Market Factors Affecting Price MKTFMRE7 Utilize pricing strategies

Market Factors Affecting Price MKT-FMRE-7 Utilize pricing strategies to maximize return on merchandising efforts and meet customers’ perception of value.

Terms l l l l Price Couture Bridge lines Better garments Moderate lines Budget lines Markup Break even point l l l l Odd/even pricing Inelastic demand Elastic demand Revenue Variable costs Fixed costs Penetration pricing Price fixing

Terms l Price – the amount the consumer pays for merchandise.

Couture l – custom made designs – l Highest priced category Elie Saab

Bridge lines l l Secondary lines of well-known designers priced between couture and better categories. Also known as diffusion line Zac Posen collection for David’s Bridal

Better garments l Reasonably priced garments that maintain high quality. – Found in specialty stores and department stores like Chaps by Ralph Lauren. – Michael Kors @ macys. com

Moderate Lines Medium priced garments with well-known brand names like Levi’s and private brands in department stores. l INC international concepts

Budget lines l Least expensive category – – Knockoffs Downscaled duplications Target - Sweater Back Vest Navy Xhilaration

Markup l l It’s the difference between the cost of a good or service and its selling price. A markup is added onto the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit.

Break even point l The point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even. "

Odd/even pricing l l l A psychological pricing strategy used to attract a price conscious and prestiguous market. $299 – odd $300 - even

Inelastic demand l A situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. l An example of a product with inelastic demand is gasoline.

Elastic demand l Demand that increases or decreases as the price of an item goes down or up. l clothing

Revenue Money that is made by or paid to a business or an organization.

Fixed costs l Fixed costs remain constant throughout the given time period. It often includes rent, buildings, machinery, etc.

Variable costs l Variable costs are costs that vary with output. l Variable costs may include wages, utilities, materials used in production, etc.

Penetration pricing l The practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors.

Price fixing l Price fixing is an agreement among competitors that raises, lowers, or stabilizes prices. l The antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor.

EQ: l What is price (selling price, retail price)?

Objectives l l l Define Price and Pricing List the four market factors that affect price Identify and discuss each market factor Define elastic demand inelastic demand List the 5 factors that contribute to demand elasticity Identify and discuss each factor

Price & Pricing l Price: the money a customer must pay for a product or service. – l Part of the Marketing Mix Pricing: establishing and communicating the value of products and services to potential customers.

Four Major Market Factors That Affect Price 1. 2. 3. 4. Costs and Expenses Supply and Demand Consumer Perceptions Competition

1. Costs and Expenses l Increasing costs and expenses lead companies to: – – Increase price of product or service Reduce size of product or service Drop service that is not valued Add to their product or service

Costs and Expenses contd. l Lower costs and expenses lead companies to: – l Decrease prices of products and services Improved technology and less expensive materials help companies produce better-quality products at lower prices. – Example: the price of computers

2. Supply and Demand l With most products: – – l l This does not apply to some products Demand Elasticity – l Demand increases with lower prices Demand decreases with higher prices The degree to which demand for a product is affected by its price Products have either elastic or inelastic demand

Elastic Demand l When a change in price creates a change in demand. – l Example: Price of Steak Law of Diminishing Marginal Utility – – Consumers will only buy so much of a product even if the price is low. Example: Price of Laundry Detergent

Inelastic Demand When a change in price has very little effect on demand for a product l Example: l – – Milk Bread

Demand Elasticity l The demand elasticity depends on five factors: – – – Brand Loyalty Availability of Substitutes Price Relative to Income Luxury vs. Necessity Urgency of Purchase

Brand Loyalty l l When a customer will not buy a substitute product over a brand name of their choice. In this case brand is inelastic.

Availability of Substitutes l l When there a variety of substitutes that will do the same job, the demand becomes elastic. Example: – Laundry Detergent

Price Relative to Income If a price increases dramatically and it is beyond a customer’s budget, they are less likely to buy it. l In this situation the demand will be elastic. l Example: l – A diamond ring

Luxury vs. Necessity l l When a consumer feels that a product is a necessity, the demand becomes inelastic. Example: – l l medicine When a consumer feels that a product is a luxury, the demand becomes elastic. Example: – automobile

Urgency of Purchase If a purchase must be made immediately then the demand will be inelastic. l Example: l – Running out of gas

3. Consumer Perceptions l l Price planning involves what the consumers perceive Some consumers associate quality with price – – High price equals high quality High price equals status, prestige, and exclusiveness

3. Consumer Perceptions Businesses limit a supply on the market to make the consumer think that it is worth more. l Example: l – l Limited Edition Personalized service can also add to a customer’s perception.

4. Competition l l l 2 Forms: – Non-Price Competition – Price Competition Non-price competition minimizes price as a reason for purchase. The more unusual a product, the greater the freedom to set prices above those of competitors. Price competition allows a company to gain target market appeal by lowering prices.

4. Competition Companies are constantly watching each other. If one lowers their price, their competitors will lower their price too. l Benefit: lower prices for consumers l Price Wars: l – When a company lowers their price to the point that they lose profits. Can cause financial trouble.

Summary l l l Defined Price and Pricing Listed the four market factors that affect price Identified and discussed each market factor Defined elastic demand inelastic demand Listed the 5 factors that contribute to demand elasticity Identified and discussed each factor