Pricing

Price Planning

Price Planning

$ Goals in Price$ Factors in Price$ Price in Supply &

Demand$ Government

Regulations

Price

$ Value of money placed on a good or service$ Items are not worth anything until a

customer is willing to pay for them

$ Barter$ Oldest form of pricing$ Exchanging on product for another

Value

$ How much is the customer willing to pay

$ Primary goal of pricing is not to make a profit, but to exceed customer value$ A customer determines value through

anticipated satisfaction$ Will this product satisfy my need?

Forms of Price

$ Tolls$ Rent$ Interest on loans or savings$ Tuition$ Retail$ Salaries

Importance of Price

$ Pricing plays a large role in the success of a firm

$ Higher prices often portray higher quality$ Companies must live up to that image

$ Lower prices portray better value$ Advertising strategies can be based

on price, think Wal-Mart

Profit from Price

$ Profit = Price * Quantity sold$ To make more profit you need to

increase price or quantity$ Higher prices will not always lower

sales$ Lower prices will not always increase

sales$ Must keep costs stable to increase

profit

Gaining Market Share

$ Market share is the firm’s percentage of total sales volume in a given market

$ Market position is the rank in relation to other companies$ Must track the size of the market & growth

of competitors

$ Will change prices, product or message to increase share or position

Return on Investment

$ Percentage of money that a company wants to get back from sales

$ Often dictates price level$ If a company wants to have a 15%

return, they will need to sell their item for 15% more than it cost to make it

Competition Pricing

$ Some companies price products to be equal to competitors price$ Typically occurs when items are very

similar across brands, i.e. soda, cookies, soup

$ When price is all the same, must compete based on quality, service and convenience

Factors in Pricing

$ Price must take into account costs & expenses of operating a business$ These costs are passed onto the

consumer

$ Pricing is a key part of an operation that will achieve the goal of business$ Whether that goal is to increase market

share or profit

Costs & Expenses

$ Increasing price$ When sales decrease, a company will

want to increase prices to maintain profit

$ This will hold margins the same, and even increase them if sales recover

$ However, consumers often respond negatively to higher prices

Costs & Expenses

$ As other costs increase, other methods of keeping profit the same:$ Reduce size

$8 cans instead of 12$3.5 oz candy bars instead of 4oz

$ Eliminate portions of service$An airline in the early 90’s saved thousands

of dollars eliminating one olive from salads

$ Improve product$Justifies higher cost

Costs & Expenses

$ Decreasing price$ Competitive firms are constantly looking

to improve efficiency or obtain less expensive materials

$ As costs decrease, a company could lower prices, or keep them constant to increase profit

Costs & Expenses

$ Break-Even point$ Making a profit is of greatest concern

when changing prices or introducing a new product

$ The break-even point is the point at which sales revenue equals costs

$ After this, all sales are recorded as profit

$ What is the relationship between supply, demand and price?$ As price increases demand $ As price decreases demand

$ Not all products respond to this general rule

$ The degree to which a product responds is referred to as Demand Elasticity

Supply & Demand

Increases

Decreases

Demand Elasticity

$ Elastic demand is when a change in price causes a change in demand

$ As prices fall, demand will rise$ Law of diminishing marginal utility

$ States that a consumer will only purchase so much of a product regardless of price

$ When price does not effect demand, it is referred to as inelastic demand

Factors of Elasticity

$ Availability of substitutes$ Readily available substitutions lead to

demand elasticity

$ Brand loyalty$ High loyalty leads to demand inelasticity

$ Luxury v Necessity$ Luxuries are elastic, necessities are not$ Relative to individual

Factors of Elasticity

$ Price relation to income$ An increase in price relatively high

compared to income will lead to an elastic demand

$ Urgency of purchase$ Immediate needs will lead to inelastic

demand

Consumer Perceptions

$ What consumers believe about the product

$ High price often reflects prestige or status

$ Company can limit quantity to portray scarcity and increase value

$ Better service increases perceived value$ Avis slogan “We try harder”

Competition

$ Price Competition$ Companies lower prices to get a bigger

market share$ Result could be a price war, often leads

to financial ruin for the companies involved

$ Non-Price$ Find some way to differentiate without

changing price

$ All things equal, people buy on price

Government Regulations

$ Price Fixing$ Price Discrimination$ Resale Price Maintenance$ Minimum Price$ Unit Price$ Price Advertising

Price Fixing

$ Competitors agree on a certain range of prices

$ Must have proof of collusion$ Eliminates free enterprise and power

of consumers$ 1999, Hoffman-LaRoche and BASF

found guilty and fined $725 million

Price Discrimination

$ Different prices for similar customers$ Intended to help small stores, since

they could not purchase the volume of large stores

$ Permissible when$ Products are physically different$ Non-competing buyers$ Increase in costs of production

Resale Maintenance Price

$ Deals with price at the retail level$ Stores buy from manufacturers and

resell to the public$ Distributors may not “coerce” stores

into selling for a certain price, they may however “suggest” a level

Minimum Price Laws

$ State laws enacted to prevent stores from selling below cost$ Not every state has these laws, some

are federally mandated, i.e. milk

$ In states without these laws, stores have a loss leader, product that is sold at a loss to get people into the store.

Unit Pricing

$ Allows consumers to compare prices based on standard unit of measure

$ Makes it easier for consumers to compare prices

$ Think of shelves at the supermarket

Price Advertising

$ Companies are not permitted to advertise a price reduction unless the regular price was advertising regularly and for a “reasonable” period of time

$ Bait-and-switch$ A tactic in which a store advertises a lower

price for an item they do not intend to sell, and substitute with a higher priced item