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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 $ $ $ $ $ $ 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 $ $ $ $ $ $ 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