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 Analysis 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) Slide 2 of 2
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 Slide 1 of 2
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($)
Calculating Prices MarkDowns Calculations for Lowering Prices • There is another, simpler way to calculate the sale price: • Subtract the markdown percentage from 100% (representing retail price): RP(%) - MD(%) = SP (%) (RP = 100%) • Multiply the retail price by the decimal equivalent of the percentage sale price: • RP x SP(%) = SP($) Slide 2 of 2
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 Slide 1 of 2
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. Slide 2 of 3
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
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)
Prestige Pricing 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 Multiple-Unit Pricing 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.
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)
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. Slide 4 of 5
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 $50. Slide 5 of 5
Graphic Organizer Types of Psychological Pricing Psychological pricing refers to techniques that create an illusion for customers or that make shopping easier for them. Odd- Even Pricing PrestigePricing Price Lining Psychological Pricing Everyday Low Prices (EDLP) Multiple- Unit Pricing Bundle Pricing Promotional Pricing
Calculating Discounts Discounts from Manufacturers and Distributors • Some common types of discounts offered by manufacturers and distributors are: • cash • trade • quantity • seasonal • promotional discounts
Calculating Discounts Cash Discounts • To calculate the cash discount: • Determine the dollar discount: P x D(%) = D($) • Determine the net price: • P - D($) = NP • To determine a cash discount on a unit price, do the same calculation, with P equaling the unit price. Slide 2 of 2
Calculating Discounts Quantity Discount • Using a quantity price list: • No. of items 1-24 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($) / P = D(%)
Geographic Pricing Strategies Cost of Freight FOB Destination Seller pays FOB Shipping Buyer pays
Calculating Discounts Trade Discounts • Trade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts: • Determine the dollar discount: P x D(%) = D($) • Determine the net price: • P - D ($) = NP
Calculating Discounts Seasonal Discounts • Sellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent: • Determine the dollar discount: P x D(%) = D($) • Determine the net price: • P - D($) = NP
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. Slide 2 of 4
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.