Chapter 29 Price Planning

What is Price? Price – is the value of money placed on a good or a service. The seller’s objective is to set a price high enough to make a profit, but not so high that it exceeds the value potential customers place on the product. $100

Price comes in many forms... Fees (paid to the dentist etc...) Rent Dues (memberships) Tuition (education) Wages, Salaries, Commissions

Importance of Price To some, high prices means better quality. To others, a low price means getting more for their money.

Price helps determine PROFIT!! Therefore, to make more money marketers can either increase the price, or sell more items. See page 379

Goals of Pricing Getting Market Share Return on Investment Meeting the Competition

1. Market Share Market Share – is a firm’s percentage of the entire market Market Position – is the company’s relative standing in relation to their competitors. Pricing may play a role in establishing and maintaining market share

2. Return on Investment ROI – is the calculation used to determine the profitability of a product. Profit Investment

3. Meeting the Competition Some companies just want to meet the prices of their competition. They either: –Follow the industry leader or –Calculate the average price and then position their product close to that figure.

Factors Affecting Prices Costs and Expenses Supply and Demand Customer Perceptions Competition

1. Costs and Expenses The amount that a business pays for a particular item determines how much they will charge for a product. Price is so important that most businesses will make every other change before changing the price of a product. (candy bar example)

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 & Expenses Selling Price

2. Supply and Demand Recall that demand tends to go up when price goes down, and down when the price goes up. However, not all products make the supply and demand curve work this way. –Demand Elasticity –Inelastic Demand

Elastic Demand $ DEMAND Elastic Demand refers to situations when a change in price creates a change in demand

Inelastic Demand $ DEMAND Inelastic Demand refers to situations when a change in price has little or no effect on demand.

Inelastic vs. Elastic Demand The following depend on the consumers personal situation and attitudes about the purchase. –Availability of Substitutes (Inelastic vs. Elastic) –Brand Loyalty (Inelastic vs. Elastic) –Price Relative to Income (Inelastic vs. Elastic) –Luxury vs. Necessity(Inelastic vs. Elastic) –Urgency of Purchase(Inelastic vs. Elastic)

3. Customer Perceptions Some customers equate quality with price. A high price may suggest status, prestige, and exclusiveness. Businesses also limit the amount of goods to give the perception of exclusivity.

4. Competition When products are very similar, price often becomes the sole basis on which customers make their purchase decisions. Price Wars – when competitors engage in a fierce battle to attract customers by lowering prices.

Activity #1 Which industries are known for their participation in Price Wars?

Government Regulations Affecting Prices 1.Price Fixing – occurs when competitors agree on certain price ranges within which they set their own prices. Also called collusion. Sherman Antitrust Act

Price Discrimination Price Discrimination – is when a firm charges different prices to similar customers in similar situations. –Robinson Patman Act

Resale Price Maintenance Manufacturers of a product usually suggest to a retailer the price that they should charge to their customers, however, they ma y not force them to use the suggestions.

Minimum Price Laws Some states have enacted minimum price laws to prevent companies from “dumping” their products. In states where these laws are not in effect, items priced at cost to draw in customers to the store are called Loss Leaders.