Marketing April 20, 2015 Price Planning

Discuss with your neighbor  Discuss the relationship between price and the other P’s of the marketing mix.  Product  Place  Promotion

Price Planning  Price – the amount a buyer is willing to pay and a seller is willing to accept for the exchange of goods or services

Price Planning  The value that a buyer places on a product or service impacts what they are willing to spend  Value is a matter of anticipated satisfaction  Seller must be able to gauge where a product, given its features and benefits, will rank in customer’s estimation  Objective: price high enough for profit yet not exceeding customer value

Price Planning Various Forms of Price:  Fees for services  Amount for goods  Minor charges for tolls or fares  Rent – monthly price  Interest – price of a loan  Dues – price of membership  Tuition – price you pay for education

Price Planning  Pricing may seem simple, but pricing can play an important role in the success or failure of a company  A well-planned pricing strategy can:  Establish and maintain a firm’s image  Create a competitive edge  Ensure anticipated profits

Price Planning  Higher price may mean better quality  Lower price may mean more for your money  Price can play an important role in the image and advertising  Revenue increased by selling more items or raising price per item

Goals of Pricing  Earning a profit  Gaining market share  Meeting the competition

Goals of Pricing - Profit  Return on investment (ROI) is a calculation that is used to determine the relative profitability of a product ROI = profit / investment Profit = revenue - expenses

Goals of Pricing - Profit Example: Your company sells watches to retailers for $9.00 each. Your cost (fixed and variable) to make and market the watches is $7.50. Profit is $9.00-$7.50 = $1.50 ROI is $1.50/$7.50 =.20 or 20% A company may price its products to earn a certain ROI.

Goals of Pricing – Market Share  A company may forego profits to attain a long term goal such as increased market share  Gaining market share – firm’s percentage of the total sales volume generated by all competitors in a given market  Market position – relative standing in relation to their competitors

Goals of Pricing – Meet Competition  Some companies simply aim to meet the prices of competition  Set prices based on industry leader or average price

How does one compete when there is no price competition?  Quality, uniqueness  Convenience of business location/hours  Level of service

Pair/Share  Why is price an important factor in the success or failure of a business?  Name the goals of pricing  Distinguish between market share and market position.

Factors Affecting Prices What are some factors that might influence prices?  Profit Goals  Supply and Demand  Consumer Perceptions  Competition

Profit  To start, most price planning begins with analyzing costs and expenses  Businesses must constantly monitor, analyze, and project prices and sales in light of costs and expenses  Sales, costs, and expenses combine to determine a firm’s profit

Profit  Increasing costs and expenses will often result in increased prices Example: What prices will rise if the price of oil increases? Rates charged by shipping companies, airline ticket prices.

Profit  What are some options to maintain profits other than raising prices when faced with increasing costs?  Reduce the size of the item  Drop features or services to reduce cost  Add features to justify a higher price

Profit  Decreasing costs and expenses will often result in decreased prices  Improved technology and less expensive materials may result in better quality products at lower costs Example: The price of personal computers and high-definition televisions have fallen because of improved technology

How do we determine price?  Break Even Point The point at which sales revenue equals the costs and expenses of making and distributing a product. After this point, businesses begin to make a profit. Break Even Example: I plan to print 100,000 books of Bushnell’s Greatest Stories and Jokes. I plan to sell the books for $6 each. The cost to make each book is $4.50.

Break Even Point *100,000 books produced *Want to sell for $6 each *Cost $4.50 each to make 100,000 X $4.50 = $450,000 cost to produce all books cost to produce all books $450,000 / $6 = 75,000 I need to sell 75,000 books to break even! Bushnell’s Greatest Stories And Jokes New York Times #1 Best Seller

How do we determine price?  Supply and Demand Demand tends to go up as price goes down Demand tends to go down as the price goes up

How do we determine price?  Demand Elasticity and Inelasticity  Elastic A product is elastic if a change in price results in a large change in demand. (cereal)  Inelastic A product is inelastic if a change in price results in very little change in demand. (milk)

What makes a product elastic or inelastic? 1.Brand Loyalty 2.Price Relative to Income 3.Availability of Substitutes 4.Luxury vs. Necessity 5.Urgency of Purchase

How do we determine price? Consumer Perceptions Consumer perceptions about the relationship between price and quality play a role in price planning  Some consumers equate quality with price  Some businesses create the perception that a product is worth more than others by limiting supply (limited edition)  Personalized service can result in customers willingness to pay more

How do we determine price?  Competition When products are very similar, price often becomes the sole basis on which customers make decisions

Steps to Determine Price 1.Establish Pricing Objectives (profit!) 2.Determine Costs of Goods Being Sold 3.Estimate Demand 4.Study Competition 5.Decide on a Pricing Strategy 6.Set Prices Revenue (Sales) - COGS = Gross Profit - Expenses = Net Profit - Expenses = Net Profit

Legal and Ethical Pricing Issues  Price Fixing – competitors agree on a certain price range –Illegal  Price Discrimination – firm charges different prices to similar customers in similar situations – Illegal  Unit Pricing – Allows customers to compare prices in relation to standard unit of measure, such as ounce or pound – may be required by state law  Loss Leader – Pricing an item at or below cost to draw customers into your store – may be prohibited by state law  Bait and Switch Advertising – A firm advertises a low price for an item it has no intention of selling - Illegal

Application of Pricing Concepts Research and prepare a visual summary of examples of each of the following: 1. 1.A company that competes on non-price factors such as uniqueness of product, convenience, service (identify, company and explanation of how they compete) 2. 2.An example of where increasing/decreasing costs have resulted in increased/decreased prices 3. 3.A product with elastic demand 4. 4.A product with inelastic demand 5. 5.A product where consumer perceptions influences pricing 6. 6.A company that attempts to attract customers with low prices