The nature and scope of the pricing function.
OE 6 Compare various pricing strategies and explain the goals of pricing
OE 7 Explain factors affecting pricing decision (e.g., cost, competition, economic factors)
Describe the concept of price
Identify factors (e.g., economics, human, nature) effecting a business's profit
Price is the money a customer must pay for a product or service. It is also the actual cost and the methods of increasing the value of the product to the customers. As well as, establishing and communicating the value of product and services to prospective customers.
Price: the money a customer must pay for a product or service.
–Part of the Marketing Mix
Pricing: establishing and communicating the value of products and services to potential customers.
Forms of pRice
•Fee you pay for service
•Amount you pay for food, clothes, etc.
•Interest on a loan
•Dues for a membership
•Tuition for education
•Wages, salaries paid to workers
importance of price
•Establishes image
•Maintains competitive edge
•Determines profits
Goals of pricing
1. Gaining market share – a firm’s % of total sales volume in a given market
2. Take business away from competitors
3. Meeting the Competition
–McDonalds and Wendy's
–Pepsi and coke
4. Earning a profit is primary goal
–CALCULATION TO DETERMINE RELATIVE PROFITABILITY
–THE FORMULA TO CALCULATE IT IS PROFIT / INVESTMENT
–PROFIT = SALES – COST
5. Return on Investment
return on investment
•Your company sells storage bins for $8 each.
•Your cost to make and market the bins is $6.50.
•$8 - $6.50 = $1.50/$6.50 = .23
•Your rate of return on investment is 23 percent.
factors that affect price
1.Costs and Expenses
2.Supply and Demand with most products:
–Demand increases with lower prices
–Demand decreases with higher prices
3.Consumer Perceptions (ASSOCIATE QUALITY WITH PRICE - HI PRICE EQUALS STATUS AND PRESTIGE)
4.Competition (PRICE AND NON PRICE)
Why is pricing an important marketing tool?
Pricing is an important marketing tool because is part of both the consumer and producer. A product needs to be sold at a price in which a company can make a profit off of it, but it also needs to be at a low enough price in which the consumer still considers to buy the product from that company. The main reason why it is so important is because it can be changed so quickly unlike other tools.
How the economic concept of elasticity of demand relates to pricing decisions.
Elasticity of Demand: the relationship between changes in a product's price and the demand for that product. Based on the number of good substitutes for a product and the willingness of consumers to go without a product if the price gets too high.
Demand Elasticity
–The degree to which demand for a product is affected by its price
Products have either elastic or inelastic demand
Inelastic Demand: a price decrease will decrease total revenue. When a change in price has very little effect on demand for a product Example:
–Milk
–Bread
The demand elasticity depends on five factors:
–Brand Loyalty
–Availability of Substitutes
–Price Relative to Income
–Luxury vs. Necessity
–Urgency of Purchase.
Elastic Demand: a price decrease will increase total revenue. When a change in price creates a change in demand.–Example: Price of Steak
Legal considerations for pricing and how the government acts upon those pricing decisions.
They regulate the economy. If one business is large enough to control a market or when a few businesses cooperate to take advantage of smaller businesses, the government may regulate them. Like when At&t had to split up into several smaller companies to allow Sprint to compete. They also regulate prices. Price fixing is competing companies at the same level in a channel of distribution cannot cooperate in ESTABLISHING prices. Price DISCRIMINATION is when business cannot discriminate in the prices they change to other businesses. A manufacture must offer equivalent prices, discounts, and quantities to all wholesalers or retailers. Price advertising when businesses cnanot mislead consumers through the advertising of prices. Bait-and-switch when companies cannot lure customers with offers of low prices and then tell them the low-priced item is not available. Unit pricing when many products sold in varying quantities or package sizes must list the price for a basic unit of measurement so consumers can make price comparisons. Taxation is another thing the government can do.
3 common pricing objectives.
1. Maximizing profits: prices are set as high as possible while still pleasing customers.
2. Increase Sales: Prices will usually be quite low for consumers to buy. result in prices that achieve the highest possible sales volume.
3. Maintain an Image: companies use the prices of products to help create a specific image for the product or company.
How businesses establish a price range for a product.
Maximum Price: the highest possible price that can be charged is determined by the target market and based on demand analysis.
Minimum Price: the lowest price in the price range is determined by the costs of the seller.
Breakeven analysis: The breakeven point is the quantity of a product that must be sold for total revenues to match total costs at a specific price.
=Total fixed costs
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Price- variable costs per unit
Determining the selling price.
Selling Price: the price charged for a product or service
Product Cost: the cost of producing the product (largest part)
Gross margin: the difference between the cost of the product and the selling price
Pricing Strategies
A product life cycle uses a skimming price which is a very high price designed to emphasize the quality or uniqueness of the product.
Also the cycle uses a penetration price which is just the opposite of the skimming price. It is where there is a very low price designed to increase the quantity of the product being sold to emphasize its value.
Non-price competition de-emphasizes price by developing a unique offering that meets an important customer need. (weddings, one-of-a-kind painting, exclusive college, or emergency situation).
Customers may or may not have a choice on how much they will pay for a product and that is where price flexibility comes into play.
A one-price policy means that all customers have to pay the same price. A flexible pricing policy allows customers to negotiate the price within a price range with the salesperson.
Price Lines are distinct categories of prices based on differences in product quality and features.
•Price Lining – offers merchandise in a given category at certain prices
–Shirts at $25, $35, $50
–Upper tier is better quality premium brand
–Middle tier is for average priced brands
–Lower tier for price-conscious customers.
•When companies sell in different parts of the country and world it becomes geographic pricing.
FOB pricing, free on board pricing, identifies the location from which the buyer pays the transportation costs from the point the product was manufactured.
Captive Product – sets the price for one product low but compensates for that low price by pricing the supplies needed to operate that product high.
Zone pricing is when different product or transportation costs are set for specific areas/zones of the seller's market.
Bundle Pricing – several complementary products sold at a single price.
–Travel services
–Computers and software•Optional Product– setting prices for accessories or options sold with the main product.
Loss Leader Pricing – offering very popular items for sale at below-cost prices
Odd-Even Pricing
–Odd numbers convey a bargain image -- $.79, $9.99, $699
–Even numbers convey a quality image -- $10, $50, $100
Prestige Pricing – sets a higher than average price to suggest statu
Multiple-Unit Pricing – 3 for $.99
•Suggests a bargain and helps increase sales volume.
•Better than selling the same items at $.33 each.
Everyday Low Prices (EDLP) – set on a consistent basis
DISCOUNTS AND allowances are reductions in the price given to the customer in exchange for preforming certain marketing activities or accepting something other than what would normally be expected in exchange.
Seasonal Discount: offered to customers who buy during times of the year when sales are normally low.
Cash Discount: Offered to customers who pay cash rather than using credit or who pay their credit accounts quickly.
Trade Discount: Reduction in price offered to business at various levels in a channel of distribution (wholesalers and retailers)
Trade-in-allowance: Reduction in price in exchange for the customer's old product when a new one is purchased
Advertising Allowance: Price reduction or specific amount of money given to channel members who participate in advertising the product
Coupon: Price reduction offered by a channel member through a printed promotional certificate
Rebate: Specific amount of money returned to the customer after a purchase is made
cost-based pricing, in which the business figures out a product’s total cost and then charges a predetermined markup. For instance, if a piece of jewelry costs $50 total to make, the company charges $75 for it to create a $25 profit. The downside of cost-based pricing is that it is easy for competitors to undercut. Another company can come along with a similar piece of jewelry and charge just $65 or $70 for it.
price-based costing, in which the business determines how much customers will pay for a certain product, then figures out how to produce it for a cost that still leaves room for profit. Let’s say the same jewelry business conducts market research and determines that it can reasonably expect customers to pay $65 for the piece of jewelry in question. The business then determines how it can make the jewelry for just $40, so it can still make $25 in profit for each piece. This means whittling down costs, either operating costs or direct costs. In most cases, a business will look to reduce operating costs first.
Why extending credit is important to the marketing and pricing function.
Credit is very important to the pricing function because it allows customers to buy expensive products or services.
They could be products and services that the company has a hard time selling, so offering credit to customers for those products and services opens many more purchases for the company.
The two types of credit are consumer credit and trade credit.
Consumer credit is credit extended by a retail business to the final consumer. Trade credit is offered by one business to another business.
PRICING technology
SMART PRICING - make decisions due to infinite amount of data AVAILABLE today
scanners
RFID - chip imbedded in product - description and price
Factors affecting BUSINESS Profit (risk) (oa 10)
economic - change in consumer lifestyles, inflation, recession, limited usefulness, POPULATION changes, etc...
human - mistakes or dishonesty - theft can lead to increasing retail proces to caover the loss
natural - loss or damage due to floods, HURRICANES, EARTHQUAKES, etc... for example drought causes the price of produce to increase
Areas of Pricing
Cost of Goods:Costs incurred by a business to produce or purchase goods and services to be sold
Examples:
Overhead Expenses: Costs incurred to run a business.
Examples:
Distribution Costs: Costs incurred to distribute goods and services.
Examples:
Profit Margin: The amount of money charged above costs & expenses.
Factors that effect profit margin:
Basic pricing formula: Costs + Markup = Retail Price
*Revenue is money brought into a business. Most revenue comes from sales.
Cost of Goods:Costs incurred by a business to produce or purchase goods and services to be sold
Examples:
- Raw Materials & Parts
- Production Machinery
- Labor
- Cost of Goods for Sale
Overhead Expenses: Costs incurred to run a business.
Examples:
- Maintenance
- Accounting
- Advertising
- Rent & Utilities
- Insurance
- Management Salaries
Distribution Costs: Costs incurred to distribute goods and services.
Examples:
- Packaging
- Storage
- Shipping
- Channels of Distribution
Profit Margin: The amount of money charged above costs & expenses.
Factors that effect profit margin:
- Markups
- Discounts
- Competition
- Supply & Demand
Basic pricing formula: Costs + Markup = Retail Price
*Revenue is money brought into a business. Most revenue comes from sales.