Transcript Document
PRICING Lee Salyards Mark Iehl Brian Gerdes PRICING Pricing is not about money. It is the value of an exchange. • What is the price to feed an African child for a month? Value = Perceived Benefits Price PRICE STRATEGIES WILL BE MORE EFFECTIVE IF THEY ARE BASED ON VALUE RATHER THAN BASED ON COSTS. PRICE OF AN ITEM CAN TAKE ON A DIFFERENT NAME DEPENDING ON WHAT YOU BUY • • • • • • • • • • • Airport booking fee Baggage fee Banking fee Delivery fee Online service fee Inspection fee Appraisal fee Survey fee Property taxes Biometric fee Court fee STAGES IN MANAGING PRICES Pricing Objectives Profit Price has both direct and indirect effects on profit. The direct effect relates to whether the price covers the cost of producing the product. Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale -- the relative benefit of selling more units. The primary profit-based objective of pricing is to maximize price for long-term profitability. Sales Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods. A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily spur a change in the other. Status Quo A status quo price objective is a tactical goal that encourages competition on factors other than price. It focuses on maintaining market share, for example, but not increasing it, or matching a competitor's price rather than beating it. Status quo pricing can have a stabilizing effect on demand for a company's products. Survival Prices are flexible. A company can lower them in order to increase sales enough to keep the business going. The company uses a survival-based price objective when it's willing to accept short-term losses for the sake of long-term viability. Stages in Managing Prices Analyzing target market’s assessment of price Determination of demand Analysis of demand, cost, and profit relationships Evaluation of competitors’ prices Selection of a basis for pricing Selection of a pricing strategy Determination of a specific price FIVE MOST COMMON DECEPTIVE PRICING PRACTICES Scenario 1) Jeff saw an ad for his favorite jeans at a clothing store that was advertised at a low price. When he arrived at the store, he was told that the jeans were no longer available. A salesperson pressured Jeff to buy a similar, higher priced item. Scenario 2) Bill’s Apple Pies put up a buy one, get one free ad. Before customers came in, Bill doubled the price up his pies. Scenario 3) Sheila sells sock s and posts a sign that says “Retail Value in area $10. Our price $5.” A lot of other sock stores in the area do not sell their socks for $10. Scenario 4) Jenny’s Juicer Company has an ad that says they sell their juicers below the manufacturer’s price. Few or no sales occur at that price in the area. Scenario 5) Jim’s Shoe store had a sign that listed all Nike shoes on sale for $100. Right before he posted the sign, he raised the price to $120. Three months before the regular price was $100. • • • • • Comparable value comparisons Comparisons with suggested prices Bait and switch Former price comparisons Bargains conditional on other purchases SHERMAN ANTITRUST LAW (1890) Main law regulating monopolies Created in response to Standard Oil actions “To protect the consumers by preventing arrangements designed, or which tend, to advance the cost of goods to the consumer.” ROBINSON-PATMAN ACT Prevents price discrimination Original draft written by US Wholesale Grocers Association Large volume retailers cannot attain lower prices than smaller volume retailers Applies only to goods, not services Sales to military exchanges and commissaries are exempt from the act. EXAMPLE COMPANIES AT&T (1980) Monopoly Adobe Monopoly Wendy’s Monopolistic Hy-Vee Monopolistic Farmer Brown Pure Competition John Deere Monopolistic Hobby Lobby Monopolistic AT&T (2013) Oligopoly Wal-Mart Monopolistic WEBER’S LAW SUPPLY AND DEMAND SUPPLY AND DEMAND “Market Clearing Price” (Equilibrium) Price and Quantity Determined by the Intersection of the Supply Curve and the Demand Curve Price Supply Demand Quantity SUPPLY AND DEMAND Supply • Controlled by producers • As Price ↑, Quantity Produced ↑ (Equilibrium) Supply Price Moving the Supply Curve • Change in cost of inputs • Change in opportunity costs • Change in profit expectations • Change in taxes and subsidies “Market Clearing Price” Demand Quantity SUPPLY AND DEMAND Demand • Controlled by consumers • As Price ↓, Quantity Produced ↑ Price Moving the Demand Curve • Change in income • Change in price of substitutes • Change in price of related goods • Change in preferences • Change in taxes Supply Demand Quantity SUPPLY AND DEMAND Price and Quantity Determined by the Intersection of the Supply Curve and the Demand Curve “Market Clearing Price” (Equilibrium) Supply • Optimal for consumers and producers • Unrestricted trade • Efficient market Price • Perfect competition Demand • “Price taker” vs “price setter” • Reality? Quantity PRICE ELASTICITY The Shape of the Demand Curve Reflects the Price Elasticity Elasticity - the change quantity relative to the change in price A Highly Elastic • small change in price causes large change in quantity Price Highly Inelastic • large change in price causes only small change in quantity B Inelastic Elastic A B Demand Quantity EXERCISE: WHAT WOULD YOU PAY? 8 Volunteers Instructions: • Sample 4 types of chocolate • For each sample identify the most you would be willing to pay for a large chocolate bar • Record the amount ($X.XX) on the sheet provided Most You Would be willing to Pay Sample 1 $ X.XX Sample 2 $ X.XX Sample 3 $ X.XX Sample 4 $ X.XX