Pricing and Strategies Section 5.2

Pricing Price: the value placed on the goods or services being exchanged

Pricing and Profit Price is important in a business because it helps determine a companies profit or loss A company sells 1,000 baseball bats They are sold at $175 The company bought them for $90 each Cost of goods sold equals $90,000 Cost of operating business is $60,000 How much profit did they make?

Pricing and Profit $175,000-$150,000 $25,000 in profit

Pricing and the Marketing Mix What a person in the target market is willing to pay becomes a major question Lower price attracts value oriented Higher price attracts serious buyers

Pricing Considerations and Strategies Consumer Perception Many consumers believe the higher the priced item the better the quality A very good quality product at a low price may not sell as well as it would at a higher price Attract people that have this perception

Consumer Perception Prestige Pricing: pricing based on consumer perception Very expensive sports watches, sports equipment, apparel priced above the average market price to attract customers who may judge a product’s quality by its price

Consumer Perception Odd-even pricing: pricing goods with either an odd number or an even number to match a product’s image $29.99 Odd pricing indicates “bargain” $100 Even priced items reflect a quality item

Consumer Perception Target Pricing: pricing goods according to what the customer is willing to pay Manufactures estimate this price and then work backward to determine how much to charge wholesalers and retailers

Demand Demand is related to price in many ways High demand and limited supply=price will be high Popular sporting events Limited edition baseball cards Low demand and a lot of supply of the product=price will decrease Lower the price of the item to increase the demand for it Retailers do at the end of the season to get rid of merchandise

Demand As a general rule, demand will be lower for a higher-priced item, because fewer people can afford to buy it

Cost The price of an item must be higher than the cost a business paid for it Two pricing strategies Markup: the difference between the retail or wholesale price and the cost of an item Must be high enough to cover expenses and ensure a profit

Cost Cost-plus pricing: pricing products by calculating all costs and expenses and adding desired profit The cost of making the item or providing the service is determined first

Newness of the Product When introducing a new product, a company may decide to price the item high to recover the costs of development Or they may price the product low to stimulate demand

Competition Businesses find out what their competitors are charging for the same items they are selling If a company does not want to compete on price they use non-price competition Competition between businesses based on quality, service and relationships

Pricing Objectives and Strategies Pricing objectives are the goals that a company wants to achieve through pricing Two common pricing objectives involve Increasing profit Improving market share

Profit Objective A company usually has an objective to earn a higher profit Sometimes costs increase but a company knows that it cannot increase the price Introduce surcharges Reduce some unneeded features or size of the product

Market Share Objective Market Share: the percentage of the total sales of all companies that sell the same type of product Gatorade 80% market share of sports drink industry

Special Pricing Strategies Price Lining: selling all goods in a product line at specific price points $39.99, $59,99 and $79.99 Makes it easier for customers to make purchasing decisions

Special Pricing Strategies Loss-leader pricing: pricing an item at cost or below cost to draw customers into the store They will then buy other products while at the store Total of shopping visit will more than cover money lost on lost leader item

Special Pricing Strategies Yield-Management Pricing: pricing items at different prices to maximize revenue when limited capacity is involved Some seats being priced higher than others Best seats cost more Tiered Pricing: charging more for tickets to home games against more competitive opponents

Price Adjustments and Regulations Discounts and Allowances: may be used to change a published price Offer discounts for buying in large quantities Or buying prior to the buying season Regulatory Factors Sherman Anti-Trust Act Prohibits price fixing and predatory pricing Price Fixing: illegal practice whereby competitors conspire to set the same prices Predatory Pricing: setting a very low price in order to drive competition out of business

Pricing Regulations Price Discrimination: The practice of charging different prices to similar buyers Is legal as long as the price discrimination does not lesson competition Was originally prohibited by the Clayton Act