain very low priced advertised products to
get customers in the door who will buy other products at the same time.
Flexible-price policies
offer the same product to customers at different negotiated prices. Cars, for
example, are typically sold at negotiated prices. Many B2B sales depend on
negotiated contracts.
Once you have determined the
list or quoted price you can make some special adjustments still.
Quantity discounts
encourage customers to buy larger quantities, and thus cut marketing costs.
Seasonal discounts
encourage buyers to stock inventory earlier than their normal demand would
require. This enables the manufacturer to smooth out manufacturing peaks and troughs
for more efficient production.
Rebates, such as $40 off
Microsoft FrontPage 2000, are usually offered by the manufacturer, but
sometimes a retail store will offer its own rebate. Rebates make marketing
sense, since they strongly motivate sales, but often less than 50% of the
buyers will remember to collect the receipt, proof-of-purchase, and rebate
form, fill it out, and mail it prior to the expiration date. And, of course,
the rebate is often subtracted from the list price of the item, which still has
considerable profit built in. Rebate marketing is less than half as expensive
to the marketer as the price cut would seem to indicate.
Trade discounts are
offered by manufacturers to distributors or resellers in their distribution
chain. For example, a manufacturer may quote list price of $1000 less 30/10/5,
meaning 30% off the list price to the retailer, an additional 10% off the $1000
to the wholesaler, and an additional 5% off the $1000 to the jobber. This
pricing will be expected if you have an online B2B store.
Cash discounts are
sometimes offered for the costs saved from not having to extend credit and bill
the buyer on an open account. This mainly affects B2B sales rather than retail.
Allowances may be permitted for
trade-ins (not too many trade-in cars shipped by modem though) or by a
manufacturer for promotional advertising that a retailer undertakes.
Geographic adjustments
involve FOB (freight on board) pricing at the point of shipping.