Blog 7: Final Price

In my last post, I talked about the importance of price and how marketers make pricing decisions by evaluating the value of the product in the minds of consumers. However, there are many more technical decisions that marketers make when deciding price. Marketing managers need to select an approximate price level by choosing one of the four approaches. These approaches are demand-oriented, cost-oriented, profit-oriented, and competition-oriented. Within each approach are even more options for setting the final price. Let’s analyze each of the approaches.

A demand oriented approach focuses of customer’s tastes and preferences rather than cost, profit, or competition. Among demand-oriented pricing there is skimming pricing, penetration pricing, prestige pricing, price lining, odd-even pricing, target pricing, bundle pricing, and yield-management pricing. Let’s particularly focus on odd-evening pricing, which is very common and definitely something us as consumers come face-to-face with every day. When I was little I never used to understand why things were priced at values such as $9.99. I would always wonder why they wouldn’t just make it $10 to make it easier on everyone. Odd-even pricing is setting the price a few dollars or cents under an even number. The presumption is that people will perceive the product as above $9 rather than about $10. While people may think they are unaffected by the one cent difference, there is evidence to show this pricing strategy can increase demand. Personally, in my head if I see something marked $9.99, I immediately translate it to $10. But if marketers say this strategy works, then why not continue using it. 

Next, we’ll talk about cost-oriented approaches, which are focused the production and marketing costs that it takes to make a product. Cost-oriented pricing approaches include standard markup pricing, cost-plus pricing, and experience curve pricing. Standard markup pricing is adding a fixed percentage to the cost of all items in a specific product class. The markups are designed to cover the expenses of the store and contribute to profits. In movie theaters, mark-ups on snacks and beverages are much higher than of that in a supermarket. If snacks and beverages weren’t marked up, the cost of a ticket would be much more expensive.

Profit oriented pricing approaches aim to balance revenues and costs to set price. This includes target profit pricing, target return on sales pricing, and target return on investment pricing. A target profit approach specifies a target profit for a specific year. Once marketers specify a target, they consider the variable and fixed costs to produce a product and factor in demand. The price is then calculated by figuring out how much each product will have to cost in order to reach the target profit.

Lastly, I will talk about competition-oriented pricing approaches, which focuses on what competitors or the market is doing. These approaches include customary pricing, above-, at-, or below- market pricing, and loss leader pricing. Loss leader pricing is when stores deliberately sell a product below its customary price in hope of attracting customers. Large retail stores often use this type of approach. Target may offer a product at a significantly lower price than competitors in order to attract people to their stores. Normally if people go to target they won’t just buy one thing when there are thousands of other products you are bound to need.

Marketers need to determine their pricing approach based on what they think is going to be the most beneficial to their company and their customers. It’s actually nice to know how much consideration goes into choosing what to price a product at. I would like to think marketers try to consider the customer (me) as much as possible.

References:
http://www.consumerschoiceaward.com/blog/post/2012/12/21/Psychological-Pricing-Why-Do-Most-Prices-End-in-95-cents.aspx
http://www.dburk.com/index2.asp