Download Pricing

Pricing
Price Planning
Price Planning
$ Goals in Price
$ Factors in Price
$ Price in Supply &
Demand
$ Government Regulations
Price
$ Value of money placed on a good or service
$ Items are not worth anything until a customer is
willing to pay for them
$ Barter
$ Oldest form of pricing
$ Exchanging on product for another
Value
$ How much is the customer willing to pay
$ Primary goal of pricing is not to make a profit,
but to exceed customer value
$ A customer determines value through anticipated
satisfaction
$ Will this product satisfy my need?
Forms of Price
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Tolls
Rent
Interest on loans or savings
Tuition
Retail
Salaries
Importance of Price
$ Pricing plays a large role in the success of a firm
$ Higher prices often portray higher quality
$ Companies must live up to that image
$ Lower prices portray better value
$ Advertising strategies can be based on price,
think Wal-Mart
Profit from Price
$ Profit = Price * Quantity sold
$ To make more profit you need to increase
price or quantity
$ Higher prices will not always lower sales
$ Lower prices will not always increase sales
$ Must keep costs stable to increase profit
Gaining Market Share
$ Market share is the firm’s percentage of total
sales volume in a given market
$ Market position is the rank in relation to other
companies
$ Must track the size of the market & growth of
competitors
$ Will change prices, product or message to
increase share or position
Return on Investment
$ Percentage of money that a company wants to
get back from sales
$ Often dictates price level
$ If a company wants to have a 15% return, they will
need to sell their item for 15% more than it cost to
make it
Competition Pricing
$ Some companies price products to be equal to
competitors price
$ Typically occurs when items are very similar across
brands, i.e. soda, cookies, soup
$ When price is all the same, must compete
based on quality, service and convenience
Factors in Pricing
$ Price must take into account costs & expenses
of operating a business
$ These costs are passed onto the consumer
$ Pricing is a key part of an operation that will
achieve the goal of business
$ Whether that goal is to increase market share or
profit
Costs & Expenses
$ Increasing price
$ When sales decrease, a company will want to
increase prices to maintain profit
$ This will hold margins the same, and even increase
them if sales recover
$ However, consumers often respond negatively to
higher prices
Costs & Expenses
$ As other costs increase, other methods of
keeping profit the same:
$ Reduce size
$ 8 cans instead of 12
$ 3.5 oz candy bars instead of 4oz
$ Eliminate portions of service
$ An airline in the early 90’s saved thousands of dollars
eliminating one olive from salads
$ Improve product
$ Justifies higher cost
Costs & Expenses
$ Decreasing price
$ Competitive firms are constantly looking to improve
efficiency or obtain less expensive materials
$ As costs decrease, a company could lower prices, or
keep them constant to increase profit
Costs & Expenses
$ Break-Even point
$ Making a profit is of greatest concern when
changing prices or introducing a new product
$ The break-even point is the point at which sales
revenue equals costs
$ After this, all sales are recorded as profit
Supply & Demand
$ What is the relationship between supply,
demand and price?
$ As price increases demand
$ As price decreases demand
Decreases
Increases
$ Not all products respond to this general rule
$ The degree to which a product responds is
referred to as Demand Elasticity
Demand Elasticity
$ Elastic demand is when a change in price causes
a change in demand
$ As prices fall, demand will rise
$ Law of diminishing marginal utility
$ States that a consumer will only purchase so much
of a product regardless of price
$ When price does not effect demand, it is
referred to as inelastic demand
Factors of Elasticity
$ Availability of substitutes
$ Readily available substitutions lead to demand
elasticity
$ Brand loyalty
$ High loyalty leads to demand inelasticity
$ Luxury v Necessity
$ Luxuries are elastic, necessities are not
$ Relative to individual
Factors of Elasticity
$ Price relation to income
$ An increase in price relatively high compared to
income will lead to an elastic demand
$ Urgency of purchase
$ Immediate needs will lead to inelastic demand
Consumer Perceptions
$ What consumers believe about the product
$ High price often reflects prestige or status
$ Company can limit quantity to portray scarcity
and increase value
$ Better service increases perceived value
$ Avis slogan “We try harder”
Competition
$ Price Competition
$ Companies lower prices to get a bigger market
share
$ Result could be a price war, often leads to financial
ruin for the companies involved
$ Non-Price
$ Find some way to differentiate without changing
price
$ All things equal, people buy on price
Government Regulations
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Price Fixing
Price Discrimination
Resale Price Maintenance
Minimum Price
Unit Price
Price Advertising
Price Fixing
$ Competitors agree on a certain range of prices
$ Must have proof of collusion
$ Eliminates free enterprise and power of
consumers
$ 1999, Hoffman-LaRoche and BASF found
guilty and fined $725 million
Price Discrimination
$ Different prices for similar customers
$ Intended to help small stores, since they could
not purchase the volume of large stores
$ Permissible when
$ Products are physically different
$ Non-competing buyers
$ Increase in costs of production
Resale Maintenance Price
$ Deals with price at the retail level
$ Stores buy from manufacturers and resell to the
public
$ Distributors may not “coerce” stores into selling
for a certain price, they may however “suggest”
a level
Minimum Price Laws
$ State laws enacted to prevent stores from selling
below cost
$ Not every state has these laws, some are federally
mandated, i.e. milk
$ In states without these laws, stores have a loss
leader, product that is sold at a loss to get
people into the store.
Unit Pricing
$ Allows consumers to compare prices based on
standard unit of measure
$ Makes it easier for consumers to compare
prices
$ Think of shelves at the supermarket
Price Advertising
$ Companies are not permitted to advertise a
price reduction unless the regular price was
advertising regularly and for a “reasonable”
period of time
$ Bait-and-switch
$ A tactic in which a store advertises a lower price for
an item they do not intend to sell, and substitute
with a higher priced item