Customary pricing

Customary pricing
See also
Contribution margin ratio Category Killer Trade discount Flexible pricing Production concept Discount pricing Low cost strategy Special offering Price bundling

Customary pricing occurs when a retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time. Movies and vending-machine products are common examples of items that use customary pricing. Here retailers, such as movie theaters with their $8 ticket prices, seek to establish prices that customers can take for granted over long periods of time.

Setting an appropriate price for a product is often much more difficult than it appears. If only one insignificant detail of the pricing procedure is overlooked or misjudged, major troubles can develop for the firm. Products are not prized in all countries, so what some may be willing to pay highly for, others may not. In a foreign environment any assumption concering a product's "special value" is dangerous. Unless the market is clearly stablished, the implementation of a high pricing strategy is not likely to achieve high sales volumes.

Customer price sensitivity

Fig.1. Pricing strategies classification using price, promotion and quality

Responding to locational differences in customer price sensitivity can substantially increase a retailer's profits. Given the availability of scanner data on sales and prices in many retailing operations, it is often practical to base these zones on empirical measurement of customer price sensitivity. Further, if an outlet's customer price sensitivity is tracked separately for different products, then a retailer can set a zone's prices higher for some products but lower for others. For example, a supermarket might find it profitable to increase the gap between national brands and store brands in more affluent neighborhoods because the national-brand buyers there may show very little price sensitivity, but the store-brand shoppers there might be highly price-sensitive.

Pricing strategies

Psychological pricing strategies encourage purchases based on emotional responses rather than on economically rational responses. These strategies are used primarily for consumer products rather than business products.These are:

• Odd-number pricing is the strategy of setting prices using odd number that are slightly below whole-dollar amounts. Nine and five are the most popular ending figures for odd-number prices.
• Multiple-unit pricing setting a single price for two or more units, such as two cans for 99 cents rather than 50 cents per can. Especially for frequently purchased products, this strategy can increase sales. Customers who see the single price and who expect evetually use more than one unit of the product regularly purchase multiple units to save money.
• Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive model or brand in the hope that the customer will use the higher price as a reference price. Because of the comparison, the customer is expected to view the moderate price favrably.
• Bundle pricing is the packing together of two or more products, usually of a complementary nature, to be sold for a single price. To be attractive to customers, the single price usually is considerably less than the sum of the prices of the individual products.
• Everyday low prices to reduce or eliminate the use of frequent short-term price reductions. Marketer sets a low price for its products on a consistent basic rather than setting higher prices and frequently discounting them.
• Customary pricing certain goods are priced primarily on the basis of tradition. Examples of customary, or traditional, prices would be those set for candy bars and chewing gum

Examples of Customary pricing

• Fast food restaurants, such as McDonald's, typically use customary pricing for their menu items. Prices for hamburgers, fries, and other items are generally consistent across locations, and customers can expect to pay the same amount for their meal regardless of their location.
• Gasoline prices are also often set on a customary basis. Prices tend to remain relatively consistent between locations, and customers can expect to pay the same amount for a gallon of gas regardless of where they purchase it.
• Clothing retailers also often use customary pricing. Many stores will have consistent prices for their items, such as a $20 t-shirt or a $50 pair of jeans.
• Grocery stores often use customary pricing as well. Prices for items such as milk, eggs, and bread are generally consistent between stores, and customers can expect to pay the same amount for those items regardless of where they purchase them.

Advantages of Customary pricing

Customary pricing has several advantages that make it attractive to retailers. It can provide a sense of stability and consistency to customers, and create an expectation of value. It can also help retailers to maintain a certain level of profitability by keeping prices stable over time. Additionally, customary pricing can help to build loyalty among customers, as they know they can rely on the same prices over a period of time. *Customary pricing also allows retailers to keep track of their costs and profit margins more easily, as they don't have to continually adjust their prices. *Finally, customary pricing can be used to differentiate a retailer from its competitors, as customers may be more likely to choose a retailer with stable prices.

Limitations of Customary pricing

Customary pricing has its limitations. These include:

• Inability to react quickly to changes in the marketplace: Because customary pricing is based on long-term price stability, it doesn't allow retailers to respond quickly to changes in the market, such as competitor pricing or new customer needs.
• Difficulty competing on price: When prices don't fluctuate, it can be difficult for retailers to compete on price. This can be especially true when competitors offer discounts or sales prices.
• Limiting profit potential: Customary pricing can limit profit potential for retailers, as it can be difficult to raise prices without alienating customers. Additionally, retailers may not be able to capture new customers by lowering prices.

Other approaches related to Customary pricing

Customary pricing is just one approach used by retailers to set prices for goods and services. Other approaches related to customary pricing include:

• Price Discrimination: Price discrimination is the practice of charging different prices to different customers for the same product or service. This is usually done to maximize profits by taking advantage of different customers’ willingness to pay different prices.
• Price Skimming: Price skimming is a pricing strategy in which a product is initially sold at a high price, then gradually lowered over time. This allows the company to maximize profits while still appealing to customers who are willing to pay a lower price.
• Bundling: Bundling is a pricing strategy in which multiple products or services are combined into one package or bundle for a discounted price. This allows the company to attract customers by offering a discount, while still making a profit.
• Loss-Leader Pricing: Loss-leader pricing is a pricing strategy in which a product is sold at a loss in order to attract customers. The idea is that customers will purchase other items at regular prices, making up for the lost profits on the discounted item.

In summary, there are several approaches related to customary pricing, including price discrimination, price skimming, bundling, and loss-leader pricing. Each approach seeks to maximize profits while still appealing to customers.

References

• Dunne P.M., Lusch R.F., Carver J.R., (2010). Retailing, Cengage Learning, Ohio.
• Pride W., Hughes R., Kapoor J., (2009). Business, Cengage Learning, Ohio.
• Ricks D.A., (2009). Blunders in International Business, John Wiley & Sons, Carlton.
• Schindler M., Schindle R., (2011). Pricing Strategies: A Marketing Approach, Sage, New Delhi.

Author: Dawid Barcik