Price Planning Ch. 25 ME

Price Planning Considerations Section 25.1 Price Planning Considerations

What is Price? Price – is the value in money placed on a good or service Oldest form of pricing is the barter system Customers use price to make judgments Relationship of Product Value – is the value a customer places on an item or service that makes in the difference in how much people will spend Various Forms of Price – can be in the forms of fees, wages, tuition, interest, due, etc. Importance of Price – is an important factor is the success or failure of a business

Goals of Pricing Return on Investment (ROI) – is a calculation that is used to determine the relative profitability of a product Rate of Return = Profit/Investment Gaining Market Share Market Share – is a firm’s total sale volume generated by all competitors in a given market A firm must keep track of the changing size of the market and the growth of its competitors Meeting the Competition Some companies aim to meet the price of their competition, follow an industry leader, or calculate the average price and then position their product close to that figure

Factors Involved in Price Planning Section 25.2 Factors Involved in Price Planning

Costs and Expenses Reponses to increasing costs and expenses For Example: when oil prices go up, increase in rates by airlines occur Some business have found that price is so important in the marketing strategy of a product they will hesitate to make any price changes Instead they will reduce the size of an item before they will change its price

Costs and Expenses Reponses to lower costs and expenses Prices occasionally drop because of decreased costs and expenses Aggressive firms are consistently looking for ways to increase efficiency and lower costs Break-Even point Is the point at which sales revenue equals the costs and expenses of making and distributing a product After this point is reached, businesses begin to make a profit on the product

Supply and Demand Demand Elasticity – the degree to which demand for a product is affected by its price Elastic Demand - refers to situations in which a change in price creates a change in demand Law of Diminishing Marginal Utility – states that consumers will buy only so much of a given product, even though the price is low Inelastic Demand – refers to situations in which a change in price has very little effect on demand for a product

Supply and Demand Factors Influencing Demand Elasticity Brand loyalty Price relative to income Availability of substitutes Luxury version necessity Urgency of purchase

Consumer Perceptions About the relationship between price and quality or other values also play a role in price planning A high price many suggest status, prestige and exclusiveness Create the perception that a particular product is worth more than other by limiting the supply of the item Personalized service can add to price

Competition Can use a lower price when its target market is price conscious Non-price competition minimizes price as a reason for purchase It creates a distinctive product through product availability and customer service Marketers change prices to reflect consumer demand, cost, or competition Price War – when competitors engage in a fierce battle to attract customers by lowering prices

Legal and Ethical Considerations for Pricing 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 Clayton Antitrust Act of 1914 – defines price discrimination as unfair competition Robinson-Patman Act of 1936 – prohibits sellers from offering one customer one price and another customer a different price if bother customers are buying the same product in similar situations

Legal and Ethical Considerations for Pricing Unit Pricing – allows consumers to compare prices in relation to a standard unit or measure Resale Price Maintenance Consumer Goods Pricing Act of 1975 – outlawed the practice of punishing retailed who charges consumers below the MSRP (manufacture's suggested retail price) Unfair Trade Practices Law – prevents large companies with market power from selling products at very low prices to drive out their competition Loss Leader – an item priced at or below cost to draw customers into a store

Legal and Ethical Considerations for Pricing Federal Trade Commission (FTC) has developed guidelines for advertising prices Forbid a company from advertising a price reduction unless the original price was offered to the public on a regular basis A company may not says its prices are lower than its competitors’ prices without proof based on a large number of items A pre-marked or list price cannot be used as the reference point for a new sale price unless the item has actually been sold at that price Bait-and-Switch Advertising - a firm advertises a low price for an item it has no intention of selling