Chapter 25 Price Planning

The Steps of Price Planning 25.1 After finishing this section, you will know: The different forms of price The importance of price The goals of pricing The difference between market share and market position

What is Price? Price- the value of money placed on a good or service The oldest form of pricing is the barter system Bartering- the exchange of a product or service for another product or service, without the use of money

Relationship of Product to Value The key to pricing is understanding the value that buyers place on a product Value- the anticipated satisfaction—if consumers believe they will gain a great deal of satisfaction from a product, they will place a high value on it and be willing to pay a higher price

Relationship of Product to Value A seller must be able to gauge where a product will rank in the customer’s estimation This information can be considered in a pricing decision The seller’s objective is to set a price high enough for the firm to make a profit yet not so high that it exceeds the value potential customers place on a product.

Various Forms of Price Price is involved in every marketing exchange.

Importance of Price Price helps to establish and maintain a firm’s image, competitive edge, and profits. Many customers use price to make judgments about products and the companies who make them. To some customers, a higher price means better quality from an upscale store

Importance of Price To other customers, a lower price means more for their money Price helps to determine profit It is important to remember that an increase in price can increase profits only if costs and expenses are maintained.

Goals of Pricing Gaining market share Achieving a certain return on investment Meeting the competition

Gaining Market Share Market share- a firm’s percentage of the total sales volume generated by all competitors in a given market Businesses constantly study their market share to see how well they are doing with a given product in relation to their competitors

Gaining Market Share Market position- relative standing in relation to competitors To monitor market position, a firm must keep track of the changing size of the market and the growth of its competitors

Return on Investment Return on investment- a calculation that is used to determine the relative profitability of a product Profit is another word for return Calculation for ROI is Profit / Investment Example: $8 - $6.50 = $1.50 / $6.50 = .23 This means that your rate of return on investment is 23 percent

Meeting the Competition Some companies simply aim to meet the prices of their competition They either Follow the industry leader Calculate an average price then position their product close to that figure What if there is no competition? You compete on the basis of other factors in the marketing mix. Examples include: uniqueness, convenience, and level of service

Assignment Page 454 Reviewing Key Terms and Concepts #1-5 Thinking Critically #6

Factors Involved in Price Planning 25.2 After finishing this section, you will know: The four market factors that affect price planning What demand elasticity is in relation to supply and demand theory The government regulations that affect price planning

Market Factors Affecting Price Most price planning begins with an analysis of costs and expenses, which are related to current market conditions

Costs and Expenses Sales, costs, and expenses together make a firm’s profit

Responses to Declining Profit Margins What happens when costs or expenses increase or when sales decline? Pass the costs to their customers Reduce the size of the item Drop features customers don’t value Improving products- add features to justify the price increase

Responses to Lower Costs and Expenses Prices may decrease because of a decrease in demand PC prices have fallen because of increased technology

Break-Even Point Break-even point- the point at which sales revenue equals the costs and expenses of making and distributing a product Example: $450,000 / 6 = 75,000 To break even, the firm must sell 75,000 dolls. After 75,000 are sold, the firm will begin to make a profit.

Supply and Demand In general, demand tends to up when price goes down and down when price goes up Demand elasticity- the degree to which demand for a product is affected by its price Elastic demand- situations in which a change in price creates a change in demand

Supply and Demand Law of diminishing marginal utility- consumers will buy only so much of a given product, even though the price is low Inelastic demand- a change in price has very little effect on demand for a product

Consumer Perceptions Consumer perceptions about the relationship between price and quality or other values also play a role in price planning

Consumer Perceptions Some consumers equate quality with price: High reflects high quality High price may also suggest status, prestige, and exclusiveness

Consumer Perceptions Businesses create the perception that a product is worth more by creating a limited edition and charging a higher price Personalized services can add to consumers’ perception of price A marketer must be concerned with subjective price- the price consumers see as the value they are getting for what they are buying

Competition Price must be evaluated in relation to the target market and is one of the four P’s of the marketing mix Nonprice competition minimizes price as a reason for purchase: The more unusual a product is the easier it is for a producer to set prices above their competitors Prices are changed to reflect consumer demand, cost, or competition

Price Fixing Price fixing- occurs when competitors agree on certain price ranges within which they set their own prices Sherman Antitrust Act of 1890- outlawed monopolies

Price Discrimination Price discrimination- occurs when a firm charges different prices to similar customers in similar situations Clayton Antitrust Act of 1914-defines price discrimination as creating unfair competition

Price Discrimination Robinson-Patman Act of 1936- prohibit sellers from offering one customer one price and another customer a different price if both customers are buying the same product Intended to help smaller retailers compete with large firms

Price Discrimination Price discrimination within a channel of distribution is permissible if: Products purchased are physically different Non-competing buyers are involved Prices don’t hurt competition Costs justify the differences in prices Production costs go up Prices are changed to meet another supplier’s bid

Resale Price Maintenance Manufacturers would punish retailers that sold the item for a lower price by holding deliveries. Consumer Goods Pricing Act of 1975- outlawed the punishing of retailers Retailers may suggest resale prices in advertising, price tags, and price lists

Minimum Price Laws Unfair sales laws- prevent retailers from selling goods below cost plus a percentage for expenses and profit Some states include all products, while others have included only specific

Minimum Price Laws Loss leaders- an item priced at cost to draw customers into a store The business will take a loss in order to lead customers into the store

Unit Pricing Unit pricing- allows consumers to compare prices in relation to a standard unit or measure, such as an ounce or pound

Price Advertising Federal Trade Commission (FTC)- developed guidelines for advertising prices Forbids a company from advertising a price reduction unless the original price was offered to the public on a regular basis for a reasonable and recent period of time

Price Advertising Bait and switch advertising- advertising a low price for an item it has no intention of selling is illegal

Assignment Page 462 Reviewing Key Terms and Concepts #1-5 Thinking Critically #6