PRICE PLANNING

Marketing Mix

$Price$ Promotion

Product Place

What is price?

Price is the value in money (or its equivalent) placed on a good or service.

The oldest form of pricing is the barter system which involves the exchange of a product or service for another product or service. Ex: a business might exchange some of its products for advertising space in

a newspaper or magazine.

Barter Activity

Jason

SaraLYNNE

Max

MelanieThomas

Relationship of Product Value Value is a matter of anticipated

satisfaction If consumers believe they will gain a

great deal of satisfaction from a product or service, they will place a high value on the product and be more willing to pay a higher price.

Sale Price: $60,000

Relationship of Product Value A seller must be able to gauge where

a product will rank in the customer’s estimation. Whether it will be valued much, little, or

somewhere in between. The seller’s objective is to set a price

high enough to make a profit, but not so high that it exceeds the value that a potential customer may place on the product.

Is it worth

it?

Relationship of Product Value A key part of the marketing plan is

setting the list price. If a home is priced too

low, you won't benefit from the optimal profit.

If a home is priced too high, potential buyers may be scared away.

To determine the best asking price review the cost of recently sold homes, evaluate the competition and study marketplace trends.

What is your

house worth?

Various Forms of Price

• The fee you pay a dentist to clean your teeth

• The amount you pay for a new pair of shoes

• Bridge tolls• Bus fares• Rent is the

monthly price of an apartment

• Tuition is the price you pay for education

Price is involved in every marketing exchange:

Various Forms of Price

• Wages, salaries, commissions, and bonuses are various prices that businesses pay workers for their labor.

• Interest is the price of a loan

• Dues are the price of a membership

Importance of Price

Price is an important factor in the success or failure of a business.

It helps establish and maintain a firm’s image, competitive edge, and profits.

Many customers use price to make judgments on products and the companies that make them A higher price means better quality to some

A lower price means more for their money to some.

Importance of Price

Advertising strategies are closely aligned to a firm’s image “Always Low Prices. Always” –Walmart’s

example of how a company can use price as the main thrust of an advertising strategy.

Price helps determine profits Sales Revenue = Price x Quantity Sold Sales revenue can be increased

either by selling more items or increasing price per item.

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

•The number of items sold may not increase or even remain stable if prices are raised.•It is important to remember that an increase in price can increase profits only if costs and expenses can be maintained

So…how could this relate to the discount cards?

Price Per Card X Quantity Sold = Sales Revenue

$5 1400 $7000

$6 1100 $6600

$7 900 $6300

$8 700 $5600

…………Just a scenario.

Goals of Pricing

1. Earning a profit/return on investment (primary goal)

2. Gaining market share

3. Meeting the competition

Earning a Profit

Return on Investment (ROI) is a calculation used to determine the relative profitability of a product.

To calculate ROI, of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. 

The return on investment formula:

Calculating ROI

Assume your company sells watches for $9 each. Your cost to make and market the watch is $7.50 per unit. Remember that profit is money earned by a business minus costs and expenses. So…1. $9-$7.50 = $1.502. Profit / Investment = ROI3. $1.50 / $7.50 = .20

Rate of Return is 20%

Earning a Profit without Expenses

Rate of Return = Profit/Investment

For example: Purchase stocks for $1000Sell stocks for $1500Rate of Return = 500/$1000Rate of Return = 50%

Gaining Market Share

Market Share is a firm’s percentage of the total sales volume generated by all competitors in a given market.

Market Position

Market Position is the relative standing a competitor has in a given market in comparison to competitors. Competitors are ranked according to their total sales volume.

Pricing is one means of improving market share and position.

Gaining Market Share Example In 2007, Nintendo Wii sold for

significantly less than Sony’s Playstation 3 and Microsoft’s Xbox 360.

Wii’s market share increased to 54%!!! That’s HUGE!

Meeting the Competition

Some companies aim to meet prices of competition. They either follow industry leader or calculate average price and position themselves close to that. Ex: Airline pricing is usually around the same price. Ex: Neighboring gas stations.

Meeting the Competition

If you don’t rely on price alone, you can compete on other factors in the marketing mix including:1. Quality/uniqueness of product2. Convenience of business location (place)3. Convenience of business hours4. Level/Quality of service

Meeting the Competition Examples (Business Hours) Commerce Bank is open seven

days a week from 8:30 AM—8:00 PMMcDonald’s recently announced that they will be open 24 hours.

They are hiring 50,000 people this week! (Service) Automobile manufacturers are competing

with warranties and maintenance agreements A computer store may offer free

installation of software and training. (Product)

Review

1. What does price help to do? (Why is it important?)

1. Sales Revenue = Price x Quantity Sold

Answers

1. Earning a profit/return on investment (primary goal)

2. Gaining market share

3. Meeting the competition

1. maintain a firm’s image, competitive edge, and profits.

2. What is the formula to find sales revenue?3. What are the main goals of pricing?

WAL*MARTIs it Good for America?

How do they keep prices so low?

Revenue US$ 421.849 billion (2010)[2]

Bargain

ing

FACTORS INVOLVED IN PRICE PLANNING

Market Factors Affecting Prices Constant changes in the marketplace

force businesses to review pricing decisions frequently. Four key market factors affecting prices are:1. Costs and expenses2. Supply and demand3. Consumer perceptions4. Competition

Costs and Expenses

Sales, costs, and expenses together determine a firm’s profit. Here are some factors that have to be considered when raising or lowering prices:1. Responses to increasing costs and

expenses2. Responses to lower costs and expenses3. Break even point

Responses to Increasing Costs and Expenses

1. Reduce size of item Ex: a candy manufacturer might reduce

a candy bar from 4 to 3.5 oz rather than increasing price.

2. Drop service features Ex: some airlines have stopped serving

meals and only offer beverages.

$1.50

$1.50

Responses to Increasing Costs and Expenses

3. Add more features to justify higher costs

Ex: Ford Motor Company designed more comfortable super-cabs on some trucks and charged more for those models.

VS

Responses to Lower Costs and Expenses

Prices may drop from decrease in costs and expenses

Aggressive firms are always looking for ways to increase efficiency and decrease costs.

Improved technology and less expensive materials Ex: Personal computers have

fallen in price due to improved technology.

Break Even Point

Break even point is the point at which sales revenue equals the costs and expenses of making and distributing a product.

Total amount of costs and expenses/selling price = BEP

A toy manufacturer plans to make 100,000 dolls sold at $6 each.The cost of making the dolls is $4.50 each.Total cost is $4.50 x 100,000 = $450,000BEP is $450,000/$6 = 75,000You must sell 75,000 dolls (or units) to break even.

Challenge Question

We purchased1500 discount cards at the cost of $0.50 each. With no additional expenses, and selling the cards at $5, what is our break even point? How many cards do we need to sell to break even?1500 cards X $0.50 = $750$750/$5 = 150 cards

BEP = 150 cards

Supply and Demand

General Rule: Demand goes up when prices go down Demand goes down when prices go up

Competition

Price must be evaluated in relation to the target market. Should create a distinctive product through

product availability and customer service. The more unusual or useable a product is

perceived by customers, the greater the marketer’s freedom to set prices above competition.

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

Legal and Ethical Considerations for Pricing

1. Price Fixing2. Price Discrimination3. Unit pricing4. Resale price maintenance5. Unfair trade practices law6. Price Advertising

Price Fixing

Price Fixing occurs when competitors agree on certain price ranges within which they set their own prices. Can only be proven when there is

evidence of collusion, or communication among competing firms to establish price range.

Illegal because it eliminates competition

Federal law: Sherman Antitrust Act of 1890 outlawed monopolies.

Microsoft Apple

Price Fixing Current News

Dell sued Sharp and Hitachi over flat panel price-fixing claims—March 13. Dell says, Sharp, Hitachi, and three other liquid crystal

panel display makers conspired to fix prices and over charge for their products.

Dates back to 1996 Sharp and Hitachi admitted to overcharging Dell. Sharp paid $120 million in fines Hitachi paid $31 million

Price Discrimination

Price Discrimination occurs when a firm charges different prices to similar customers in similar situation. Note that price discrimination does not

pertain to discounts. You can offer discounts to certain people when

applicable You cannot discriminate on the basis of gender,

race, religion, etc.

Price Discrimination Acts

The Clayton Antitrust Act of 1914 defines price discrimination as creating unfair competition.

The Robinson Patman Act of 1936 prohibits sellers from offering one customer one price and another customer a different price if both customers are buying the same product in similar situations. Intended to help smaller retailers

compete with the large chain stores.

Movie Renta

l

Unit Pricing

Unit Pricing allows consumers to compare prices in relation to a standard unit or measure, such as an ounce or a pound. Food stores have been most affected by

these laws and responded with shelf labels and computer records of unit prices. This is to make it easier for consumers to

compare similar goods that are packaged in different sizes or forms.

Resale Price Maintenance

Consumer Goods Pricing Act of 1975

prohibited manufacturers from punishing retailers for not selling items at their suggested price. Manufacturers can suggest pricing for

retailers to sell in its advertising, price

tags, and price lists; but cannot force retailers to sell at those prices unless agreed upon in contract.

Resale Price Maintenance Example:

Unfair Trade Practices Law

Also Known As: Minimum Price Law, prevents large companies with market power from selling products at very low prices to drive out their competition. May prohibit below-cost pricing in

some states. Enacted to prevent retailers from selling

goods below cost plus a percentage for expenses and profit. Some large companies use the unfair trade

tactic to get rid of Mom & Pop (family stores).

Meijer fights back

Meijer launched its free prescription drug program in October 2006. The program covers leading oral generic antibiotics with a special focus on the prescriptions most often filled for children. The program includes at least one antibiotic from each of the major antibiotic classifications and more than 70 percent of the generic, pediatric antibiotic prescriptions filled by Meijer. They are: Amoxicillin, Cephalexin, SMZ-TMP, Ciprofloxacin, Penicillin VK, Ampicillin and Erythromycin.

This no-strings-attached program means that any customer, regardless of insurance or co-pay, can take their prescription to any Meijer pharmacy and receive their designated antibiotic free of charge. There is no card required, no membership to purchase, no minimum charges, no special forms to fill out and no fees to pay.

Unfair Trade Practices Law

In states where minimum price laws are not in effect, an item priced at or below cost to draw customers into a store is called a loss leader. Which means the business takes a loss on the item to lead customers into the store. Milk is often

sold below cost and placed at back of store. Store takes loss to reel customers in.

Price Advertising

The Federal Trade Commission (FTC) has developed guidelines for advertising prices. Forbidden to advertise price reduction

unless original price was offered to the public on a regular basis.

Company may not say its prices are lower than competitors unless there is proof on a large number of items.

Premarked or list price cannot be used as reference point for a new sale price unless the item has been actually sold at that price.

Bait-and-Switch is illegal.

Bait and Switch

Bait and Switch is where a firm advertises a low price for an item it has no intention of selling.

Ex: when a customer comes in and asks for the advertised item and the salespeople switch the customer to a higher priced item claiming the advertised product is out of stock.

Review Questions

1. What are the four market factors that affect prices?

Answers

2. What is the break even point?

3. How does the government regulate the pricing process? Give one example.

4. What is bait and switch?

1. Costs and expenses

2. Supply and demand

3. Consumer perceptions

4. Competition

Break even point is the point at which sales revenue equals the costs and expenses of making and distributing a product.

1. Price Fixing2. Price

Discrimination3. Unit pricing4. Resale price

maintenance5. Unfair trade

practices law6. Price Advertising

Bait and Switch is where a firm advertises a low price for an item it has no intention of selling.

BASIC PRICING POLICIES

Basic Pricing Concepts

To establish the base price or price range of a good or service, some or all three pricing approaches can be used:

1. Cost-Oriented Pricing Mark Up Pricing Cost-Plus

2. Demand-Oriented Pricing3. Competition-Oriented Pricing

Markup Pricing

Markup Pricing-resellers add a dollar amount (markup) to their cost to arrive at a price. Example: If an item cost $10 and the percentage markup

on cost is 40% the retail price would be $14.00.

$10 x .40 = $4$10 + $4 = $14

Markup pricing is used primarily by wholesalers and retailers, who are involved in acquiring goods for resale such as Jewel, Sears, Home Depot, etc.

Cost-Plus Pricing

Cost-Plus Pricing-all costs (variable and fixed) and expenses are calculated, then the desired profit is added to arrive at a price. Ex: Plenty of Pants Clothing Manufacturer:

Unit Price for a Pair of Pants

Materials (fabric, thread, zipper, buttons)………………....$7.50

Labor (Piecework)………………………………………….$1.50

Fixed Expenses (Overhead)………………………………..$0.25

Intended Profit……………………………………………..$2.25

Final Price to Business Customer…………..……………$11.50

Demand-Oriented Pricing

Marketers who use demand-oriented pricing attempt to determine what consumers are willing to pay for goods and services. Price set must be in line with the consumer’s

perceived value of the item. Relies on supply and demand.

The higher the demand, the higher the price. The lower the demand, the lower the price.

Example: Auction

Competition-Oriented Pricing

Marketers may elect to take one of three actions after learning their competitors’ prices: Price above competition Price below competition Price in line with competition

There is no relationship between cost and price or between demand and price with this method.

Review

1. List three ways/approaches to find a base price.

2. What is the difference between Markup Pricing and Cost-Plus Pricing?

Answers1. Cost Oriented2. Demand Oriented3. Competition Oriented

Mark up pricing increases the price by a certain percentage. Cost-Plus pricing increases the price by adding a dollar amount to the cost.

STRATEGIES IN THE PRICING PROCESS

Adjusting the Base Price

To remain competitive, businesses can use specific pricing strategies to fit different economic and market conditions. To adjust base prices, marketers use the following pricing strategies:1. Geographical2. Psychological3. Promotional pricing4. Discounts and allowances

Geographical Pricing Strategies Geographical Pricing refers to price

adjustments required because of the location of the customer. Ex: A customer is more likely to buy a

pickup truck in a rural location than in New York City. (Texas Truck)

Psychological Pricing Strategies

Psychological pricing strategies are pricing techniques that help create an illusion for customers. Odd-even pricing

Odd numbers convey a bargain image ($.79, $9.95, $699)

Prestige pricing Sets higher than average prices to suggest

status or high quality (Waterford Crystal, Rolex) Every day low price (EDLP)

Low prices set on a consistent basis with no intention of raising or offering discounts.

Only

$9.99

Promotional Pricing

Promotional Pricing is generally used in conjunction with sales promotions where prices are reduced for a short period of time. Loss leader pricing

Used to increase store traffic by offering very popular items for sale at below cost prices.

Special-event Items are reduced in price for short

period of time (black Friday) Rebates and coupons

Partial refunds by manufacturers to consumers

Discounts and Allowances

Discount pricing involves the seller offering reductions from the usual price. Cash discounts

Discounts offered if buyers pay bills quickly. Quantity discounts

Discounts offered when buyers place large orders.

Seasonal discounts Discounts offered to buyers willing to buy

at time outside of customary buying season.

Allowances Customers offered price reduction if they

sell back old model of the product they are purchasing.

Steps in Determining Prices

1. Establishing pricing objectives2. Determine costs3. Estimate demand4. Study competition5. Decide on pricing strategy6. Set prices

Review

2. List three types of promotional pricing?

1. What are the four types of pricing strategies that may be used to adjust the base price?

AnswersLoss LeaderSpecial EventRebates and Coupons

1. Geographical2. Psychological3. Promotional

pricing4. Discounts and

allowances