Price Planning. Marketing 2

Transcription

1 Price Planning Marketing 2

2 Enduring Understanding: Pricing decisions can make or break a company. Essential Questions: How does supply and demand affect price? What factors affect pricing decisions? How does charging the lowest price lead to maximizing sales?

3 What is Price? Price is the value of money (or its equivalent) placed on a good or service. To the seller... Price is revenue and profit source To the consumer... Price is what you give up to get what you want

4 Huffy - $79.87 Key to Pricing Product Value Understanding the value that buyers place on a product. Price a product high enough for a profit, but not so high that it exceeds the VALUE customers place on the product. Trek - $

5 Forms of Price Amount you pay for goods Fee you pay for service Interest on a loan Dues for a membership Tuition for education Wages, salaries paid to workers

6 Importance of Price Establishes image Maintains competitive edge Determines profits

7 Goals of Pricing Gaining market share Achieving a certain return on investment Meeting competition

8 Market Share Companies percentage of total sales volume in a specific category. OREO -#1 Brand in Cookie Category 42% CHIPS AHOY -#2 Brand in Cookie Category 32%

9 U.S. Cookie Market Share Column1 Oreo Chips Ahoy Fig Newtons SnackWells 12% 42% 32% 14% Market Share Activity

10 Projected Effects of Different Prices on Sales Price per item X Quantity Sold = Sales Revenue $ $10,000 $ $11,250 $ $11,200 $ $11,375 $ $12,000 $ $12,500 An increase in the price of an item may not produce an increase in sales revenue. Why is this true?

11 Supply and Demand Elastic Demand A change in price creates a change in demand Example- If the price of steak were $8 per pound, few people would buy steak, if the price were to drop to $5, $3 and finally $2 per pound, demand would increase at each level Law of diminishing marginal utility Consumers will only buy so much of a given product, even though the price is low

12 Supply and Demand Inelastic Demand A change in price has very little effect on demand for a product Milk and bread fall into this category What determines whether demand for a product is likely to be elastic or inelastic? Substitute Products, Necessity, Duration, Brand Loyalty Supply & Demand Activity

13 The Steps of Price Planning Return on Investment Return on investment is a calculation used to determine the profitability of a product. Profit Investment 13

14 Return on Investment Will the product be profitable? Box of chocolate: Sell for $8 Cost to make & market $6.50 $8 - $6.50 = $1.50/$ % return Return on Investment Activity

15 Meeting the Competition Some companies simply aim to meet the prices of their competition. They either follow the industry leader or calculate the average price. Examples of products priced in this manner: Automobiles Soft drinks

16 Market Factors Affecting Prices Costs and Expenses Supply and Demand Consumer Perceptions Competition

17 Costs and Expenses What do marketers do when costs or expenses increase or when sales decline? Pass costs on to their consumers Examples? When oil prices increase, we often see an increase in rates charged by airlines Reduce size of item Examples? Candy manufacturers may decrease the size of the candy bar, instead of increasing the price Drop less important features Examples? Airlines may stop serving meals and only offer beverages and pretzels Improving products Examples? Ford designed more comfortable supercabs on some trucks and charged more for those models

18 Break-Even Point The point at which sales revenue equals the cost and expenses of making and distributing a product. To calculate the break-even point, the manufacturer divides the total amount of costs and expenses by the selling price A toy manufacturer plans to make 100,000 dolls that will be sold for $6 dollars each. The cost of making and marketing the dolls is $4.50 per unit, or $450,000 for 100,000 dolls. How many dolls must the company sell to break-even? $450,000/6= 75,000 Break-Even Activity

19 Break-Even Chart

20 Basic Pricing Concepts Three basic pricing concepts to consider when determining the price for any given product: cost-oriented pricing demand-oriented pricing competition-oriented pricing

21 Cost-Oriented Pricing 1. Marketers first calculate the costs making a product and their expenses of doing business 2. Then add their projected profit margin to these figures to arrive at a price. Two common methods are: markup pricing cost-plus pricing

22 Markup Pricing Used primarily by wholesalers and retailers who are involved in acquiring goods for resale The markup must cover the business s expenses Product Category Typical Markup Percentage Based on Cost Small Appliances (microwave, coffee maker) Large Appliances (refrigerator, dryer) Automobiles Automobile Accessories (sunroof, CD player) 30% 15%-20% 5-10%* (*note dealers make money on factor incentives and sale of accessories) 15-20% Clothing 100%

23 Calculating Prices Profit vs. Markup A business s profit is not the same as its markup. Markup is the difference between the cost of an item and the retail price. Profit is what s left over after all other expenses have been paid. 23

24 Calculating Prices Basic Markup Calculations The Formula for mark-up Cost (C) + markup (MU) = retail price (RP) Two other formulas can be derived from this formula: Retail price (RP) markup (MU) = cost (C) Retail price (RP) cost (C) = markup (MU) 24

25 Calculating Prices Calculations for Lowering Prices Slide 1 of 2 When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown Determine the dollar markdown by multiplying the retail price by the percentage markdown: RP x MD(%) = MD($) Subtract the dollar markdown from the retail price to get the sale price: RP - MD($) = SP Mark-up /Mark-down Activity 37

26 Demand-Oriented Pricing Marketers who use demand-oriented pricing attempt to determine what consumers are willing to pay for given goods and services. Demand-oriented pricing is effective when: there are few substitutes for an item there is demand inelasticity

27 Competition-Oriented Pricing When marketers study their competitors to determine the prices of their products These marketers may elect to take one of three actions: price above the competition price below the competition price in line with the competition (going-rate pricing)

28 Combining Pricing Considerations Most marketers use all three pricing policies to determine prices. Cost-oriented pricing helps determine the price floor (lowest selling price) for a product. Demand-oriented pricing helps determine a price range for the product. Competition-oriented pricing ensures that the final price is in line with the company s pricing policies.

29 Cost-Plus Pricing Used by manufacturers and service companies Price = all costs + all expenses (fixed and variable) + desired profit Suburban Research Consultants Questionnaire Design and $3,500 Printing Postage 400 Labor (40 hours at $30) 1,200 Refreshments 100 Expenses 350 Profit 950 Final Price to customer $6,500 Cost-plus pricing breaks a price down into its component parts. Cost Plus Activity

30 Discount Pricing Discount pricing involves the seller's offering reductions from the usual price. They include: cash quantity trade seasonal discounts promotional discounts and allowances

31 Discount Pricing Seasonal discounts are offered to buyers willing to buy at a time outside the customary buying season. Promotional discounts are offered to wholesalers and retailers willing to advertise or promote a manufacturer's products. Allowances are granted to customers for selling back an old model.

32 Discount Pricing Cash discounts are offered to buyers to encourage them to pay their bills quickly. Quantity discounts are offered to buyers for placing large orders. Noncumulative quantity discounts are offered on one order. Cumulative quantity discounts are offered on all orders over a specified period of time.

33 Quantity Discount Calculating Discounts Slide 2 of 2 Using a quantity price list: No. of items Unit price $.95 $.90 $.85 If you purchased 50 items, you would pay $.85 each. Your total bill would be $42.50 ($.85 X 50). A cumulative discount is quoted as a percentage and is calculated like a cash discount. Quantity Discount Activity 33

34 Price Lining Offering all merchandise in a given category at certain prices, such as $25, $35, and $50 Upper tier is better quality premium brand Middle tier is for average priced brands Lower tier for price-conscious customers

35 Geographic Pricing Strategies Cost of Freight FOB Destination Seller pays FOB Shipping Buyer pays

36 Parts of a Cash Discount

37 Consumer Perceptions Equate quality with price High price may also suggest prestige, status, and exclusiveness Businesses can create the perception that a particular product is worth more than others by limiting the supply of the item (limited editions) Personalized service (= higher prices)

38 Competition When products are very similar, price often becomes the sole basis on which consumers make their purchase decisions When one company changes prices others usually react Price Wars

39 Pricing Policies A basic pricing decision every business must make is to choose between a one-price policy and a flexible-price policy. A one-price policy is one in which all customers are charged the same price for the goods and services offered for sale. A flexible-price policy permits customers to bargain for merchandise.

40 Product Life Cycle Pricing plays an important role in the product life cycle. In this sequence of events, products move through four stages: introduction growth maturity decline

41 Other Product Stages Growth Stage: Very little price changes will be made Maturity Stage: The goal is to stretch the life of a product Add new features Seek new markets in other nations Decline Stage: Companies are forced to reduce prices to generate sales Cut back on advertising and other promotional activities

42 New Product Introduction A business may elect to price a new product above, in-line, or below its competitors. When a going-rate strategy is not used, two polar methods may be used: skimming pricing penetration pricing

43 Skimming Pricing A pricing policy that sets a very high price for a new product to capitalize on the initial high demand for a new product. Advantages: High profit margin; may cover research and development costs. Disadvantages: Cost must eventually be lowered; attracts competition; if price is too high no one buys.

44 Penetration Pricing Sets the initial price for a product very low to encourage as many people as possible to buy the product. Advantages: Quick market penetration; can capture a large market; blocks competition. Disadvantages: Low demand leads to big losses.

45 Psychological Pricing Psychological pricing refers to techniques that create an illusion for customers or that make shopping easier for them. Common psychological pricing techniques are: odd-even pricing prestige pricing multiple-unit pricing bundle pricing loss leader promotional pricing everyday low prices (EDLP)

46 Prestige Pricing Setting higher-than-average prices to suggest status and prestige Examples: Perrier Water Nike Air Jordan s Lexus

47 Odd-Even Pricing Setting prices that end in either odd or even numbers Odd numbers convey a bargain image ($19.99) Even numbers convey quality ($100.00)

48 Multiple-Unit Pricing Pricing items in multiples to suggest a bargain and increase sales volume (3 for.99) Suggests a bargain and helps increase sales volume. Better than selling the same items at $.33 each. $.99 ea. OR 3 for $2.50

49 Bundle Pricing Including several complementary products in a package and pricing them lower as a group than if they were bought separately Examples: Fast food Basic Cable Computer packages (Package deals)

50 Promotional Pricing Promotional pricing is generally used in conjunction with sales promotions when prices are lower than average. Loss-leader pricing provides items at cost to attract customers. In special-event pricing, prices are reduced for a short period of time, such as a holiday sale (Back to School, Veteran s Day.

51 Everyday Low Prices (EDLP) Low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future.

52 Government Regulations Affecting Prices Price Fixing -occurs when competitors agree on certain price ranges within which they set their own prices This eliminates competition Sherman Antitrust Act (1890) Federal law against price fixing Made monopolies illegal

53 Government Regulations Affecting Prices Price Discrimination Occurs when a firm charges different prices to similar customers in similar situations The Clayton Antitrust Act (1914) The Robinson-Patman Act (1936) Prohibits sellers from offering different prices on the same product in similar situations

54 Government Regulations Affecting Prices Resale Price Maintenance Manufacturers would set a retail price for an item and force retailers to sell it at that price. Consumer goods Pricing Act (1975) Outlawed practice of punishing retailers

55 Government Regulations Affecting Prices Minimum Price Laws Selling goods at a very low price Enacted to prevent retailers from selling goods below cost Only a law in some states States without this law, use technique to draw customers into store Loss leader (businesses take a loss on the item)

56 Government Regulations Affecting Prices Unit Pricing Many states have passed laws to make it easier for consumers to compare similar goods that are packaged in different sizes Standard unit or measure such as an ounce or pound

57 Government Regulations Affecting Prices Price Advertising FTC developed guidelines for advertising prices Price reductions Claiming prices are lower than competitors Bait and switch

58 Review Steps in Setting Prices These are the six steps in determining a price for an item: 1. Determine pricing objectives. 2. Study costs. 3. Estimate demand. 4. Study competition. 5. Decide on a pricing strategy. 6. Set price.