Download 3.00 Understand product/service management, pricing and channel

PERFORMANCE INDICATOR 3.06
DEVELOP A FOUNDATIONAL
KNOWLEDGE OF PRICING TO
UNDERSTAND ITS ROLE IN
MARKETING.
Worksheet
Warm-up
Do you equate value to price?
Yes
What’s the most expensive thing you have ever bought?
List item & Price
No
PART A
Describe the characteristics of effective pricing.
Attracts the customer’s attention
Enforces the idea of “value” for the money
Takes into account:
◦ Cost to produce
◦ What competitors are charging
◦ What customers are willing to pay
Example
University of Kentucky Basketball Sweatshirt
◦ #1 College Bball team in country
◦ Lost last night to #2 Michigan State
◦ Best recruiting class ever?
Cost to produce a Nike Sweatshirt
◦ $13.99
Kentucky Sweatshirt
Nike
v.
Adidas
v. Old Varsity Brand
How much would Nike charge for the sweatshirt they created?
$49.99
$20.00
Boston Red Sox’s
Won 2013 World Series
Collectors Item / Date Specific
World Series T-Shirt
Cost $5.75 to make t-shirt
‘47 Brand v. Nike v. Majestic
$39.99
$27.99
$__________
Explain what is being priced when prices
are set for products.
The good or service
Any services and warranties
Consider not only the cost of making but the benefit to
the customer
◦ Think about the price of a diamond, rare baseball card,
limited edition car
What Goes Into Cost of Car
Cost of the car
◦ $31,395.00
Option Packages
◦ $2,000.00
Destination Charges
◦ $795.00
Warranty, Extended Service Plans,
etc..
◦ My car payment increased
$44.00/months for added plan
How much do these 2 cards cost?
$2.8 Million
Factors that Affect Price
Costs
Supply & Demand
Economic Conditions
Government Regulation
Channel Members
Company objectives & strategies
List factors that affect a
product's price
Perfect competition:
Many buyers and many sellers all dealing in an identical product. Neither producer nor user
has any market power and both must accept the prevailing market price.
Monopoly:
One seller who dominates many buyers. The monopolists can use his market power to set a
profit-maximizing price.
Monopolistic competition:
A large number of suppliers offer similar, but not identical products. The similarities ensure
elastic demand whereas the slight differences give some monopolistic power to the
supplier.
Common in restaurant, cereal, clothing, books, music, movies, & shoes industries
Monopolistic Competition
Basically brand loyalty is what differentiates & keeps the
business going.
Example would be shaving kits.
There are a lot of shaving manufacturers on market that offer
similar products.
Many people only buy Gillette Fusion Power
Gillette’s High Level of Brand Loyalty gives it more “power” in
the market
Companies have the freedom to create a product to compete
against Gillette but they have to build brand loyalty in order to
stay in business.
List factors that affect a product's price.
Oligopoly
Monopolies “little brother”
Industries with only 2-3 businesses.
Boeing & Airbuss are two main airline manufactures. Each have 50% of market.
Not a monopoly because there is some competition that prevents one company from doing
whatever it wants.
Each firm has the ability to influence market prices
Not good for consumers because prices are high & competition low.
Cost to produce
Companies need to make a profit so the cost to product an item is a key
factor in affecting price
Describe how pricing affects product decisions.
Pricing affects whether customers will be a product
and how much customers will buy
Decisions on whether to expand
a product line or close it
are related to what price can be charged.
Affects of Pricing
Explain how pricing affects place (distribution) decisions.
Shipping products long distances can significantly increase the price of an
item
◦If a company has to fly a product to consumer it will cost more
◦Why do you think products in Hawaii are more expensive?
Describe how pricing affects promotion decisions.
When setting prices and promotion plans and company must consider:
– Is the company trying to break into an existing market?
– Is it trying to expand into new markets?
– What is the competition doing?
– Type of Medium you choose (Radio v. Print) & Length of promotion
Explain pricing objectives.
Pricing objectives are the goals a company hopes to
achieve through it pricing decisions.
◦ Profit goals
◦ Set a price that gives you the most profit
◦ Sales goals
◦ Set a price that leads to most quantity sold
◦ Competition
◦ Set a price that is based off of a competitor
◦ Company Image
◦ Used mainly in luxury items
Price is Right
Grades
◦ Price Worksheets
◦ Branding Project Present Ideas
◦ Worksheet from Cultural & Social Media
◦ Price is Right Game
◦ 3 Examples
◦ Quiz Review
Be able to identify & differentiate between the various type of pricing policies
businesses take.
Do you think its fair for colleges to charge higher rates to students who are from
out-of-state?
Price Fixing
Two Examples:
General Electric & Westinghouse got caught price fixing in the 1950’s.
The Tennessee Valley Authority was going over records and noticed
bids submitted by 47 companies were almost always identical. Heads
of companies would get together at restaurants and pick out a
winning bid & losing bids.
British Airways & Virgin Atlantic
In 2004, the airline entered into secret talks with its rival Virgin
Atlantic to simultaneously bump up their fuel surcharges, a practice
that continued into 2006. Over the course of the collusion, fuel
surcharges rose from an average of five pounds a ticket to over 60
pounds a fare.
Predatory Pricing
Wal-Mart has been sued numerous times over this issue. Lawsuits from
government officials in Wisconsin & Germany have sued Wal-Mart over
their selling prices.
Example:
Wal-Mart sells butter, milk, laundry detergent & other staple goods
below cost to force other businesses out of business. After other
companies go out of businesses; Wal-Mart raises prices to recoup
losses.
Bait-and-Switch Advertising
◦
One of a Kind
◦
◦
While Supplies Last
◦
◦
Sell you something else
Financing
◦
◦
Car for sale but in limited stock
Only excellent credit scores
Actual item Not Pictured
Deceptive Pricing
Dumping
For example:
Suppose there are two companies selling identical products;
company Y is a domestic firm and company X is a foreign firm.
Company X wants to drive company Y out of the market,
so it prices its product far below the cost of producing it.
Company Y must compete by lowering its prices,
which eventually causes the company to lose money and exit the market.
Loss Leader
Price Discrimination
Price Discrimination occurs when a
firm charges different prices to
similar customers in similar
situations
Example:
◦ Adult Movie price is
higher than kids
◦ In-state college tuition
is less than out-ofstate college tuition
Describe laws affecting pricing.
American consumers have the right to expect the benefits of free
and open competition — the best goods and services at the lowest
prices.
Public and private organizations often rely on a competitive bidding
process to achieve that end.
The competitive process only works, however, when competitors
set prices honestly and independently.
When competitors collude, prices are inflated and the customer is
cheated.
Price fixing, bid rigging, and other forms of collusion are illegal and
are subject to criminal prosecution by the Antitrust Division of the
United States Department of Justice.
Describe laws affecting pricing.
Explain positive effects of pricing laws.
•Customers know that they aren’t being taken advantage of
•Pricing is consistent
Discuss negative effects of pricing laws.
•Prices become less like to be modified (even down) because
the law might see the change in a negative manner.
•Companies worry about sales & price promotions they offer
because of how government perceives it
Identify ethical considerations in setting
prices.
Ethical considerations include the importance of
accessibility to the company’s product(s).
 Think about the price for medicine that is required to
keep ill people alive (like insulin)

How much profit does the company need to stay in
business to provide jobs for its employees?
Explain ethical concerns associated with the use of
complex prices that are confusing to consumers.
Ethically, making pricing so complex that customers don’t understand
how it works means that the company might be taking financial
advantage of customers.
– This ultimately results in customers looking for different suppliers
– Think about the complexity of taking an airline flight vs. renting a car
Explain how pricing tactics can relate to social responsibility.
Since products often help improve the standard of living for the
customers, pricing has a direct effect on society.
Pricing should consider both the welfare of society & the supplier.
What if I buy
12 Vitamin
Waters?
PART B
Technology & Pricing
Identify ways that the use of technology impacts
the pricing function and explain specific
applications of technology in pricing.
•Technology allows data to be easily collected, collated and analyzed.
This means that pricing decisions can be effectively reviewed with solid
information.
•Pricing can also be inputted into the computer cash register system
reducing the number of input pricing errors at the cash register.
Describe benefits of automating the pricing process.
•Instead of having to price every item in the store, one person can easily
change prices with a change in the programming and signs that inform
the customer of the price.
Transformation of Price Tags
Customers
Item Pricing
http://rivergrandrapids.com/price-stickers-on-grocery-items-going-away/
Taco Bell: Overpriced Burritos
http://www.youtube.com/watch?v=HcrDmfGCWfA
Discuss risks associated with automating the
pricing process.
Errors in the programming might be hard to catch, especially if the
price is off by only a few cents or dollars (depending on the overall
price of the item).
Cashiers don’t have to learn the prices and therefore can’t check
that they are charging the correct prices on the register.
Item Pricing Laws (8 States have such laws)
Michigan has enacted over price law; where you get back the
overcharged amount plus 10x the difference ($1.00 - $5.00)
If charged $1.25 for $1.00 item they have to give you $.25 + 10*.25.
Refund = $2.75
Explain how automating pricing facilitates
targeted pricing.
•Targeted pricing allows a company to charge different
prices to new customers it is trying to entice than to
established customers who need no other incentive to
by the company’s brand.
•Automated pricing allows the programmer to set the
qualifications and then the system awards the targeted
price when the conditions have been met.
Targeted Customer: Sprint
Automated Pricing:
Best Buy v. Amazon v. Sears
Friday 11/15 = Monday 11/18
Monday Warm Up
Objectives to be Answered
a.
Define the term selling price.
b.
Distinguish between price and selling price.
c.
Describe the importance of selling price.
d.
Identify factors affecting selling price.
e.
Explain how consumers can affect selling price.
f.
Describe how government affects selling price.
g.
Discuss how competition can affect selling price.
h.
Explain how the nature of a business can affect selling price.
i.
Identify pricing objectives.
j.
Explain how pricing objectives affect selling price.
3.06: Pricing
Define the term selling price.
The Selling Price is the Price At Which A Product Is ACTUALLY Sold To The
Customer
Distinguish between price and selling price. (Retail Price Vs. Selling Price)
–Retail Price Is The initial amount that the company would like to
charge for an item (suggested retail price)
–Selling Price Is the actual price for which it is sold to the customer
(sale price)
3.06: Pricing
Describe the importance of selling price.
The Selling Price Must Bring Enough Profit To The
Seller So The Company Can Stay In Business
Identify factors affecting selling price.
– Competitors’ Prices
– What Customers are Willing To Pay (demand)
– What The Item Costs to Produce, Transport, and Sell
– External factors such as current economic conditions
3.06: Pricing
Explain how consumers can affect selling price.
–It is all about what they are willing to pay
Describe how government affects selling price.
–Regulations and laws can affect what companies will
charge.
–Tariffs and additional taxes (think gasoline) can
significantly change prices
• Sales tax may affect selling price
• The Price Of Gas In NC vs. SC
State Taxes
for Gasoline
NC: 57.6%
SC: 35.2%
3.06: Pricing
Discuss how competition can affect selling price.
–If competition raises its prices, a company might be able to
make more profit by raising prices
–The opposite is true for lowering prices
Explain how the nature of a business can affect selling price
–How much competition does your business have in the area
or online?
–Are you selling big ticket or inexpensive items?
–Are your products seasonal?
–Are you the industry leader or a follower?
3.06: Pricing
Identify pricing objectives.
•Increase market share
•Enter a new market
•“Cash cow” phase
• Cash Cow: Product with high market share in an industry with little growth
• Example: Pepsi and Coke
Explain how pricing objectives affect selling price.
•Is the company trying to break into an existing market?
Lower prices usually help.
•Is it trying to expand into new markets?
Target pricing for new customers. Predict what the customer will spend
•Trying to build market share?
Match competitors or lower prices below theirs.