Pricing 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

$What is the relationship between supply, demand and price? $As price increases demand $As price decreases demand $Not all products respond to this general rule $The degree to which a product responds is referred to as Demand Elasticity Supply & Demand Increases Decreases

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