Marketing Essentials Chapter 25: Price Planning

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning What You'll Learn The different forms of price The importance of price The goals of pricing The difference between market share and market position

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Why It's Important Price is one of the four Ps of the marketing mix and is an essential element in marketing a product to the correct target market. The goals of company and government regulations are two issues that must be considered in the pricing process. Understanding the steps involved in determining the price of a product is essential for business success.

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Key Terms price share market position return on investment

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning What Is Price? Price is the value of money (or its equivalent) placed on a good or service. It is usually expressed in monetary terms. The oldest form of pricing is the barter system—the exchange of a product or service for another product or service, without the use of money.

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Importance of Price Price is involved in every marketing exchange. It helps establish and maintain a firm's: image—to some customers, high price equals quality competitive edge—a business can attract customers by guaranteeing low prices profits—sales price is directly related to the price and number of items sold

Price per Item x Quantity Sold = Sales Revenue SECTION 25.1 The Steps of Price Planning Projected Effects of Different Prices on Sales Price per Item x Quantity Sold = Sales Revenue An increase in the price of an item may not produce an increase in sales revenue. Why is this true? Are you more likely to buy a higher priced item or a lower priced item? $50 200 $10,000 $45 250 $11,250 $40 280 $11,200 $35 325 $11,375 $30 400 $12,000 $25 500 $12,500

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Goals of Pricing Marketers’ pricing goals include: gaining market share achieving a certain return on investment meeting the competition

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Gaining Market Share A business may engage in price competition to take market share from its competitors, forgoing immediate profits for long-term gains in market share.

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Market Share Market share is a firm's percentage of the total sales volume generated by all competitors in a given market. Which brand has the largest share of the digital camera market? If total sales for this market are $3 billion, what is the sales revenue for the market leader? Do you have more confidence in a company that has a large market share?

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Market Position Market position is the relative standing a competitor has in a given market in comparison to its competitors. Which brand is the market leader in the U.S. cookie market? Given total sales of $1,221 (in millions) for the U.S. cookie market, what is the leader's market share? Are you more inclined to buy a product if you know it is the market leader? Why?

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Return on Investment Return on investment is a calculation used to determine the relative profitability of a product. The formula for calculating return on investment is Profit Investment Companies often price products to produce a certain return on investment.

The Steps of Price Planning SECTION 25.1 The Steps of Price Planning Meeting the Competition Some companies simply aim to meet the prices of their competition, either by following the industry leader or meeting the industry average. Example: Automobiles and soft drinks have similar prices and compete based on other factors.

Reviewing Key Terms and Concepts ASSESSMENT 25.1 Reviewing Key Terms and Concepts 1. What is bartering? 2. Why is price an important factor in the success or failure of a business? 3. Name three goals of pricing in addition to making a profit. 4. Distinguish between market share and market position. 5. Define and show the formula for return on investment.

ASSESSMENT Thinking Critically 25.1 Setting prices higher than the competition will put your business on a fast track to failure. Is this statement true or false? Explain the reasons for your answer.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning What You'll Learn The four market factors that affect price planning What demand elasticity is in relation to supply and demand theory The government regulations that affect price planning

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Why It's Important Pricing a product may seem like an easy task, but there are many factors affecting that decision that must be taken into consideration. Skipping even one aspect of this process could cost a business millions of dollars in lost sales, or even in fines or lawsuits if the laws governing pricing are not followed.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Key Terms break-even point elastic demand law of diminishing marginal utility inelastic demand price fixing price discrimination loss leader unit pricing

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Market Factors Affecting Prices Pricing decisions are not necessarily easy. Most price planning begins with an analysis of costs and expenses, many of which are related to current market conditions. An organization's goals also must be considered.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Costs and Expenses Businesses constantly monitor, analyze, and project prices and sales in the light of costs and expenses because sales, costs, and expenses together determine a firm's profit.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Responses to Declining Profit Margins When profits decline, some businesses increase price. Others feel that price is so important in the marketing strategy of a product that instead of making price changes, they will change the product to maintain profit margin.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Responses to Lower Costs/Expenses Prices may occasionally be lowered because of decreased costs and expenses. Improved technology and less expensive materials may help create better-quality products at lower costs.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Break-Even Point The break-even point is the point at which sales revenue equals the costs and expenses of making and distributing a product. This is especially important to consider when marketing a new product or establishing a new price.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Supply and Demand The degree to which demand for a product is affected by its price is called demand elasticity. Demand elasticity is affected by: brand loyalty price relative to income availability of substitutes luxury vs. necessity urgency of purchase Slide 1 of 2

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Supply and Demand The law of diminishing marginal utility states that consumers will buy only so much of a given product, even though the price is low. Elastic Demand A change in price creates a change in demand. Inelastic Demand A change in price has very little effect on demand for a product. Slide 2 of 2

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Consumer Perceptions Price planning is affected by the following consumer perceptions about price: Some consumers equate quality with price. Some consumers are willing to pay more for status, prestige, and exclusiveness, as well as extra services. Subjective price is the price consumers see as the value they are getting for the price.

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Competition Price must be evaluated in relation to the target market and is one of the four Ps of the marketing mix. Companies can compete with: price competition—offering lower prices nonprice competition—attracting customers with prestige, service, or quality Slide 1 of 2

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Competition Marketers change prices to reflect: consumer demand cost competition Similar products sometimes differ only in price, so when one company changes its prices, others usually react. Sometimes price wars produce financial losses that can ruin businesses. Slide 2 of 2

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Government Regulations Affecting Price Federal and state governments have enacted laws regarding: price fixing price discrimination resale price maintenance minimum pricing unit pricing price advertising Slide 1 of 4

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Government Regulations Affecting Price Price fixing occurs when competitors agree on certain price ranges within which they set their own prices. Price discrimination occurs when a firm charges different prices to similar customers in similar situations. Slide 2 of 4

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Government Regulations Affecting Price Resale price maintenance occurs when a manufacturer forces retailers to sell an item at a minimum price. Minimum price laws prevent retailers from selling goods below cost plus a percentage for expenses and profit. Some states do not have minimum price laws and allow loss leaders, items sold at cost to attract customers. Slide 3 of 4

Factors Involved in Price Planning SECTION 25.2 Factors Involved in Price Planning Government Regulations Affecting Price Unit pricing allows consumers to compare prices in relation to a standard unit or measure, such as an ounce or a pound. The Federal Trade Commission (FTC) price advertising guidelines forbid fraudulent and misleading pricing advertisements. Slide 4 of 4

Reviewing Key Terms and Concepts ASSESSMENT 25.2 Reviewing Key Terms and Concepts 1. Name four market factors that affect price planning. 2. In response to increased costs and expenses, what three pricing options might a business consider to maintain their profit margins? 3. What is demand elasticity, and how does it apply to the theories of supply and demand? 4. What is the difference between price fixing and price discrimination? What laws govern each?

ASSESSMENT Thinking Critically 25.2 Many people with diabetes depend on insulin to stay alive. If the price of insulin went up $10, would the demand for insulin go down as is suggested by the theory of supply and demand? Explain your answer in terms of demand elasticity.

Market Factors Affecting Prices 25.2 Graphic Organizer Market Factors Affecting Prices Costs and Expenses Consumer Perceptions Competition PRICES Supply and Demand