Pricing Why don’t businesses charge customers the price they pay for the goods they sell?
Unit 8 Vocabulary Break-even Point Bundle Pricing Cost-plus Pricing Everyday Low Prices (EDLP) Flexible-price Policy Geographical Pricing Law of Diminishing Marginal Utility Loss Leader Market Share Market Position Markup Pricing Return on Investment One-price Policy Penetration Pricing Prestige Pricing Price Price Discrimination Price Fixing Price Lining Product Mix Pricing Strategies Promotional Pricing Psychological Pricing Seasonal Discounts Segmented Pricing Strategy Skimming Pricing Trade Discounts Unit Pricing
Unit 8 Essential Question What are the various pricing strategies utilized to maximize return and meet customer’s perception of value?
What is nature and scope of the pricing function? Essential Question 1 Pricing
Pricing How does price relate to value? What products would you be willing to buy even if it meant not being able to buy other products? What is the maximum you would be willing to pay for the product?
Price Planning What is Price? Price is the value of money (or its equivalent) placed on a good or service.
Relationship of Price to Product Value Value is a matter of anticipated satisfaction. The seller’s objective is to set price high enough to make a profit and yet not so high that it exceeds the value potential customers place on it.
Importance of Price It is a major factor in the success or failure of a business. It helps establish and maintain a firm’s image, competitive edge, and profits.
What is the difference between market share and market position as it relates to price? Essential Question 2 Pricing
Market Share v. Position Market Share: A firms percentage of the total sales volume generated by all competitors in a given market. Market Position: A firms rank, based on sales volume, compared to all competitors in a given market.
How does markup, markdown, sales price, discount dollars and discount percentage compare and contrast? Essential Question 3 Pricing
Price Calculations Cost: The total amount a firm pays for a product. Retail Price: The amount a firm sells its products for. Markup: The dollar amount added to the cost to reach the retail price.
Price Calculations Margin: The percent of markup. One margin point is equal to one percent markup. Sales Price: Temporary price of a product below the retail price.
Price Calculations Markdown: The amount subtracted from the retail price to reach the sales price. – –Discount Dollars: The dollar amount marked down from the retail price to the sales price. – –Discount percentage: The percentage marked down from the retail price to the sales price.
Price Calculations Wanda’s Manufacturing purchases widgets from Marketing Parts Wholesalers for $100 and resells them for $150. – –What is the cost of widgets? – –What is the retail price of widgets? – –What is the markup of widgets? – –What is the margin of widgets? – –How much profit is made on the sale of each widget?
Price Calculations Wanda’s Manufacturing has a surplus of widgets and is offering an incentive by selling widgets at $112.50. – –What is the retail price of widgets? – –What is the sales price of widgets? – –What is the dollar markdown of widgets? – –What is the percent markdown of widgets?
What are the factors that affect price? Essential Question 4 Pricing
Costs and Expenses –Break-even Point: The point at which the money from product sales equals the costs of making and distributing the product. –( Number of Units) = Supply and Demand –Elasticity depends on: Availability of substitutes. Price relative to income. Luxury versus necessity. Factors Affecting Prices ______________ Fixed Expenses Unit Sales Price - Variable Expenses
Factors Affecting Prices Consumer Perceptions – –Consumers tend to equate high prices with quality, status, prestige, and exclusiveness. Competition – –Price Competition - Competition based on assumption that customers will purchase lower price. – –Nonprice Competition - Competition based on other marketing factors.
Factors Affecting Prices Government Regulations – –Price Fixing: Where competitors agree on certain price ranges within which they set their own price. Price fixing (collusion) is illegal because it eliminates competition. – –Price Discrimination: Occurs when a firm charges different prices to similar customers in similar circumstances. Price Discrimination is illegal.
Factors Affecting Prices Technological Trends – –The major technology trend affecting business today is the internet. – –Business that adapt to technological changes can create a competitive edge. – –Business that do not adapt to technological change could become obsolete.
What are the key price mix strategies? Essential Question 5 Pricing
The Pricing Concept The combination of pricing strategies, pricing policies, and pricing techniques in combination with the business’s pricing goal.
Gain Market Share –A firm’s percentage of the total sales volume generated by all competitors in a given market. Goals of Pricing Return on Investment: – –Used to determine the relative profitability of a product. – –Is calculated by profit divided by investment.
Meet the Competition –Some companies simply price their product the same as the competition. –The price is either same as the industry leader or the average price of the industry. Goals of Pricing
Basic Price Strategies Cost-Based Pricing: - Cost of product plus the cost of doing business plus your projected profit margin (markup). Demand-Based Pricing - Determine what customers are willing to pay and set the price accordingly. –Demand must be inelastic. –Customers must believe the product is different or of greater value. Competition-Based Pricing - You determine whether to price above, below, or in line with the competition.
Pricing Policies Flexible-Price Policy: – –Allows customers to haggle over price. – –Takes into account changing market conditions such as shifts in demand and prices of competitors. One-Price Policy: – –Tells customers they are treated equally. – –Strongly recommended for service businesses.
Pricing Techniques Psychological Pricing: Based on the belief that customers base perceptions of a product on price. –Prestige Pricing: Uses higher than average prices to suggest exclusiveness, status, and prestige. –Odd/Even Pricing: Uses odd prices ($19.99) to suggest bargains. Uses even prices ($20.00) to suggest higher quality. –Price Lining: Prices items according to category. –Promotional Pricing: Offers lower prices for a limited period to generate sales.
Pricing Techniques Discount Pricing: Offers reductions from the regular price to customers. –Cash Discounts: Normally given to customer for prompt payment. »2/10, n/30 –Quantity Discounts: Encourages buyers to order large amounts. –Trade Discounts: Given to distribution-channel members who provide marketing services for the manufacturer. –Promotional Discounts: Manufacturers pay wholesalers or retailers for carrying out promotional activities for the manufacturer. –Seasonal Discounts: Used for products which have a heavy seasonal demand.
What is the impact of product life cycles on marketing decisions? Essential Question 6 Pricing
If you were to classify the human life cycle into 4 phases, what would they be? How would you equate the human life cycle to the product life cycle? Pricing
Product Life Cycle All products move through a four stage life cycle. Introduction –Skimming Pricing: Charging a high price to recover costs then dropping the price when the product is no longer unique. –Penetration Pricing: Charge a low price to build customer base and discourage competition.
Product Life Cycle Growth –Sales increase and unit costs decrease. –If you skimmed you will need to lower price to expand customer base. –If you were penetrating, little to no change is necessary.
Product Life Cycle MaturityMaturity –Need to look for new markets and possible product improvements to hold prices. Decline –Cut prices to stimulate sales and clear inventory.