Meaning of price Significance of price Concept of price and value relationship Pricing objectives Factors influencing price

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Meaning of price Significance of price Concept of price and value relationship Pricing objectives Factors influencing price

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Meaning of price

Significance of price

Concept of price and value relationship

Pricing objectives

Factors influencing price

Costs of producing and marketing a product

Approaches to determining price

Break-even analysis

GOALS

The Steps of Price Planning

Importance of Price

- Price is involved in every marketing exchange. It helps establish and maintain a firm's:
- image—to some customers, high price equals quality
- competitive edge—a business can attract customers by guaranteeing low prices
- profits—sales price is directly related to the price and number of items sold

The Steps of Price Planning

Goals of Pricing

- Marketers’ pricing goals include:
- gaining market share
- achieving a certain return on investment
- meeting the competition

The Steps of Price Planning

Market share is a firm's percentage of the total sales volume generated by all competitors in a given market.

Which brand has the largest share of the digital camera market?

Do you have more confidence in a company that has a large market share?

Market Share

The Steps of Price Planning

Market Position

Market position is the relative standing a competitor has in a given market in comparison to its competitors.

Which brand is the market leader in the U.S. cookie market?

Are you more inclined to buy a product if you know it is the market leader? Why?

SECTION 25.1

The Steps of Price Planning

Return on Investment

- Return on investment is a calculation used to determine the relative profitability of a product. The formula for calculating return on investment is
- Profit
- Investment

- Companies often price products to produce a certain return on investment.

BREAK-EVEN POINT

The quantity of output at which total revenue

equals total costs assuming a certain selling price

B E P :

Total revenue = Total costs

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.

Pricing Concepts

- Markup pricing is used primarily by wholesalers and retailers who are involved in acquiring goods for resale. The markup must cover the business’s expenses.
- Price = cost + markup (as percentage)

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SECTION 27.1

Calculating Prices

Basic Markup Calculations

- Retailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price:
- 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)

Calculating Prices

Percentage Markup

- In most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($).
- Most sellers compute markup based on retail price rather than cost because:
- the markup on retail sounds smaller
- future markdowns are calculated on retail
- profits are calculated on sales revenue

Calculating Prices

Cost Method of Pricing

- Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing:
- Multiply the cost by the percentage markup on cost in decimal form:
C x MU(%) = MU($)

- Add the dollar markup to the cost to get the retail price:
- C + MU($) = RP

- Multiply the cost by the percentage markup on cost in decimal form:

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Product Category

Typical Markup Percentage Based on Cost

30%

Small Appliances (microwave, coffee maker)

15%-20%

Large Appliances (refrigerator, dryer)

5-10%* (*note dealers make money on factor incentives and sale of accessories)

Automobiles

15-20%

Automobile Accessories (sunroof, CD player)

100%

Clothing

Calculating Prices

Typical Markup Percentage

Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?

Calculating Prices

Retail Method of Pricing

- If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price.
- Determine what percentage of the retail price is the cost:
RP(%) - MU(%) = C(%) (retail price would be 100%)

- Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage:
C($) / C(%) = RP

- Calculate the dollar markup:
- RP - C = MU($)

- Determine what percentage of the retail price is the cost:

Calculating Prices

MarkDowns

Calculations for Lowering Prices

- There is another, simpler way to calculate the sale price:
- Subtract the markdown percentage from 100% (representing retail price):
RP(%) - MD(%) = SP (%) (RP = 100%)

- Multiply the retail price by the decimal equivalent of the percentage sale price:
- RP x SP(%) = SP($)

- Subtract the markdown percentage from 100% (representing retail price):

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Calculating Prices

Markdowns

Calculations for Lowering Prices

- 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 markdown percentage on retail. Then:
- 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

- Determine the dollar markdown by multiplying the retail price by the percentage markdown:

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Pricing Concepts

Cost-Oriented Pricing

- In cost-oriented pricing, marketers first calculate the costs of acquiring or making a product and their expenses of doing business; then they add their projected profit margin to these figures to arrive at a price.

Slide 1 of 2

Pricing Concepts

Cost-Plus Pricing

- Cost-plus pricing is 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.

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

Slide 1 of 2

Pricing Concepts

Competition-Oriented Pricing

- Marketers who study their competitors to determine the prices of their products are using competition-oriented pricing. 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)

Pricing Concepts

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.

Pricing Concepts

New Product Introduction

- Skimming pricing is 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.

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Pricing Concepts

New Product Introduction

- 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.

Slide 3 of 3

Setting Prices

Pricing Techniques

- Two common pricing techniques marketers use are:
- psychological pricing
- discount pricing

Setting Prices

Psychological Pricing

- Odd-even pricing involves setting prices that end in either odd or even numbers. Odd numbers convey a bargain image; even numbers convey quality.
- Prestige pricing involves setting higher-than-average prices to suggest status and prestige.

Slide 2 of 5

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

Setting higher-than-average prices to suggest status and prestige

Examples:

- Perrier Water
- Nike – Air Jordan’s
- Lexus

Setting Prices

Psychological Pricing

- Multiple-unit pricing involvespricing items in multiples to suggest a bargain and increase sales volume.
- Bundle pricing involves including several complementary products in a package and pricing them lower as a group than if they were bought separately.

Slide 3 of 5

$.99 ea.

OR

3 for $2.50

Pricingitems 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.

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)

Setting Prices

Psychological 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.

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Setting Prices

Psychological Pricing

- Everyday low prices (EDLP) are low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future.
- Price lining involves offering all merchandise in a given category at certain prices, such as $25, $35, and $50.

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Graphic Organizer

Types of Psychological Pricing

Psychological pricing refers to techniques that create an illusion for customers or that make shopping easier for them.

Odd-

Even

Pricing

PrestigePricing

Price

Lining

Psychological

Pricing

Everyday

Low Prices

(EDLP)

Multiple-

Unit

Pricing

Bundle

Pricing

Promotional

Pricing

Calculating Discounts

Discounts from Manufacturers and Distributors

- Some common types of discounts offered by manufacturers and distributors are:
- cash
- trade
- quantity
- seasonal
- promotional discounts

Calculating Discounts

Cash Discounts

- To calculate the cash discount:
- Determine the dollar discount:
P x D(%) = D($)

- Determine the net price:
- P - D($) = NP

- Determine the dollar discount:
- To determine a cash discount on a unit price, do the same calculation, with P equaling the unit price.

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Calculating Discounts

Quantity Discount

- Using a quantity price list:
- No. of items1-24 25-48 49-72
- 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.

Slide 2 of 2

Calculating Discounts

Promotional Discounts

- Promotional discounts are given to businesses that agree to advertise or promote a manufacturer's products. When the promotional discount is quoted as a percentage, it is calculated the same way as a cash discount. If a dollar discount is given, calculate the discount percentage this way:
- Divide the dollar discount by the original price of the order:
- D($) / P = D(%)

- Divide the dollar discount by the original price of the order:

Cost of Freight

FOB

Destination

Seller pays

FOB Shipping

Buyer pays

Calculating Discounts

Trade Discounts

- Trade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts:
- Determine the dollar discount:
P x D(%) = D($)

- Determine the net price:
- P - D ($) = NP

- Determine the dollar discount:

Calculating Discounts

Seasonal Discounts

- Sellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent:
- Determine the dollar discount:
P x D(%) = D($)

- Determine the net price:
- P - D($) = NP

- Determine the dollar discount:

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.

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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.

Slide 3 of 4

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.

Slide 4 of 4

Market Factors Affecting Prices

Costs

and

Expenses

ConsumerPerceptions

Competition

PRICES

Supply

and

Demand

Pricing Concepts

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.

Setting Prices

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.