1. Pricing
Price Planning

2. Pricing = Product Value
Price is the value of money placed on a good or service
Value is a matter of anticipated customer satisfaction
Seller must gauge where product ranks in anticipated satisfaction (value)
Set price HIGH enough for a profit but LOW enough to still meet customer’s value

3. Forms of Price
Price is involved in every exchange regardless of the term (word) you use:
Some Examples of Terms used for price:
Fee
Interest
Salary
Wage
Commission
Tuition
Admission
Toll
Rent
Bonus
Dues

4. Importance of Price
Price is an important factor in the success or failure of a business
Provides an Image
Gain Competitive Edge
Helps Determine Profits

5. Importance (IMAGE)
Does the company want to position itself as a high priced, elite business or as a low priced, discount business?
To most customers, high price means better quality, upscale.
To most customers, low price means better value or more for their money

6. Importance (COMPETITIVE EDGE)
Price may be the advertising strategy that differentiates companies.
“We are the lowest price in town…”
“We will beat any deal…”
Price may be the critical role in establishing an edge over another company.

7. Importance (PROFITS) PROFIT = REVENUE – COST
Price helps determine revenue (sales) !!
Revenue = Price * Quantity Sold
High price means more revenue per each unit, but may also mean fewer units sold.

8. Importance (PROFITS)
An increase in price may not mean an increase in revenue. WHY?
(If you increase your price, do you make more money?)
Price X Qty Sold = Revenue
$ $ 3,000
$ $ 3,240
$ $ 3,120
$ $ 3,045

9. Goals of Pricing Gaining Market Share Meeting the Competition
Return on Investment (ROI)

10. Gaining Market Share
Market Share – Percentage of total sales generated by all competitors in an industry
(A Piece of the Pie)

11. Gaining Market Share (cont.)
Business may forgo short term profits to gain market share.
(Lower their prices to get a bigger piece of pie)
WHY is Market Share Important?
1) Reputation (clout with customers) – Brand Name
2) Bargaining power w/ suppliers and channel members (lower prices, faster service, etc)

12. Gaining Market Share (Cont)
Market Position – Company’s standing in a market based on their market share
1) Ford F-150
2) Chevy Silverado
3) Dodge Ram
Ford can make statements like:
“Number one selling truck in America…”

13. Market Share Project

14. Goals of Pricing Gaining Market Share Meeting the Competition
Return on Investment (ROI)

15. Meeting the Competition
Some simply aim to meet the prices of their competition.
Business with less market share may simply follow industry leaders in pricing strategy.
(Fast food, soft drinks, airlines)

16. Meeting the Competition
So how do they compete then if prices are same?
Uniqueness, convenience, warranty, service
Burger King – Western Whopper
Auto Industry – Warranties, Service
Banks – Extended Hours

17. Goals of Pricing Gaining Market Share Meeting the Competition
Return on Investment (ROI)

18. Return on Investment (ROI)
How much you get back for putting forth an effort (cost) or “investment”
Investment is the cost of doing business
Formula:
Price - Cost
Profit
Profit
$8 - $6.5
$1.5 =
= .23
Investment
(cost)
$6.5
$6.5
Cost
Cost

19. Return on Investment (cont)
Can also work backwards to determine price:
A company may want to make 15% on their investment. (cost * ROI = Price)
$6.5 * 15% = $7.48
Also used to show a company is priced to
make reasonable profits (utility companies)
So they aren’t viewed as gouging.

20. ROI Worksheet

21. Market Factors that Affect Price
Costs and Expenses
Supply and Demand
Consumer Perceptions
Competition

22. Costs and Expenses
Constantly monitor costs and expenses to determine price changes or production decisions.
Just because costs go up or down, doesn’t mean prices go up or down.

23. Costs and Expenses As costs and expenses go down,
prices may go down, OR
more profit can be made.
As technology improves (ex. electronics) prices may drop.
Companies may put increased profit back into research (new products)

24. Costs and Expenses As costs and expenses go up, prices may go up, OR
production is altered.
- Maybe reduce size (4 to 3.5 oz)
- Drop features (airlines – food)
- Add features to justify price

25. Costs and Expenses BREAK-EVEN Point
Is the point where Sales = Total Costs.
Profit is made for each sale over break-even
To calculate the break-even point (in units):
TOTAL COSTS / SELLING PRICE

26. Break-Even Point Assume you produce 100 TV’s.
Costs and Expenses are $200 per TV.
You sell the TV’s for $299.
How many must you sell to break even?
(total cost / selling price)
Total Cost = $20,000 (100 units X $200)
$20,000 / $299 = 67 units to breakeven

27. break-even worksheet

28. Market Factors that Affect Price
Costs and Expenses
Consumer Perceptions
Competition
Supply and Demand

29. Consumer Perceptions
Consumer Perception can dictate demand based on the price:
High price is perceived as high quality
Status, Prestige, Exclusiveness
Limited Editions perceived as rare
(higher price can be charged)
-limit supply-

30. Competition
As learned in Chapter 3, the greater the competition, the lower the price.
Businesses must compete with each other for sales.
- Price Competition (Price Wars)
- Non-Price Competition

31. How much does price affect your decision?
Elasticity
How much does price affect your decision?

32. Law of Demand The law of demand states… when price goes down,
demand goes up
when price goes up,
demand goes down…
however,

33. Law of Demand ELASTICITY How much demand changes is known as:
…the demand for all products does not respond evenly to changes in price.
How much demand changes is known as:
ELASTICITY

34. Elasticity Elastic Demand – A change in price creates a
significant change in demand
Inelastic Demand –
A change in price creates very
little change in demand

35. Elasticity Factors
Why is the demand for some goods so much less elastic than for other goods?
There are Several Factors:
Availability of Substitutes
Brand Loyalty
Price Relative to Income
Luxury vs. Necessity
Urgency of Purchase

36. Availability of Substitutes
If substitutes are available, demand is more elastic (demand fluctuates with price)
INELASTIC
ELASTIC
Few Substitutes
Many Substitutes
Demand Changes
Demand Constant

37. Brand Loyalty ELASTIC INELASTIC
If customer are loyal to one brand, demand is less elastic (demand does not fluctuate with price)
INELASTIC
ELASTIC
HIGH BRAND LOYALTY
LOW BRAND LOYALTY
Demand Constant
Demand Changes

38. Price Relative to Income
If price has a significant impact on the consumer’s budget, demand is more elastic
INELASTIC
ELASTIC
Low percentage of income
High percentage of income
Demand Constant
Demand Changes

39. Luxury vs. Necessity INELASTIC ELASTIC
When product is necessary, demand is inelastic
INELASTIC
ELASTIC
Necessity
Luxury
Demand Constant
Demand Changes

40. Urgency of Purchase
When product is needed immediately, demand is inelastic
INELASTIC
ELASTIC
Urgent
When Convenient
Demand Constant
Demand Changes