Transcript MP_9 The Definition of Pricing

The Definition of Price
The Price is Right
Match the SUV in the
product column with
its corresponding
MSRP in the price
column:
What are the features,
options, or other
differentiations in each
SUV that warrants a
difference in prices?
Product
1.Hummer
H2
2.Dodge
Durango
3.GMC Envoy
4.Ford
Explorer
Price
A. $27,010.00
B. $26,285.00
C. $48,455.00
D. $28,645.00
Ford Explorer
Correct Answer: A Base MSRP-
$26,285.00
Dodge Durango
Correct Answer: B Base MSRP-
$27,010.00
GMC Envoy
Correct Answer: D Base MSRP-
$28,645.00
Hummer H2
Correct Answer: C Base MSRP-
$48,455.00
Objectives
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Define Price.
Describe the functions of pricing.
Identify the importance of price.
Discuss the goals of pricing.
Describe the factors involved in
price planning.
What is Price?
– Price is the value of money (or its equivalent)
placed on a good or service. It is usually
expressed in monetary terms.
– Price is involved in every marketing
exchange.
– Price is the actual cost and the methods of
increasing the value of the product to the
customers.
– The oldest form of pricing is the barter
system—the exchange of a product or
service for another product or service, without
the use of money.
What is Price?
– Price is such an important part of marketing
that it is one of the four elements of the
marketing mix.
– As one of the seven functions of marketing,
pricing is defined as establishing and
communicating the value of products and
services to prospective customers.
– When planning any marketing activity,
business people must consider the impact of
the cost to the business, the price customers
must pay, and the value that is added to the
product or service as a result of the activity.
The Importance of Price
–Price is directly involved in the
success or failure of a business.
–Price is involved in every marketing
exchange. It helps establish and
maintain a firm's:
image
competitive edge
profits
The Importance of Price To a
Company’s Image
– Many customers use price to make
judgments about products and the
companies that make them.
– A higher price means a better quality
from an upscale store or company to
some customers; to other customers, a
lower price means more for their
money.
– Price is a vital component of a
business’s image.
The Importance of Price To a
Company’s Competitive Edge
– Price is sometimes the main thrust of a
firm’s advertising strategy.
– Some retailers stress that they offer the
lowest prices in town or promise that
they will beat any other store’s prices.
– In such cases, price plays an important
role in establishing the edge a firm
enjoys over its competition.
The Importance of Price To a
Company’s Profits
– Price helps determine profits.
– Marketers know that sales revenue is
equal to price multiplied by the quantity
sold.
– Sales revenue can be increased either
by selling more items or by increasing
the price per item, in theory.
– The number of items sold may not
increase or even remain stable if prices
are raised.
The Importance of Price To a
Company’s Profits
– An increase in the price of an item may not produce
an increase in sales revenue. Why is this true? Are
you more likely to buy a higher priced item or a lower
priced item?
Price per Item x Quantity Sold = Sales Revenue
$50
$45
$40
$35
$30
$25
200
250
280
325
400
500
$10,000
$11,250
$11,200
$11,375
$12,000
$12,500
The Goals of Pricing
–Marketers’ pricing goals include:
Gaining market share/ increase
sales
Achieving a certain return on
investment/ maximize profits
Meeting the competition
Maintain an image
Gaining Market Share/
Increasing Sales
- A business may engage in price
competition to take market share from its
competitors, forgoing immediate profits for
long-term gains in market share.
- Sales-based pricing objectives result in prices
that achieve the highest possible sales
volume.
- Prices usually will be quite low to encourage
customers to buy.
Achieving Return on
Investment/ Maximizing
Profits
– Return on investment is a calculation used
to determine the relative profitability of a
product. The formula for calculating return on
investment is
 ROI = Profit / Investment
– Companies often price products to produce a
certain return on investment.
– Companies that seek to maximize profits
carefully study consumer demand and
determine what customers in the target
market are willing to pay for their products.
Meeting the Competition
– Some companies simply aim to meet the
prices of their competition, either by
following the industry leader or meeting
the industry average.
– Example: Automobiles and soft
drinks
have similar prices and compete based
on other factors.
Maintain an Image
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Companies can use the prices of products
to create an image for the product or
company.
Some consumers believe that price and
quality are related, that higher prices
mean better quality while lower prices
suggest poorer quality.
Also, companies trying to appeal to costconscious customers need to keep their
prices as low as or lower than competitors’
prices.
Factors Involved in
Price Planning
Market Factors Affecting Prices
– Pricing decisions are not necessarily easy.
Most price planning begins with an analysis of
costs and expenses, many of which are related
to current market conditions. An organization's
goals also must be considered.
Factors Involved in
Price Planning
 Costs
and Expenses
– Businesses constantly monitor, analyze,
and project prices and sales in the light of
costs and expenses because sales, costs,
and expenses together determine a firm's
profit.
Factors Involved in
Price Planning
 Responses
to Declining Profit Margins
– When profits decline, some businesses
increase price. Others feel that price is so
important in the marketing strategy of a
product that instead of making price
changes, they will change the product to
maintain profit margin.
Factors Involved in
Price Planning
Responses to Lower Costs/Expenses
– Prices may occasionally be lowered
because of decreased costs and expenses.
Improved technology and less expensive
materials may help create better-quality
products at lower costs.
Factors Involved in
Price Planning
Break-Even Point
– The break-even point is the point at
which sales revenue equals the costs and
expenses of making and distributing a
product. This is especially important to
consider when marketing a new product
or establishing a new price.
Factors Involved in
Price Planning
 Consumer
Perceptions
– Price planning is affected by the following consumer
perceptions about price:
•Some consumers equate quality with price.
•Some consumers are willing to pay more for
status, prestige, and exclusiveness, as well as
extra services.
– Subjective price is the price consumers see as
the value they are getting for the price.
Factors Involved in
Price Planning
Competition
– Price must be evaluated in relation to the
target market and is one of the four Ps of the
marketing mix. Companies can compete with:
•price competition—offering lower
prices
•nonprice competition—attracting
customers with prestige, service, or quality
Factors Involved in
Price Planning
Competition
– Marketers change prices to reflect:
•Consumer demand
•Cost
•Competition
– Similar products sometimes differ only in price,
so when one company changes its prices, others
usually react. Sometimes price wars produce
financial losses that can ruin businesses.
Factors Involved in
Price Planning
 Government
Regulations Affecting Price
– Federal and state governments have
enacted laws regarding:
•price fixing
•price discrimination
•resale price maintenance
•minimum pricing
•unit pricing
•price advertising
Factors Involved in
Price Planning
 Government
Regulations Affecting Price
– Price fixing occurs when competitors agree
on certain price ranges within which they set
their own prices.
– Price discrimination occurs when a firm
charges different prices to similar customers in
similar situations.
Factors Involved in
Price Planning
 Government
Regulations Affecting Price
– Resale price maintenance occurs when a
manufacturer forces retailers to sell an item
at a minimum price.
– Minimum price laws prevent retailers from
selling goods below cost plus a percentage for
expenses and profit. Some states do not have
minimum price laws and allow loss leaders,
items sold at cost to attract customers.
Factors Involved in
Price Planning
 Government
Regulations Affecting Price
– Unit pricing allows consumers to compare
prices in relation to a standard unit or measure,
such as an ounce or a pound.
– The Federal Trade Commission (FTC)
price advertising guidelines forbid fraudulent
and misleading pricing advertisements.
Pricing Concept Checkpoint
1. What is bartering?
2. Why is price an important factor in the
success or failure of a business?
3. Name three goals of pricing in addition to
making a profit.
4. Distinguish between market share and
market position.
5. Define and show the formula for return
on investment.
Pricing Concept Checkpoint
6. Name four market factors that affect price
planning.
7. In response to increased costs and
expenses, what three pricing options might a
business consider to maintain their profit
margins?
8. What is demand elasticity, and how does it
apply to the theories of supply and demand?
9. What is the difference between price fixing
and price discrimination? What laws govern
each?
Answers 1-5
Answers 6-9
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