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Price Planning

Price Planning. What is price?. Price is the value in money (or its equivalent) placed on a good or service. The oldest form of pricing is the barter system which involves the exchange of a product or service for another product or service.

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Price Planning

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  1. Price Planning

  2. What is price? • Price is the value in money (or its equivalent) placed on a good or service. • The oldest form of pricing is the barter system which involves the exchange of a product or service for another product or service. • Ex: a business might exchange some of its products for advertising space in a newspaper or magazine.

  3. Lynne Sara Barter Activity Melanie Thomas Jason Max

  4. Relationship of Product Value • Value is a matter of anticipated satisfaction • If consumers believe they will gain a great deal of satisfaction from a product or service, they will place a high value on the product and be more willing to pay a higher price. Sale Price: $60,000

  5. Relationship of Product Value • A seller must be able to gauge where a product will rank in the customer’s estimation. • Whether it will be valued much, little, or somewhere in between. • The seller’s objective is to set a price high enough to make a profit, but not so high that it exceeds the value that a potential customer may place on the product. Is it worth it?

  6. Relationship of Product Value • A key part of the marketing plan is setting the list price. • If a home is priced too low, you won't benefit from the optimal profit. • If a home is priced too high, potential buyers may be scared away. • To determine the best asking price review the cost of recently sold homes, evaluate the competition and study marketplace trends. What is your house worth?

  7. Various Forms of Price Price is involved in every marketing exchange: • The fee you pay a dentist to clean your teeth • The amount you pay for a new pair of shoes • Bridge tolls • Bus fares • Rent is the monthly price of an apartment • Tuition is the price you pay for education

  8. Various Forms of Price • Wages, salaries, commissions, and bonuses are various prices that businesses pay workers for their labor. • Interest is the price of a loan • Dues are the price of a membership

  9. Importance of Price • Price is an important factor in the success or failure of a business. • It helps establish and maintain a firm’s image, competitive edge, and profits. • Many customers use price to make judgments on products and the companies that make them • A higher price means better quality to some • A lower price means more for their money to some.

  10. Importance of Price • Advertising strategies are closely aligned to a firm’s image • “Always Low Prices. Always” –Walmart’s example of how a company can use price as the main thrust of an advertising strategy. • Price helps determine profits • Sales Revenue = Price x Quantity Sold • Sales revenue can be increased either by selling more items or increasing price per item.

  11. Projected effects of different prices on sales: • The number of items sold may not increase or even remain stable if prices are raised. • It is important to remember that an increase in price can increase profits only if costs and expenses can be maintained

  12. So…how could this relate to the discount cards? …………Just a scenario.

  13. Goals of Pricing • Earning a profit/return on investment (primary goal) • Gaining market share • Meeting the competition

  14. Earning a Profit • Return on Investment (ROI) is a calculation used to determine the relative profitability of a product. • To calculate ROI, of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

  15. Calculating ROI • Assume your company sells watches for $9 each. Your cost to make and market the watch is $7.50 per unit. Remember that profit is money earned by a business minus costs and expenses. So… • $9-$7.50 = $1.50 • Profit / Investment = ROI • $1.50 / $7.50 = .20 Rate of Return is 20%

  16. Earning a Profit without Expenses Rate of Return = Profit/Investment For example: Purchase stocks for $1000 Sell stocks for $1500 Rate of Return = 500/$1000 Rate of Return = 50%

  17. Gaining Market Share • Market Share is a firm’s percentage of the total sales volume generated by all competitors in a given market.

  18. Market Position • Market Position is the relative standing a competitor has in a given market in comparison to competitors. • Competitors are ranked according to their total sales volume. • Pricing is one means of improving market share and position.

  19. Gaining Market Share Example • In 2007, Nintendo Wii sold for significantly less than Sony’s Playstation 3 and Microsoft’s Xbox 360. • Wii’s market share increased to 54%!!! • That’s HUGE!

  20. Meeting the Competition • Some companies aim to meet prices of competition. They either follow industry leader or calculate average price and position themselves close to that. • Ex: Airline pricing is usually around the same price. • Ex: Neighboring gas stations.

  21. Meeting the Competition • If you don’t rely on price alone, you can compete on other factors in the marketing mix including: • Quality/uniqueness ofproduct • Convenience of business location (place) • Convenience of business hours • Level/Quality of service

  22. Meeting the Competition Examples • (Business Hours) Commerce Bank is open seven days a week from 8:30 AM—8:00 PM McDonald’s recently announced that they will be open 24 hours. They are hiring 50,000 people this week! • (Service) Automobile manufacturers are competing with warranties and maintenance agreements • A computer store may offer free installation of software and training. (Product)

  23. Review 1. What does price help to do? (Why is it important?) 2. What is the formula to find sales revenue? 3. What are the main goals of pricing? Answers 1. maintain a firm’s image, competitive edge, andprofits. 1. Sales Revenue = Price x Quantity Sold Earning a profit/return on investment (primary goal) Gaining market share Meeting the competition

  24. Wal*Mart Bargaining Is it Good for America? How do they keep prices so low?

  25. Factors involved in price planning

  26. Market Factors Affecting Prices • Constant changes in the marketplace force businesses to review pricing decisions frequently. Four key market factors affecting prices are: • Costs and expenses • Supply and demand • Consumer perceptions • Competition

  27. Costs and Expenses • Sales, costs, and expenses together determine a firm’s profit. Here are some factors that have to be considered when raising or lowering prices: • Responses to increasing costs and expenses • Responses to lower costs and expenses • Break even point

  28. Responses to Increasing Costs and Expenses • Reduce size of item • Ex: a candy manufacturer might reduce a candy bar from 4 to 3.5 oz rather than increasing price. • Drop service features • Ex: some airlines have stopped serving meals and only offer beverages. $1.50 $1.50

  29. Responses to Increasing Costs and Expenses • Add more features to justify higher costs • Ex: Ford Motor Company designed more comfortable super-cabs on some trucks and charged more for those models. VS

  30. Responses to Lower Costs and Expenses • Prices may drop from decrease in costs and expenses • Aggressive firms are always looking for ways to increase efficiency and decrease costs. • Improved technology and less expensive materials • Ex: Personal computers have fallen in price due to improved technology.

  31. 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 and expenses/selling price = BEP • A toy manufacturer plans to make 100,000 dolls sold at $6 each. • The cost of making the dolls is $4.50 each. • Total cost is $4.50 x 100,000 = $450,000 • BEP is $450,000/$6 = 75,000 • You must sell 75,000 dolls (or units) to break even.

  32. Challenge Question • We purchased1500 discount cards at the cost of $0.50 each. With no additional expenses, and selling the cards at $5, what is our break even point? How many cards do we need to sell to break even? 1500 cards X $0.50 = $750 $750/$5 = 150 cards BEP = 150 cards

  33. Supply and Demand • General Rule: • Demand goes up when prices go down • Demand goes down when prices go up

  34. Competition • Price must be evaluated in relation to the target market. • Should create a distinctive product through product availability and customer service. • The more unusual or useable a product is perceived by customers, the greater the marketer’s freedom to set prices above competition. • Marketers change prices to reflect consumer demand, cost, or competition.

  35. Legal and Ethical Considerations for Pricing • Price Fixing • Price Discrimination • Unit pricing • Resale price maintenance • Unfair trade practices law • Price Advertising

  36. Price Fixing • Price Fixing occurs when competitors agree on certain price ranges within which they set their own prices. • Can only be proven when there is evidence of collusion, or communication among competing firms to establish price range. • Illegal because it eliminates competition • Federal law: Sherman Antitrust Act of 1890 outlawed monopolies. Microsoft Apple

  37. Price Fixing Current News • Dell sued Sharp and Hitachi over flat panel price-fixing claims—March 13. • Dell says, Sharp, Hitachi, and three other liquid crystal panel display makers conspired to fix prices and over charge for their products. • Dates back to 1996 • Sharp and Hitachi admitted to overcharging Dell. • Sharp paid $120 million in fines • Hitachi paid $31 million

  38. Price Discrimination • Price Discrimination occurs when a firm charges different prices to similar customers in similar situation. • Note that price discrimination does not pertain to discounts. • You can offer discounts to certain people when applicable • You cannot discriminate on the basis of gender, race, religion, etc.

  39. Movie Rental Price Discrimination Acts • The Clayton Antitrust Act of 1914 defines price discrimination as creating unfair competition. • The Robinson Patman Act of 1936 prohibits sellers from offering one customer one price and another customer a different price if both customers are buying the same product in similar situations. • Intended to help smaller retailers compete with the large chain stores.

  40. Unit Pricing • Unit Pricing allows consumers to compare prices in relation to a standard unit or measure, such as an ounce or a pound. • Food stores have been most affected by these laws and responded with shelf labels and computer records of unit prices. • This is to make it easier for consumers to compare similar goods that are packaged in different sizes or forms.

  41. Resale Price Maintenance • Consumer Goods Pricing Act of 1975 prohibited manufacturers from punishing retailers for not selling items at their suggested price. • Manufacturers can suggest pricing for retailers to sell in its advertising, price tags, and price lists; but cannot force retailers to sell at those prices unless agreed upon in contract.

  42. Resale Price Maintenance Example:

  43. Unfair Trade Practices Law • Also Known As: Minimum Price Law, prevents large companies with market power from selling products at very low prices to drive out their competition. • May prohibit below-cost pricing in some states. • Enacted to prevent retailers from selling goods below cost plus a percentage for expenses and profit. • Some large companies use the unfair trade tactic to get rid of Mom & Pop (family stores).

  44. Meijer fights back • Meijer launched its free prescription drug program in October 2006. The program covers leading oral generic antibiotics with a special focus on the prescriptions most often filled for children. The program includes at least one antibiotic from each of the major antibiotic classifications and more than 70 percent of the generic, pediatric antibiotic prescriptions filled by Meijer. They are: Amoxicillin, Cephalexin, SMZ-TMP, Ciprofloxacin, Penicillin VK, Ampicillin and Erythromycin. • This no-strings-attached program means that any customer, regardless of insurance or co-pay, can take their prescription to any Meijer pharmacy and receive their designated antibiotic free of charge. There is no card required, no membership to purchase, no minimum charges, no special forms to fill out and no fees to pay.

  45. Unfair Trade Practices Law • In states where minimum price laws are not in effect, an item priced at or below cost to draw customers into a store is called a loss leader. Which means the business takes a loss on the item to lead customers into the store. Milk is often sold below cost and placed at back of store. Store takes loss to reel customers in.

  46. Price Advertising • The Federal Trade Commission (FTC) has developed guidelines for advertising prices. • Forbidden to advertise price reduction unless original price was offered to the public on a regular basis. • Company may not say its prices are lower than competitors unless there is proof on a large number of items. • Premarkedor list price cannot be used as reference point for a new sale price unless the item has been actually sold at that price. • Bait-and-Switch is illegal.

  47. Bait and Switch • Bait and Switch is where a firm advertises a low price for an item it has no intention of selling. • Ex: when a customer comes in and asks for the advertised item and the salespeople switch the customer to a higher priced item claiming the advertised product is out of stock.

  48. Review Questions 1. What are the four market factors that affect prices? 2. What is the break even point? 3. How does the government regulate the pricing process? Give one example. Bait and Switch is where a firm advertises a low price for an item it has no intention of selling. 4. What is bait and switch? Answers Price Fixing Price Discrimination Unit pricing Resale price maintenance Unfair trade practices law Price Advertising • Break even point is the point at which sales revenue equals the costs and expenses of making and distributing a product. • Costs and expenses • Supply and demand • Consumer perceptions • Competition

  49. Basic pricing policies

  50. Basic Pricing Concepts • To establish the base price or price range of a good or service, some or all three pricing approaches can be used: • Cost-Oriented Pricing • Mark Up Pricing • Cost-Plus • Demand-Oriented Pricing • Competition-Oriented Pricing

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