Pricing Copyright © Texas Education Agency, All rights reserved.

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 Students will understand the goals of pricing.  Students will be able to identify the factors affecting pricing.  Students will be able to explain how pricing affects product, place and promotion decisions.  Students will be able to explain the use of technology in the pricing function.  Students will be able to describe the role of business ethics in pricing. Goals Pricing Copyright © Texas Education Agency, All rights reserved.

 Price  Market share  Market position  Return on investment  Break even point  Elastic demand  Law of diminishing marginal utility  Price fixing  Price discrimination  Loss leader  Unit pricing Terms to Know Copyright © Texas Education Agency, All rights reserved. Pricing Strategies

Price is the value of money placed on a good or service The key to setting price is to understand the value that a customer would place on the item. Pricing Copyright © Texas Education Agency, All rights reserved.

Gaining Market Share Increase the firm’s percentage of total sales in a given market. Return on Investment A company may price their products to have a certain percentage of return on investment. Meeting the Competition Some companies just want to be priced similarly to their competitors. Pricing Goal of Pricing Copyright © Texas Education Agency, All rights reserved.

Costs and expenses are factors that affect pricing. Businesses must continually monitor their costs and expenses when producing a product to ensure they are making a profit. Costs and Expenses Copyright © Texas Education Agency, All rights reserved. Pricing

When costs and expenses rise, business can: Increase the price of the product Reduce the size of the product instead of increasing the price. Drop features that customers don’t value and maintain the same price. Improve products by adding features or upgrades and charging more for product. Costs and Expenses Copyright © Texas Education Agency, All rights reserved. Pricing

Occasionally costs and expenses may decrease due to: o increases in efficiency o decreased costs Aggressive firms are always looking for ways to decrease costs and improve efficiency. Costs and Expenses Copyright © Texas Education Agency, All rights reserved. Pricing

Businesses are always concerned with their break- even point. This is the point at which sales revenue equals the cost and expenses of making the product. So businesses must determine the minimum number of products they must sell to cover their costs and expenses. Any products that they sell after the minimum will begin to make the business a profit. Costs and Expenses Copyright © Texas Education Agency, All rights reserved. Pricing

Demand Elasticity is the degree to which a product is affected by price. Elastic demand is when a change in price creates a change in demand. (steak) Inelastic demand is when a change in price has very little effect on demand. (gas) Supply and Demand Copyright © Texas Education Agency, All rights reserved. Pricing

Customer perception plays a role in pricing also. Some customers equate quality with price. A high price equals high quality. Some businesses will produce a limited edition of a product and then charge more because of is exclusivity. Exceptional customer service can also entice customers to purchase from certain businesses and pay more than competitors. Supply and Demand Copyright © Texas Education Agency, All rights reserved. Pricing

Price, as one of the four P’s of marketing, must be evaluated in relation to the target market. If a businesses target market is price sensitive they must carefully consider the price of their product. If the target market is not price sensitive they can use other non-price incentives to meet the competition. Supply and Demand Copyright © Texas Education Agency, All rights reserved. Pricing

Federal and state laws have been passed that control pricing. Price fixing – companies get together and agree on a certain price for products or services. Price discrimination – when a business charges different prices to similar customers in similar situations. Robinson-Patman Act allows exceptions for Products purchased are physically different Non-competing buyers are involved Prices do not hurt competition. Costs justify the different pricings Production costs go up Prices are changed to meet another supplier’s bid. Government Regulations Copyright © Texas Education Agency, All rights reserved. Pricing

Resale Price Maintenance – manufacturers cannot set a retail price for an item and force retailers to sell it at that price. Minimum Price Laws – some states have laws prohibiting retailers from selling goods below cost. Some states prohibit this for all products some for only specific products. In states where it is not prohibited retailers will price an item at below cost to entice customers to their store. This is called a loss leader. These are highly popular, well-advertized products such as diapers or milk. Government Regulations Copyright © Texas Education Agency, All rights reserved. Pricing

Unit Pricing – requires retailers to provide consumers with a standard unit price such as an ounce or pound to compare prices between different sized packages. This has affected grocery stores the most. Price Advertising – are laws that are regulated by the Federal Trade Commission to ensure that retailers are not using deceptive advertising of prices to get customers into the store. Government Regulations Copyright © Texas Education Agency, All rights reserved. Pricing