Pricing

Price Bundling

This is the practice of giving the customers the option of buying several items or services for a single price. A furniture retailer might offer customers a sofa and love seat combination at a price somewhat lower than the two goods would cost if bought separately. Similarly, a landscaper might lure customers by offering two free months of lawn maintenance with any major landscaping job. These approaches, all pricing approaches, depend on precise pricing, at least for internal purposes, of each item—and good ability to predict volume changes due to the strategy.

Multiple Pricing

Similar to price bundling, multiple pricing is the practice of selling multiples of a unit for a single price—two for the price of one, $10 for 10, and endless combinations. This sort of pricing is used for moving low-cost items in that few people will buy three cars for the price of two—even if offered.

Cost-Plus Pricing

This method is the standard method of pricing everything initially, as described above. It combines all direct costs, apportions overhead to each product, and then adds the necessary profit margin, the "plus." Cost-plus should be the foundation on which all else is based.

Competitive Pricing

Some small business owners choose to base their own prices on the prices of their principal competitors. Business owners who choose to follow this course, however, should make sure that they look at competing businesses of similar size and strength. Competitive pricing among service-oriented businesses is more difficult to achieve, first because competitive pricing is difficult to discover and second because service jobs are more more variable than identical products spat out three a second by an automated system.

Pricing Above Competition

Oddly enough this strategy is used both in very up-scale and in rather poor areas. In the first the high income of the population permits an upward bias and is in part justified by providing convenience and ambiance. In poor neighborhoods prices are frequently higher than in middle-class neighborhoods because accessible outlets are few, the population has less access to transportation, and the merchant can therefore use his or her presence alone as a wedge and leverage. "Ghetto" pricing tends often to be of this nature, alas.

Pricing Below Competition

Pricing below competition is the practice of setting one's prices below those of its competitors. Commonly employed by major discount chains such as Wal-Mart—which can do so because its purchasing power enables it to save on its costs per unit—this strategy can also be effectively used by smaller businesses in some instances (though not when competing directly with Wal-Mart and its ilk), provided they keep their operating costs down and do not spark a price war. Indeed, the smaller profit margins associated with this pricing strategy make it a practical necessity for participating companies to: exercise tight control over inventory; keep labor costs down; keep major operational expenses such as facility leases and equipment rental under control; obtain good prices from suppliers; and make effective use of its pricing strategy in all advertising.

Price Lining

Companies that engage in this practice are basically hoping to attract a specific segment of the community by only carrying products within a specified price range. Here, again, very high-end retail (Cartier, Furla, Tiffany & Company) and very low-end ("Dollar stores") ultimately use the same strategy. Advantages sometimes accrued through price lining practices include reduced inventory and storage costs, ease of merchandise selection, and enhanced status or large volume. Analysts note, however, that this strategy frequently limits the company's freedom to react to competitors' pricing strategies, and that it can leave businesses particularly vulnerable to economic trends.

Odd Pricing

Odd pricing is used in nearly all segments of the business world today. It is the practice of pricing goods and services at prices such as $9.95 (rather than $10) or $79.99 (rather than $80) because of the conviction that consumers will often round the price down rather than up when weighing whether to make a purchase. This little morsel of pricing psychology has become so universally employed that many observers rightly question its value. Everybody rounds up, not down. But the practice remains widespread and is practiced worldwide.

Other commonly used pricing policies include penetration pricing and skimming pricing (for manufacturers) and loss leader pricing (for retailers). Both subjects are discussed in more detail elsewhere in this volume.

REAL PRICE AND NOMINAL PRICE

For national accounting purposes and to help all sectors of the economy calculate adjustments to pensions, changes in prices for the same goods or services are calculated by using the Consumer Price Index (CPI), prepared and published at monthly intervals by the U.S. Bureau of Labor Statistics. CPI is calculated by systematically pricing all manner of goods and services in the dollars of the day, the actual dollars charged. This is then labeled the "nominal price." The nominal price today is compared with prices for identical "shopping baskets" of goods and clusters of services (e.g., rents, education, fuels, etc.) in an earlier period. If one basket is priced in 2006 and another in 1996, the total price will be different yet will have purchased the same goods and services. CPI data, therefore, can be used to calculate inflation or deflation between two periods. If a dollar's worth of purchases in 1996 cost $1.27 in 2006 (the actual change between the years), the inflation rate has been 27 percent. Thus a couple who received $40,000 in pensions in 1996 would have to have $50,800 in 2006 to have the same standard of living. Using simple arithmetic, it is thus possible to express prices at any time in the past in dollars comparable to any other time. This is called "real price," i.e., price with inflation removed. Real dollars are always associated with a year. Thus when people speak of real 2000 dollars, they mean that all values are expressed in values of the dollar as it had in 2000. Because inflation is increasing, someone earning $75,000 in 2006 earned only $64,500 in 2000 dollars because of the inflation between the two years.