Marketing & Sales – 3rd Hour Pricing Marketing & Sales – 3rd Hour

What is price? Price is the value of money placed on a good or service. The oldest form of pricing is the barter system.

Goals of Pricing Earn a profit! – return on investment (“ROI”) is used to calculate profitability of a product (profit divided by investment [what you put into it]) Gain market share – % of total sales volume generated by all competition Meet the Competition – follow the industry leader to calculate an average price

Factors involved in pricing: Goals (revenue v. volume; image) Costs and Expenses (break-even point) Supply and Demand Customer Perceptions Competition Advertising

(Total costs divided by the selling price) Break even point Point at which sales revenues = the cost of producing and distributing the product: Total costs Selling price (Total costs divided by the selling price)

Break even point - Example Our new hoodies cost us $21.40 each. We bought 48 of them (minimum order.) We sell them for $28.99. What is our break even point? Formula: Total costs / selling price $21.40 x 48 units = $1,027.20 = Total costs $1,027.20 / $28.99 (price) =35.43= 36 We must sell 36 hoodies before we make money.

Supply and demand Demand elasticity – the degree to which the demand for a product is affected by its price Elastic Demand – change in price has BIG effect on demand Inelastic Demand – change in price has LITTLE effect on demand

Law of Diminishing Marginal Utility Consumers will only buy a certain amount of a product, no matter how low the price goes.

What affects Demand Elasticity? Brand loyalty Price relative to income Availability of substitutes Luxury v. necessity Urgency of purchase

Consumer Perceptions How customers perceive the relationship between price and quality (or other values) Businesses may limit supply – limited editions – value will increase because of exclusiveness Personal service

Is target market price conscious? If so, must compete based on price Competition Is target market price conscious? If so, must compete based on price If not, then non-price competition – distinguish the product

Legal & Ethical Considerations Price fixing Price discrimination Unit pricing

Advertising Price FTC guidelines May not advertise a “reduced” price unless the original price was really offered to the public May not advertise “lower prices” unless they really are lower than the competition

Unfair trade practices Predatory pricing - setting prices so low that it drives out the competition Price fixing – sellers agreeing to charge the same (higher) price Price gouging - raising prices when there is an emergency (e.g., natural disaster) and no substitutes are available Price discrimination (charging different groups different prices)

6 Steps to Determine Price: Establish pricing goals (objectives) Determine costs Estimate demand Study competition Decide on a pricing strategy Set prices

Pricing Calculate percentage markup Retail price – Cost = markup Divide dollar markup by retail price MU / RP = MU% Change decimal to a percent Example: price = $15, cost = $10 $15 - $10 = $5.00 5 / 15 = .3333; .3333 x 100 = 33-1/3% (cost x mark up %) = markup amount; add to cost

Penetration Pricing Prices are set low, to gain market share / market penetration. Price will increased once this is achieved.

Product Mix Pricing Strategies Price lining – charge one price for a specific group or line of merchandise, e.g., “all T-shirts $5.00” Bundle pricing – offering several complementary products in a package sold at a single price (e.g., perfume and body lotion) Geographical pricing – adjusting price because of the location of the customer – e.g., delivery / shipping costs

Psychological Pricing Strategies 1. Premium or prestige pricing: High price for a unique / luxury brand. Product has a substantial competitive edge

2. Odd – even pricing Setting prices that all end in either odd or even numbers. Based on the principle that odd numbers (e.g., $5.99 or $4.95) give the image of a bargain, while even numbers ($100) give the image of quality.

3. Economy pricing Low price, no frills. Costs of marketing and promoting the product are kept to a minimum. Store brands, budget airlines. “Everyday low prices” (“EDLP”)

4. Value Pricing External factors (e.g., recession or increased competition) force companies to compete on price (McDonalds value meals). You get great value for the money. Reducing price does not usually increase value.

Promotional Pricing 1. Loss leader pricing – used to increase store traffic by offering a popular item or items at below-cost prices. The idea is that it will attract customers into the store, where they will buy more expensive things.

Promotional Pricing 2. Special Event pricing – items are reduced in price for a short period of time, based on a special event, like “back-to-school” or a holiday.

Promotional Pricing 3. Rebates and coupons – provided to customers. Coupons reduce the price at the point of sale; rebates must be mailed in, usually to the manufacturer.

Promotional Pricing 4. Discounts and allowances used to promote sales

Cash Discounts to Retail Customers Seller gives the retail buyer a discount if they pay cash. Why would a seller do that? Checks v. cash Credit cards v. cash

The terms of the cash discount will usually appear on the invoice Cash Discounts Manufacturers and wholesalers may also give buyers a cash discount to encourage them to pay their bills quickly. The terms of the cash discount will usually appear on the invoice

Typical Cash Discount For example, 2/10 net 30 means that a 2% discount is granted if the bill is paid in 10 days (with the bill normally due in 30 days.)

Quantity Discounts Seller reduces the price if the buyer buys a certain (larger) quantity. Why would the seller do that?

Seasonal Discounts Seller reduces the price if the buyer buys out of season (e.g. snow blowers in the summer)

Discount given directly to the buyer – e.g., trade-in allowance Allowances Discount given directly to the buyer – e.g., trade-in allowance