Chapter 29 Price Planning What is Price Price

Chapter 29 Price Planning

What is Price? • Price – is the value of money placed on a good or a service. $100 • 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.

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

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