Price Planning

Chapter 25

Price

• Value of money (or its equivalent) placed on a good or service.

• Usually expressed in monetary terms, such as $5.99 for a pen.

• Nonmonetary would be free goods or services in exchange for the purchase of a product.– Bartering: involves the exchange of a product or

service for another product or service, without the use of money.

• Example: business might exchange some of its products for advertising space in a magazine or newspaper.

Relationship of a Product Value

• Value is a matter of anticipated satisfaction. If consumers believe they will gain a great deal of satisfaction from a product, they will place a high value on it. They will also be willing to pay a high price.

• Seller’s objective is to set a price high enough for the firm to make a profit and yet not so high that it exceeds the value potential customers place on the product.

Various Forms of Price

• Price is involved in every marketing exchange.– Fee you pay a dentist– New pair of shoes– Charges such as bridge tolls and bus fares– Rent– Interest – loans– Dues of a membership– Tuition for education

Importance of Price

• Important factor in the success or failure of a business.

• Helps establish and maintain a firm’s image, competitive edge, and profits.

• Vital component of a business’s image.

• Price helps determine profits.Sales Revenue=Price x Quantity Sold

Goals of Pricing

1. Gaining market share– Market share: a firm’s percentage of the total sales

volume generated by all competitors in a given market.

– Businesses must watch their competitors to maintain or improve their market share and position.

– A company that wants to take business away from a competitor would engage in price competition. This may be done by increasing advertising or using new advertising media and messages.

2. Achieving a certain return on investment• Return on investment: a calculation that is used to

determine the relative profitability of a product.• The formula is: Proft/Investment• Example: Your company sells trash cans for $8

each. Your cost to make and market these cans are $6.50 per unit. Remember that profit is money earned by a business minus costs and expenses, so that your calculation on investment is:

• $8-$6.50 = $1.50/$6.50 = .23 rate of return on investment is 23 percent.

3. Meeting the competition• Some companies simply aim to meet the prices of

their competition.• Manufacturers want to ensure they match their

competition in price and quality.• How do you compete if there is no price

competition???1. You compete the basis of the marketing mix

1. Quality or uniqueness of a product2. Convenience of a business location or hours3. Level of service (warranty could be longer term)4. Specials of a product (restaurant could give specials for

certain businesses within a certain zip code).

Market Factors Affecting Prices

• Price planning begins with an analysis of costs and expenses, many of which are related to current market conditions.– Cost of raw materials may increase a

manufacturer’s cost to make an item (housing industry)

– Manufacturers must consider the effect of raising prices in the marketplace – what kind of an effect will it have to business and consumers?

Four Factors Affecting Prices

• Costs and expenses– Responses to declining profit margins

• Supply and Demand

• Consumer Perceptions

• Competition

Costs and Expenses

• Together these determine a firm’s profit.1. Response to declining profit margin:

• Some businesses pass costs to customers (i.e. when oil prices increase affects - price of gas, airline tickets, shipping companies)

• Reduce the size of an item before they change price (i.e. candy manufacturer may change size of candy bar from 4 to 3.5 ounces rather than increase the price)

Costs and Expenses cont.

• Manufacturers drop features their customers don’t value– i.e. airlines stopped serving meals and only

offer beverages

• Improve their products– Add more features or upgrade the materials in

order to justify that higher price (Ford – supercabs)

Costs and Expenses cont

2. Responses to Lower Costs/Expenses– Prices may drop because of decreased costs

and expenses– Aggressive companies are always looking for

ways to increase efficiency and decrease costs

– Improved technology can help decrease cost

Costs and Expenses Cont

3. Break Even point – the point at which sales revenue equals the costs and expenses of making and distributing a product. After this point is reached a profit is made.

– Manufacturers are concerned in two ways:• When marketing a new product• When trying to establish a new price

Example of Break Even Point

Toy manufacturer decides to make 100,000 dolls that will be sold at $6 each to retailers. The cost of making and marketing the dolls is $4.50 per unit, or $450,000 for the 100,000 dolls.

To calculate break even point:

Manufacturer divides the total amount of costs and expenses by the selling price:

$450,000/6 = 75,000

To break even, the firm must sell 75,000 dolls – after the 75,000 the firm makes a profit

Supply and Demand

• You might recall that demand tends to go up when price goes down and down when price goes up. Not always…– Demand elasticity: the degree to which

demand for a product is affected by it’s price.• Elastic demand: situations in which a change in

price creates a change in demand.– Steak - $8 per lb., few people would buy steak; if the

price were to drop to $5, $3, and finally $2 per lb., demand would increase at each price level.

Supply and Demand Cont.

• Law of diminishing marginal utility: consumers will buy only so much of a given product, even though the price is low.– Detergent went on sale, and you bought two

cases of it; three weeks later a new sale is announced for same detergent, but you already have enough for months.

Supply and Demand Cont.

• Inelastic Demand: situations in which a change in price has very little effect on demand for a product.– Milk and bread.

Consumer Perceptions

Some consumers equate quality with price.

They believe high price reflects high quality – also higher status, prestige, and exclusiveness.

Subjective price – the price consumers see as the value they are getting for what they are buying.

Competition

• Nonprice competition: minimizes price as a reason for purchase; instead, it creates a distinctive product through such means as product availability and customer service.– The more unusual a product, the greater the

marketers freedom to set prices above those of competitors.

– Marketers change prices to reflect consumer demand, cost, or competition.

Government Regulations Affecting Prices

• Price fixing: when competitors agree on certain price ranges within which they set their own prices. – Illegal because this eliminates competition.

• Price discrimination: when a firm charges different prices to similar customers in similar situations.

Resale Price Maintenance

• A manufacturer may suggest resale prices in its advertising, price tags, and price lists.

• There can be an agreement to fix the maximum retail price as long as the price agreement is not an “unreasonable restraint of trade” or considered “anticompetitive”

Minimum Price Laws

• In most states, laws were enacted to prevent retailers from selling goods below cost plus a percentage for expenses and profit.

• Remaining states have loss leader: an item priced at cost to draw customers into the store. Business takes a loss on the item to lead customers into the store.

Unit Pricing

• Allows consumers to compare similar in relation to a standard unit or measure.