1. Chapter 25
Price Planning

2. 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

3. 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

4. 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

5. 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.

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

7. 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

8. 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.

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

10. 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

11. 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

12. 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

13. 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

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

15. 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

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

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

18. 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

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

20. 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.

21. 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

22. 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

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

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

25. 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

26. 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

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

28. 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

29. Price Discrimination
Robinson-Patman Act of 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

30. 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

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

32. 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

33. 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

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

35. 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

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

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