Download The Steps of Price Planning

Marketing Essentials
Chapter 25:
Price Planning
Chapter 25 n Price Planning
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SECTION 25.1
The Steps of Price Planning
What You'll Learn
 The different forms of price
 The importance of price
 The goals of pricing
 The difference between market share
and market position
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SECTION 25.1
The Steps of Price Planning
Why It's Important
Price is one of the four Ps of the marketing
mix and is an essential element in marketing
a product to the correct target market.
The goals of company and government
regulations are two issues that must be
considered in the pricing process.
Understanding the steps involved in
determining the price of a product is
essential for business success.
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SECTION 25.1
The Steps of Price Planning
Key Terms
 price
 share
 market position
 return on investment
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SECTION 25.1
The Steps of Price Planning
What Is Price?
Price is the value of money (or its equivalent)
placed on a good or service. It is usually
expressed in monetary terms.
The oldest form of pricing is the barter
system—the exchange of a product or
service for another product or service, without
the use of money.
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SECTION 25.1
The Steps of Price Planning
Importance of Price
Price is involved in every marketing exchange.
It helps establish and maintain a firm's:
 image—to some customers, high price
equals quality
 competitive edge—a business can attract
customers by guaranteeing low prices
 profits—sales price is directly related to the
price and number of items sold
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SECTION 25.1
The Steps of Price Planning
Projected Effects of Different Prices
on Sales
Price per Item x Quantity Sold = Sales Revenue
$50
200
$10,000
$45
250
$11,250
$40
280
$11,200
$35
325
$11,375
$30
400
$12,000
$25
500
$12,500
An increase in the price
of an item may not
produce an increase in
sales revenue. Why is
this true? Are you more
likely to buy a higher
priced item or a lower
priced item?
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SECTION 25.1
The Steps of Price Planning
Goals of Pricing
Marketers’ pricing goals include:
 gaining market share
 achieving a certain return on investment
 meeting the competition
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SECTION 25.1
The Steps of Price Planning
Gaining Market Share
A business may engage in price
competition to take market share from its
competitors, forgoing immediate profits for
long-term gains in market share.
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SECTION 25.1
The Steps of Price Planning
Market Share
Market share is a firm's
percentage of the total sales
volume generated by all
competitors in a given market.
Which brand has the largest
share of the digital camera
market? If total sales for this
market are $3 billion, what is the
sales revenue for the market
leader? Do you have more
confidence in a company that has
a large market share?
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SECTION 25.1
The Steps of Price Planning
Market Position
Market position is the relative
standing a competitor has in
a given market in comparison
to its competitors. Which
brand is the market leader in
the U.S. cookie market?
Given total sales of $1,221
(in millions) for the U.S.
cookie market, what is the
leader's market share? Are
you more inclined to buy a
product if you know it is the
market leader? Why?
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SECTION 25.1
The Steps of Price Planning
Return on Investment
Return on investment is a calculation used
to determine the relative profitability of a
product. The formula for calculating return
on investment is
Profit
Investment
Companies often price products to produce
a certain return on investment.
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SECTION 25.1
The Steps of Price Planning
Meeting the Competition
Some companies simply aim to meet the
prices of their competition, either by
following the industry leader or meeting the
industry average.
 Example: Automobiles and soft drinks
have similar prices and compete based
on other factors.
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25.1 ASSESSMENT
Reviewing Key Terms and Concepts
1. What is bartering?
2. Why is price an important factor in the
success or failure of a business?
3. Name three goals of pricing in addition to
making a profit.
4. Distinguish between market share and
market position.
5. Define and show the formula for return
on investment.
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25.1 ASSESSMENT
Thinking Critically
Setting prices higher than the competition
will put your business on a fast track to
failure. Is this statement true or false?
Explain the reasons for your answer.
Chapter 25 n Price Planning
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SECTION 25.2
Factors Involved in
Price Planning
What You'll Learn
 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
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SECTION 25.2
Factors Involved in
Price Planning
Why It's Important
Pricing a product may seem like an easy
task, but there are many factors affecting
that decision that must be taken into
consideration. Skipping even one aspect
of this process could cost a business
millions of dollars in lost sales, or even in
fines or lawsuits if the laws governing
pricing are not followed.
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SECTION 25.2
Factors Involved in
Price Planning
Key Terms








break-even point
elastic demand
law of diminishing marginal utility
inelastic demand
price fixing
price discrimination
loss leader
unit pricing
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SECTION 25.2
Factors Involved in
Price Planning
Market Factors Affecting Prices
Pricing decisions are not necessarily easy.
Most price planning begins with an analysis of
costs and expenses, many of which are related
to current market conditions. An organization's
goals also must be considered.
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SECTION 25.2
Factors Involved in
Price Planning
Costs and Expenses
Businesses constantly monitor, analyze, and
project prices and sales in the light of costs
and expenses because sales, costs, and
expenses together determine a firm's profit.
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SECTION 25.2
Factors Involved in
Price Planning
Responses to Declining Profit Margins
When profits decline, some businesses
increase price. Others feel that price is so
important in the marketing strategy of a
product that instead of making price
changes, they will change the product to
maintain profit margin.
Chapter 25 n Price Planning
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SECTION 25.2
Factors Involved in
Price Planning
Responses to Lower Costs/Expenses
Prices may occasionally be lowered
because of decreased costs and expenses.
Improved technology and less expensive
materials may help create better-quality
products at lower costs.
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SECTION 25.2
Factors Involved in
Price Planning
Break-Even Point
The break-even point is the point at which
sales revenue equals the costs and
expenses of making and distributing a
product. This is especially important to
consider when marketing a new product or
establishing a new price.
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SECTION 25.2
Factors Involved in
Price Planning
Supply and Demand
The degree to which demand for a product is
affected by its price is called demand
elasticity. Demand elasticity is affected by:
 brand loyalty
 price relative to income
 availability of substitutes
 luxury vs. necessity
 urgency of purchase
Slide 1 of 2
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SECTION 25.2
Factors Involved in
Price Planning
Supply and Demand
The law of diminishing marginal utility states
that consumers will buy only so much of a given
product, even though the price is low.
Elastic Demand A change in price creates
a change in demand.
Inelastic Demand A change in price has
very little effect on demand for a product.
Slide 2 of 2
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SECTION 25.2
Factors Involved in
Price Planning
Consumer Perceptions
Price planning is affected by the following
consumer perceptions about price:
 Some consumers equate quality with price.
 Some consumers are willing to pay more
for status, prestige, and exclusiveness, as
well as extra services.
Subjective price is the price consumers see as
the value they are getting for the price.
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SECTION 25.2
Competition
Factors Involved in
Price Planning
Price must be evaluated in relation to the
target market and is one of the four Ps of the
marketing mix. Companies can compete with:
 price competition—offering lower prices
 nonprice competition—attracting
customers with prestige, service, or quality
Slide 1 of 2
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SECTION 25.2
Competition
Factors Involved in
Price Planning
Marketers change prices to reflect:
 consumer demand
 cost
 competition
Similar products sometimes differ only in
price, so when one company changes its
prices, others usually react. Sometimes price
wars produce financial losses that can ruin
businesses.
Slide 2 of 2
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SECTION 25.2
Factors Involved in
Price Planning
Government Regulations Affecting Price
Federal and state governments have enacted
laws regarding:
 price fixing
 price discrimination
 resale price maintenance
 minimum pricing
 unit pricing
 price advertising
Slide 1 of 4
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SECTION 25.2
Factors Involved in
Price Planning
Government Regulations Affecting Price
Price fixing occurs when competitors agree
on certain price ranges within which they set
their own prices.
Price discrimination occurs when a firm
charges different prices to similar customers
in similar situations.
Slide 2 of 4
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SECTION 25.2
Factors Involved in
Price Planning
Government Regulations Affecting Price
Resale price maintenance occurs when a
manufacturer forces retailers to sell an item
at a minimum price.
Minimum price laws prevent retailers from
selling goods below cost plus a percentage for
expenses and profit. Some states do not have
minimum price laws and allow loss leaders,
items sold at cost to attract customers.
Slide 3 of 4
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SECTION 25.2
Factors Involved in
Price Planning
Government Regulations Affecting Price
Unit pricing allows consumers to compare
prices in relation to a standard unit or
measure, such as an ounce or a pound.
The Federal Trade Commission (FTC)
price advertising guidelines forbid
fraudulent and misleading pricing
advertisements.
Slide 4 of 4
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25.2 ASSESSMENT
Reviewing Key Terms and Concepts
1. Name four market factors that affect price
planning.
2. In response to increased costs and expenses,
what three pricing options might a business
consider to maintain their profit margins?
3. What is demand elasticity, and how does it
apply to the theories of supply and demand?
4. What is the difference between price fixing and
price discrimination? What laws govern each?
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25.2 ASSESSMENT
Thinking Critically
Many people with diabetes depend on insulin
to stay alive. If the price of insulin went up
$10, would the demand for insulin go down
as is suggested by the theory of supply and
demand? Explain your answer in terms of
demand elasticity.
Chapter 25 n Price Planning
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25.2 Graphic Organizer
Market Factors Affecting Prices
Costs
and
Expenses
Consumer
Perceptions
PRICES
Competition
Supply
and
Demand
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