Copyright, 1996 © Dale Carnegie & Associates, Inc. PRICE PLANNING PART 2 Factors

Four Market Factors Affecting Price Costs and ExpensesCosts and Expenses Supply and DemandSupply and Demand Consumer PerceptionsConsumer Perceptions CompetitionCompetition Costs and Expenses

Responses to Declining Profit Margins Change PricesChange Prices Change Package SizesChange Package Sizes Drop Features that arent ValuedDrop Features that arent Valued Improving ProductsImproving Products

Responses to Lower Costs/Expenses Lower pricesLower prices Higher profitsHigher profits Sales!

Break-even Points The break-even point is the point at which sales revenue equals the costs and expenses of making and distributing a product. After reaching this point, businesses make a profit on additional sales.The break-even point is the point at which sales revenue equals the costs and expenses of making and distributing a product. After reaching this point, businesses make a profit on additional sales. Break-even Point = Total costs + expenses/Selling priceBreak-even Point = Total costs + expenses/Selling price

Supply and Demand Demand for a product goes up as prices go down and demand goes down as prices go up.Demand for a product goes up as prices go down and demand goes down as prices go up. If supply is low then prices tend to be high, if supply is high then prices tend to be low.If supply is low then prices tend to be high, if supply is high then prices tend to be low.

Action Plan Describe the following (where additional information is needed assign responsibility to the logical person)Describe the following (where additional information is needed assign responsibility to the logical person) –Action steps. –Materials needed. –Training needed. –Schedules. –Costs.

Demand Elasticity Elastic Demand means that demand responds to price changes - high prices = low demand; low prices = high demandElastic Demand means that demand responds to price changes - high prices = low demand; low prices = high demand Inelastic Demand means that change in price has little effect on demand.Inelastic Demand means that change in price has little effect on demand.

The Law of Diminishing Marginal Utility Consumers will only buy so much of a given product, even though price is low.Consumers will only buy so much of a given product, even though price is low. Consumers will usually purchase more at lower prices, but not a lot more than they really need or can afford, no matter how low the price.Consumers will usually purchase more at lower prices, but not a lot more than they really need or can afford, no matter how low the price.

What has Inelastic Demand? GAS!GAS! StaplesStaples WaterWater ElectricityElectricity CarsCars TiresTires OilOil

Factors Affecting Demand Elasticity Availability of SubstitutesAvailability of Substitutes Price Relative to IncomePrice Relative to Income Brand Loyalty Luxury vs. Necessity Urgency of Purchase

Consumer Perceptions People pay a price according to their perceived value.People pay a price according to their perceived value. Higher price = QualityHigher price = Quality ExclusivityExclusivity Customer ServiceCustomer Service

Competition If consumers are price conscious then price competition is effective.If consumers are price conscious then price competition is effective. If consumer perceive the product is unique, price is not as much a factor.If consumer perceive the product is unique, price is not as much a factor. Similar products must be very price competitive to sell their product.Similar products must be very price competitive to sell their product.

Price War When businesses lower prices to attract customers from the competition, sometimes to the detriment of profits.When businesses lower prices to attract customers from the competition, sometimes to the detriment of profits.

Price Fixing When competitors agree to a certain price range to charge customersWhen competitors agree to a certain price range to charge customers Price Fixing is illegal because it eliminates competition.Price Fixing is illegal because it eliminates competition. The Sherman Antitrust Act of 1890 outlawed monopolies.The Sherman Antitrust Act of 1890 outlawed monopolies.

Price Discrimination When a company charges different prices to similar customers in similar situations.When a company charges different prices to similar customers in similar situations. Illegal - The Clayton Antitrust Act of 1914Illegal - The Clayton Antitrust Act of 1914 The Robinson-Patman Act (1936)The Robinson-Patman Act (1936) You cant charge small retailers more than large retailers or give large retailers special services not offered to small retailers.You cant charge small retailers more than large retailers or give large retailers special services not offered to small retailers.

When can Price Discrimination be Used? When products purchased are differentWhen products purchased are different If non-competing buyers are involvedIf non-competing buyers are involved If prices do not hurt competitionIf prices do not hurt competition If costs justify the differences in pricesIf costs justify the differences in prices If production costs go upIf production costs go up If prices are changed to meet another suppliers bidIf prices are changed to meet another suppliers bid

Resale Price Maintenance Manufacturers cant tell retailers that they cannot sell below a certain price point. It is illegal for manufacturers to coerce retailers to sell at a particular price.Manufacturers cant tell retailers that they cannot sell below a certain price point. It is illegal for manufacturers to coerce retailers to sell at a particular price. Manufacturers can tell retailers in advance that they cant sell below a certain price, not coerce.Manufacturers can tell retailers in advance that they cant sell below a certain price, not coerce.

Minimum Price Laws Some states have laws against retailers selling goods below cost.Some states have laws against retailers selling goods below cost. Where there are no laws prohibiting it retailers have loss leaders. These are popular items priced below cost (at a loss) to entice customers into the store.Where there are no laws prohibiting it retailers have loss leaders. These are popular items priced below cost (at a loss) to entice customers into the store.

Unit Pricing Some states have laws requiring unit pricing.Some states have laws requiring unit pricing. Unit pricing is when a store puts on the price sticker how much the item is per unit (i.e. 2.3 cents per ounce)Unit pricing is when a store puts on the price sticker how much the item is per unit (i.e. 2.3 cents per ounce) Unit pricing allows consumers to comparison shop to get the best value.Unit pricing allows consumers to comparison shop to get the best value.

Price Advertising FTC has guidelines for advertising prices.FTC has guidelines for advertising prices. –A price reduction can only be advertised if the product was offered to the public at the regular price for a reasonable time. –You must be able to prove your prices are lower than a competitors to advertise it. –A regular price cannot be used for a reference point unless the item has actually sold for that price. –No bait-and-switch advertising.