Factors Affecting Selling Price Make Cents Factors Affecting Selling Price Pricing LAP 3

Explain the importance of selling price. Discuss pricing objectives. Discuss factors affecting selling price.

Explain the importance of selling price.

What do you ask yourself when you want to: Buy lunch at a local restaurant? Purchase a new e-reader? Book a plane ticket?

You probably ask “How much?” Can you pay the price and do you want to?

You probably don’t spend much time thinking: How was the selling price determined? Why is the price important to the seller?

What Is Selling Price? The amount a seller charges for a good or service Examples: Dollar figure shown on a price tag Membership dues Insurance premiums

What Is Selling Price? The amount a seller charges for a good or service Examples: College tuition Bus fare Legal fees

What Is Selling Price? Businesses go through their own pricing process. The selling prices fluctuate.

The Components of Selling Price Costs of the product Operating expenses A profit

Importance of Selling Price To customers Helps to compare products when making buying decisions Indication of quality A guide in selecting the products they buy Helps to decide how to allocate their money Few people can buy everything they want. Selling price helps them to decide what they can afford.

Importance of Selling Price To businesses Determines income from sales May determine a business’s success or failure Should include enough mark-up to pay current expenses and to provide for future growth Mark-up—the difference between the cost of a product and its selling price Is a tool that businesses can use in achieving their goals

Describe pricing objectives.

Pricing Objective Basics Should be compatible with marketing objectives The business must know where it wants to go before it can choose selling prices that will help it to get there.

Pricing Objective Basics Choosing them isn’t a one-time job. As circumstances change, or the business changes its goals, pricing objectives may also need to be changed.

Sales-Oriented Pricing Objectives Purpose—to increase the total amount of income from sales Two ways a business can do this: Charge low prices in an effort to increase sales volume Charge high prices in an effort to increase the dollar value of sales

Sales-Oriented Pricing Objectives Achievements of using sales-oriented pricing: Creating a business image (discount or exclusive)

Sales-Oriented Pricing Objectives Achievements of using sales-oriented pricing: Being more competitive Matching competitors’ prices—often happens in industries where products are quite similar Pricing above the competition—works when customers see the product as more valuable than other, similar products Pricing below the competition—to still make a profit, the business has to keep tight control over its costs.

Sales-Oriented Pricing Objectives Achievements of using sales-oriented pricing: Obtaining, maintaining, or increasing market share Size of market share used as a measure of success May set low prices to get as much of the market as possible right from the start

Sales-Oriented Pricing Objectives Achievements of using sales-oriented pricing: Obtaining, maintaining, or increasing market share Established companies may lower prices to enlarge their market share. Other companies stabilize selling prices to maintain the market share they have.

Profit-Oriented Pricing Objectives Purpose—to create profits for the business Prices chosen to provide largest profit. Other businesses want to recover their costs and earn a reasonable amount of profit. Specific objectives a business might achieve by using profit-oriented pricing: Surviving

Profit-Oriented Pricing Objectives Specific objectives a business might achieve by using profit-oriented pricing: Maximizing profits—making the most possible immediate profit To improve cash flow To maximize profits

Profit-Oriented Pricing Objectives Specific objectives a business might achieve by using profit-oriented pricing: Earning a return on investment Capital investment is needed to start and operate any business. All businesses need to earn income, or return, from that investment. Some companies base needed profit on the amount of their capital investment (often expressed as a specific percentage). The business sets prices that it hopes will provide enough profit to give the firm that percentage of return.

Profit-Oriented Pricing Objectives Specific objectives a business might achieve by using profit-oriented pricing: Earning a return on sales Called target return because the company uses a percentage of profit on its sales as a target or goal Often used by companies that don’t want to be accused of unfair trade practices or of earning too much profit

Discuss factors affecting selling price.

Factors Affecting Selling Price Costs Business needs to recover product costs. Total costs are made up of two kinds of costs—fixed and variable. Fixed costs are not affected by changes in sales volume. Variable costs change according to changes in sales volume.

Factors Affecting Selling Price Supply and demand Information needed by marketers for pricing when they are engaged in pricing. Obtained by: Monitoring current business and economic conditions Trying to predict how those conditions will change Estimating the way those changes will affect their product demands

Factors Affecting Selling Price Supply and demand Supply and demand are determined by what people want and by what they can afford to buy. When consumer demand increases, producers make more. When supply increases, the selling price goes down.

Factors Affecting Selling Price Supply and demand As supply increases, the number of buyers may decrease. Sellers will have to reduce prices to get the product off the shelves. When the producer is not able to increase production, and the supply does not increase, the price may go up.

Factors Affecting Selling Price Supply and demand Customers may pay the higher price to obtain the product. If the selling price goes too high, customers may stop buying. Demand will drop.

Factors Affecting Selling Price Economic conditions Always changing Ups and downs in economic activity are business cycles. Monitored to predict whether business conditions will get better or worse Prices adjusted according to the changes in the economy

Factors Affecting Selling Price Competition Customers compare prices to get the best buys. Businesses may adjust prices to remain competitive or to become more competitive. The kind of market in which the business operates determines what kind of pricing will help the business to be more competitive.

Factors Affecting Selling Price Competition (cont’d) Each one affects pricing in a different way: Pure competition: A great many buyers and sellers of nearly identical products Very little control over pricing Most competitive kind of market Most products are sold at market price—the actual price in a market at any particular moment.

Factors Affecting Selling Price Competition (cont’d) Each one affects pricing in a different way: Monopolistic competition: Many buyers and sellers A range of prices rather than one market price Customers choose products based on differences from other products.

Factors Affecting Selling Price Competition (cont’d) Each one affects pricing in a different way: Oligopoly Relatively few sellers Industry leader usually determines prices. Fairly stable prices Not many new firms can afford to enter the market.

Factors Affecting Selling Price Competition (cont’d) Each one affects pricing in a different way: Monopoly Only one seller or provider of a product No substitutes readily available Almost eliminated by the federal government because monopolies control the pricing of their products

Factors Affecting Selling Price Government regulation Both state and federal laws affect pricing. The major purposes are to promote competition and to prevent monopolies.

Factors Affecting Selling Price Government regulation Examples of pricing areas regulated by law: Price fixing: Agreeing on a price or price range for a product Forbidden because it limits competition Price discrimination—prohibits businesses from charging different prices to similar customers in similar situations if doing so would damage competition Price advertising—prevents any kind of customer deception

Factors Affecting Selling Price Government regulation Examples of pricing areas regulated by law: Unit pricing: Shows the price per unit along with the total price of the item Makes it easy for consumers to compare product values

Factors Affecting Selling Price Channel members Affect pricing because all channel members try to make a profit on the products they sell Expect producers to provide support such as sales and service training Cost of the supports considered when producers price their products

Factors Affecting Selling Price Channel members Price increases are usually passed through the channel to customers. Channel members may absorb part of the increase rather than pass all of it on to customers due to fear of reduced sales.

Factors Affecting Selling Price Company objectives and strategies Product mix A company with a large product mix does not have to rely on any one unit for its income. In a company with a small product mix, the price of each product has more effect on the firm’s total income.

Factors Affecting Selling Price Company objectives and strategies (cont’d) Product life cycle Product Life Cycle Curve Introduction Maturity Decline Growth Sales Time

Factors Affecting Selling Price Company objectives and strategies (cont’d) Product life cycle Introductory stage: Products are usually priced higher to enable the business to recover its investment in the new product. Growth stage: Prices usually must be reduced to promote sales and to compete with copycat products that have entered the market. Maturity stage: The effort is on stabilizing prices to maintain a share of the market. Obsolescence: Sellers reduce prices to get rid of it.

Factors Affecting Selling Price Company objectives and strategies (cont’d) Target market Affects pricing because customers in different markets view prices differently Price is often a more important factor for high-ticket items that aren’t bought frequently. Most marketers price according to the way their customers view the product.

Factors Affecting Selling Price Company objectives and strategies (cont’d) Target market Customers’ judgment of the value received may determine whether or not they buy the product. Even within the same market, not all customers see price from the same point of view.

Think of a purchase you’ve made within the past week. How much did you pay for it? How do you think the selling price was influenced by costs? By supply and demand? By economic conditions? By competition? By government regulation?

Do you think you paid a fair price for the product? Why or why not?

Jamie has four tickets to next weekend’s concert. She is taking her friend and planning to sell the other two tickets. The concert is sold out. Lots of students at Jamie’s school are dying to attend. When one classmate offers her $75 each for the tickets, she tells him that another classmate has promised $85 each.

The price continues to climb. Is Jamie treating her peers unfairly by asking for more money than she originally paid for the tickets? Or, is she just getting market price? What do you think? Are Jamie’s actions ethical or unethical?

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