Meaning of priceSignificance of priceConcept of price and value relationshipPricing objectivesFactors influencing priceCosts of producing and marketing a productApproaches to determining priceBreak-even analysis

GOALS

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The Steps of Price Planning

Importance of Price

Price is involved in every marketing exchange. It helps establish and maintain a firm's:

image—to some customers, high price equals quality

competitive edge—a business can attract customers by guaranteeing low prices

profits—sales price is directly related to the price and number of items sold

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The Steps of Price Planning

Marketers’ pricing goals include: gaining market share achieving a certain return on investment meeting the competition

Goals of Pricing

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The Steps of Price Planning

Market share is a firm's percentage of the total sales volume generated by all competitors in a given market.

Which brand has the largest share of the digital camera market?

Do you have more confidence in a company that has a large market share?

Market Share

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The Steps of Price Planning

Market position is the relative standing a competitor has in a given market in comparison to its competitors.

Which brand is the market leader in the U.S. cookie market?

Are you more inclined to buy a product if you know it is the market leader? Why?

Market Position

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SECTION 25.1 The Steps of Price Planning

Return on investment is a calculation used to determine the relative profitability of a product. The formula for calculating return on investment is

Profit Investment

Companies often price products to produce a certain return on investment.

Return on Investment

Break-Even Analysis

BREAK-EVEN POINT

The quantity of output at which total revenue equals total costs assuming a certain selling price

Computation of Break-Even Point

Break-Even Chart

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Calculating Prices

A business’s profit is not the same as its markup.

Markup is the difference between the cost of an item and the retail price.

Profit is what’s left over after all other expenses have been paid.

Profit vs. Markup

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Pricing Concepts

Markup pricing is used primarily by wholesalers and retailers who are involved in acquiring goods for resale. The markup must cover the business’s expenses.

Price = cost + markup (as percentage)

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Markup Pricing

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SECTION 27.1 Calculating Prices

Basic Markup CalculationsRetailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price:

Cost (C) + markup (MU) = retail price (RP)Two other formulas can be derived from this formula:

Retail price (RP) – markup (MU) = cost (C) Retail price (RP) – cost (C) = markup (MU)

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Calculating Prices

Percentage MarkupIn most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($).Most sellers compute markup based on retail price rather than cost because:

the markup on retail sounds smaller future markdowns are calculated on retail profits are calculated on sales revenue

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Calculating Prices

Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing:

Multiply the cost by the percentage markup on cost in decimal form:

C x MU(%) = MU($) Add the dollar markup to the cost to get the

retail price:C + MU($) = RP

Cost Method of Pricing

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Calculating Prices

Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?

Typical Markup PercentageProduct Category Typical Markup Percentage Based on Cost

Small Appliances (microwave, coffee maker)

Large Appliances (refrigerator, dryer)

Automobiles

Automobile Accessories (sunroof, CD player)

Clothing

30%

15%-20%

5-10%* (*note dealers make money on factor incentives and sale of accessories)

15-20%

100%

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Calculating Prices

If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price. Determine what percentage of the retail price is the cost:

RP(%) - MU(%) = C(%) (retail price would be 100%) Determine the retail price by dividing the cost by the

decimal equivalent of the cost percentage:C($) / C(%) = RP

Calculate the dollar markup:RP - C = MU($)

Retail Method of Pricing

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Calculating Prices

There is another, simpler way to calculate the sale price:

Subtract the markdown percentage from 100% (representing retail price):

RP(%) - MD(%) = SP (%) (RP = 100%) Multiply the retail price by the decimal

equivalent of the percentage sale price:RP x SP(%) = SP($)

MarkDownsCalculations for Lowering Prices

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Calculating Prices

When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown, determine the markdown percentage on retail. Then:

Determine the dollar markdown by multiplying the retail price by the percentage markdown:

RP x MD(%) = MD($) Subtract the dollar markdown from the retail price

to get the sale price:RP - MD($) = SP

MarkdownsCalculations for Lowering Prices

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Pricing Concepts

Cost-Oriented PricingIn cost-oriented pricing, marketers first calculate the costs of acquiring or making a product and their expenses of doing business; then they add their projected profit margin to these figures to arrive at a price.

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Pricing Concepts

Cost-plus pricing breaks a price down into its component parts.

Suburban Research Consultants

Cost-Plus Pricing

Questionnaire Design and $3,500Printing

Postage 400

Labor (40 hours at $30) 1,200

Refreshments 100

Expenses 350

Profit 950

Final Price to customer $6,500

Cost-plus pricing is used by manufacturers and service companies.Price = all costs + all expenses (fixed and variable) + desired profit

King’s Kastles

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Factors Involved in Price Planning

Price must be evaluated in relation to the target market and is one of the four Ps of the marketing mix. Companies can compete with:

price competition—offering lower prices nonprice competition—attracting

customers with prestige, service, or quality

Competition

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Pricing Concepts

Marketers who study their competitors to determine the prices of their products are using competition-oriented pricing. These marketers may elect to take one of three actions: price above the competition price below the competition price in line with the competition

(going-rate pricing)

Competition-Oriented Pricing

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Pricing Concepts

A basic pricing decision every business must make is to choose between a one-price policy and a flexible-price policy. A one-price policy is one in which all

customers are charged the same price for the goods and services offered for sale.

A flexible-price policy permits customers to bargain for merchandise.

Pricing Policies

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Pricing Concepts

Skimming pricing is a pricing policy that sets a very high price for a new product to capitalize on the initial high demand for a new product.

Advantages: High profit margin; may cover research and development costs.

Disadvantages: Cost must eventually be lowered; attracts competition; if price is too high no one buys.

New Product Introduction

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Pricing Concepts

Penetration pricing sets the initial price for a product very low to encourage as many people as possible to buy the product.

Advantages: Quick market penetration; can capture a large market; blocks competition.Disadvantages: Low demand leads to big losses.

New Product Introduction

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Setting Prices

Two common pricing techniques marketers use are:

psychological pricing discount pricing

Pricing Techniques

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Setting Prices

Psychological Pricing

Odd-even pricing involves setting prices that end in either odd or even numbers. Odd numbers convey a bargain image; even numbers convey quality.Prestige pricing involves setting higher-than-average prices to suggest status and prestige.

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Odd-Even Pricing Setting prices that end in either odd

or even numbers

Odd numbers convey a bargain image ($19.99)

Even numbers convey quality ($100.00)

Prestige PricingSetting higher-than-average prices to suggest status and prestige

Examples:– Perrier Water– Nike – Air Jordan’s – Lexus

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Setting Prices

Psychological Pricing

Multiple-unit pricing involves pricing items in multiples to suggest a bargain and increase sales volume.

Bundle pricing involves including several complementary products in a package and pricing them lower as a group than if they were bought separately.

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Multiple-Unit PricingPricing items in multiples to suggest a bargain and increase sales volume (3 for .99)

Suggests a bargain and helps increase sales volume.

Better than selling the same items at $.33 each.

$.99 ea.OR

3 for $2.50

Bundle PricingIncluding several complementary products in a package and pricing them lower as a group than if they were bought separately

Examples: Fast food Basic Cable Computer packages (Package deals)

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Setting Prices

Promotional pricing is generally used in conjunction with sales promotions when prices are lower than average.

Loss-leader pricing provides items at cost to attract customers.

In special-event pricing, prices are reduced for a short period of time, such as a holiday sale.

Psychological Pricing

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Setting Prices

Everyday low prices (EDLP) are low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future.Price lining involves offering all merchandise in a given category at certain prices, such as $25, $35, and $50.

Psychological Pricing

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Graphic OrganizerTypes of Psychological Pricing

EverydayLow Prices(EDLP)

PromotionalPricing

BundlePricing

Multiple-UnitPricing

Odd-EvenPricing

PriceLining

PrestigePricing

PsychologicalPricing

Psychological pricing refers to techniques that create an illusion for customers or that make shopping easier for them.

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Calculating Discounts

Discounts from Manufacturers and Distributors

Some common types of discounts offered by manufacturers and distributors are:

cash trade quantity seasonal promotional discounts

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Calculating Discounts

To calculate the cash discount: Determine the dollar discount:

P x D(%) = D($) Determine the net price:

P - D($) = NPTo determine a cash discount on a unit price, do the same calculation, with P equaling the unit price.

Cash Discounts

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Parts of a Cash Discount

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Calculating Discounts

Using a quantity price list:No. of items 1-24 25-48 49-72Unit price $.95 $.90 $.85

If you purchased 50 items, you would pay $.85 each. Your total bill would be $42.50 ($.85 X 50).

A cumulative discount is quoted as a percentage and is calculated like a cash discount.

Quantity Discount

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Calculating Discounts

Promotional discounts are given to businesses that agree to advertise or promote a manufacturer's products. When the promotional discount is quoted as a percentage, it is calculated the same way as a cash discount. If a dollar discount is given, calculate the discount percentage this way:

Divide the dollar discount by the original price of the order:

D($) / P = D(%)

Promotional Discounts

Geographic Pricing Strategies

FOB ShippingBuyer pays

FOB DestinationSeller pays

Cost of Freight

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Calculating Discounts

Trade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts: Determine the dollar discount:

P x D(%) = D($) Determine the net price:

P - D ($) = NP

Trade Discounts

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Calculating Discounts

Sellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent:

Determine the dollar discount:P x D(%) = D($)

Determine the net price:P - D($) = NP

Seasonal Discounts

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Factors Involved in Price Planning

Price fixing occurs when competitors agree on certain price ranges within which they set their own prices. Price discrimination occurs when a firm charges different prices to similar customers in similar situations.

Government Regulations Affecting Price

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Factors Involved in Price Planning

Resale price maintenance occurs when a manufacturer forces retailers to sell an item at a minimum price.Minimum price laws prevent retailers from selling goods below cost plus a percentage for expenses and profit. Some states do not have minimum price laws and allow loss leaders, items sold at cost to attract customers.

Government Regulations Affecting Price

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Factors Involved in Price Planning

Unit pricing allows consumers to compare prices in relation to a standard unit or measure, such as an ounce or a pound.The Federal Trade Commission (FTC) price advertising guidelines forbid fraudulent and misleading pricing advertisements.

Government Regulations Affecting Price

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PRICESConsumerPerceptions

Costs and Expenses

Competition

SupplyandDemand

Market Factors Affecting Prices

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Pricing Concepts

Most marketers use all three pricing policies to determine prices.

Cost-oriented pricing helps determine the price floor (lowest selling price) for a product.

Demand-oriented pricing helps determine a price range for the product.

Competition-oriented pricing ensures that the final price is in line with the company’s pricing policies.

Combining Pricing Considerations

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Setting Prices

These are the six steps in determining a price for an item:

1. Determine pricing objectives.2. Study costs.3. Estimate demand.4. Study competition.5. Decide on a pricing strategy.6. Set price.

Steps in Setting Prices