Price: the amount of money paid for a good, service, or resource Pricing is stating the value of a product. Value is subjective. The same product can have varying values to different people. Value is unique to each customer because the benefits of purchasing the product are based on individual perception.
Sales Revenue Sales Revenue – The amount of money a company makes prior to expenses and cost of goods. Sales= 1000 baseball bats @ $175 = $175,000 Its not all profit!
COST COGS - Cost of Goods Sold – how much the product costs the distributor Ex: How much does Foot Locker (the distributor) pay for Nike shoes? COGS = $90,000
Expenses Expenses - Cost of running business Advertising Utilities Rent Equipment Variable costs - expenses that change along with the amount of production. Ex: Utilities Fixed costs - expenses that stay the same no matter how much of the product is being produced. Ex: Rent
Income Statement Footlocker Income Statement Sales (1000@ $175) 175,000 -COGS 90,000 Gross Profit 85,000 -Operating Expenses 60,000 Net Profit = $25,000
Pricing & Target Market What is the target market willing to pay? Ex: In-line Roller Skates: Lower priced skate = Wal-Mart/Target Higher-priced skates = Specialty skate shops
Consumer Perception – relationship of price and quality in a consumers mind Prestige Pricing – pricing based on consumer perception. Businesses will price products above the average price to attract customers who judge a products quality by its price. Odd-Even Pricing – pricing products with either an odd number or an even number to match a products image. Ex: Odd number pricing, ex: 25.99, suggests a bargain. Ex: Even number pricing, ex: 100.00, reflects a quality item. (Expensive restaurants & clothes) Target Pricing – pricing goods according to what the customer is willing to pay. They determine the price and then make product modifications to ensure that they meet that price.
Demand – greatly affects pricing decisions. If a product is in high demand, and there is a limited supply, its price will be high. (UK basketball tickets) Companies may produce a limited edition of a product so they can price the item high. Large supply of an item and demand is not high, dealers may lower prices to increase demand for the item. SALES!
Demand & Price Elasticity Price elasticity gauges the relationship between market demand and price Elastic Demand – A change in price will affect demand Golf clubs, concert tickets In-elastic Demand – A change in price will not affect demand Gas prices
Smoothing Smoothing divides the sport/event product into different segments for customers. Time smoothing involves determining "prime" and "nonprime" hours for services. (Ex: Movies) Place smoothing involves dividing a sport/event venue into different sections (Ex: Upper & Lower Arena)
Cost - To make a profit, the price of an item must be higher than the cost a business paid for it Strategy #1: Markup Pricing – difference between the retail or wholesale price and the cost of an item. Markup must be high enough to cover expenses and ensure a profit. Footlocker purchases Nikes for $25.00 To cover expenses and ensure a profit they sell for $49.99 Dollar markup = 49.99 – 25 = 24.99 Percentage Markup = 24.99/25.00 = 100% Product-line Pricing – setting different markup percentages for each product so that the average markup is achieved for the entire line of products. Ex: Increase one model of skates 25% and another model 75%. The average markup is 50%.
Strategy #2: Cost-plus Pricing – pricing products by calculating all costs and expenses and adding desired profit. Ex: food service providers at sporting events determine the salaries of their employees, the cost of food supplies and rent. Then they add their intended profit to set the prices to charge for food.
Newness of the Product When introducing a new product, distributors must chose between price skimming and penetration pricing
Special Pricing Strategies Price Lining – selling all goods in a product line at a specific price Bundle Pricing – selling several items as a package for a set price Loss-leader Pricing – pricing an item at cost or below cost to draw customers into the store. Ex: Kroger newspaper ads Yield-Management Pricing – pricing items at different prices to maximize revenue when limited capacity is involved. Upper/lower arena pricing/box seat pricing
Regulatory Factors: Pricing is subject to government regulations. Sherman Anti-Trust Act prohibits price fixing and predatory pricing. Price-fixing – illegal practice where competitors conspire to set the same prices. Predatory Pricing – setting a very low price in order to drive competitors out of business. (Monopolistic competition)