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Price Price • Is the rate of value used to exchange goods

and services• May be in monetary or non-monetary terms

– monetary example:• paying $75 for a pair of shoes

– non-monetary examples:• an office supply store giving merchandise

to a newspaper producer in exchange for advertising

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PricePrice

• Can influence the success or failure of a company

• Can establish a business’s image, position in the market and competitive edge

• Is used by customers to make judgments about products and services regarding quality and value

ValueValue• Is the level of satisfaction associated with a

particular good or service• Is largely influenced by price• Is perceived differently by each consumer• Is not the same as quality

– quality is about performance level while value is about performance relative to cost

– for example, a shirt may be of poor quality, but at only $2, it can still be a good value, while a shirt of high quality could be a poor value if priced too high

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Goals of PricingGoals of Pricing

• Include:– create/enhance value– maximize profits– increase market share– increase customer satisfaction– “beat” the competition– enhance the

business’s image

Market Share - a firm’s percentage of total sales

volume within a given market or industry

Factors Affecting PriceFactors Affecting Price

• Include:– costs and expenses– competition– customer perceptions– consumer income– supply and demand– laws and ethics

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Costs & ExpensesCosts & Expenses• Typically directly influence price• Changes will sometimes result in changes in

price– increased costs will often result in increased prices– decreased costs don’t always result in

decreased prices• When considered with price, determine a

business’s break-even point and profit margins Break-Even Point - the point at which sales equal expensesProfit Margin – the ratio of profit to cost

CompetitionCompetition• Includes the following types:

– price competition refers to competition based solely on price largely affects pricing strategy can cause industry-based “price wars”

– non-price competition refers to competition based on factors

other than price, such as customer service or features and benefits

has much less affect on pricing strategy

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Customer PerceptionsCustomer Perceptions• Refer to how customers view a business and

its products and/or services– everyone sees a different level of value in various

business offerings• Are influenced by factors including personal

experiences, opinions of others, and the components of the marketing mix

• When favorable, can result in brand loyalty– the tendency to be faithful to a specific brand

regardless of price or convenience

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Consumer IncomeConsumer Income

Target Market - the specific group of

customers to which a product is marketed

• Has a considerable impact on determining a target market

• Should be an influential factor when determining a final sales price

• Should reflect the pricing strategy used

Supply & DemandSupply & Demand• Are basic economic concepts businesses

consider when pricing– supply refers to the amount of goods/services

producers are willing to produce and sell– demand refers to the amount of goods/services

customers are willing and able to buy• Interact to cause the following:

– surplus: when supply exceeds demand– shortage: when demand exceeds supply– equilibrium: when supply and demand are equal

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The Law of Supply & DemandThe Law of Supply & Demand

• States price and supply move in the same economic direction– as one increases or decreases, the other will do

the same

• States price and demand move in the opposite economic direction– as one increases of decreases, the other will do

the opposite

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Demand ElasticityDemand Elasticity• Refers to the degree in which demand is

affected by price • Classifies goods and services as either

having elastic demand or inelastic demand• Can create exceptions to the law of supply

and demand• Indicates whether sales will

respond to a change in price

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Elastic DemandElastic Demand• Applies to products and services for which a

small change in price creates a change in demand

• Occurs with non-essential goods/services, those for which a purchase can be postponed, and those for which there are substitutes– entertainment, travel, convenience

foods, luxury items, etc.

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Inelastic DemandInelastic Demand• Applies to products and services for which

a small change in price has little or no affect on demand

• Occurs with essential goods and services– milk, bread, gasoline,

toilet paper, medical care, etc.

Basic Pricing ConceptsBasic Pricing Concepts

• Include:– cost-oriented pricing– demand-oriented pricing– competition-oriented pricing

• Are usually used in combination to determine ideal price

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Cost-Oriented PricingCost-Oriented Pricing

• Is based on projected profit margins• Takes into account the cost of production

and the company’s profit objectives – for example, if a widget costs a company $10 to

make and distribute, and a 20 percent profit margin is needed, the widget is priced at $12

• Is very common because it uses a simple equation to calculate price

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Calculating PriceCalculating Price

Markup - adding a specific amount to the cost of the goods in order to generate an exact profit margin

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(C x M) + C = total sales price

Production Cost (C)

Markup %(M)

Total SalesPrice

$20 30% $26

$20 60% $32

$150 30% $195

$150 60% $240

Demand-Oriented PricingDemand-Oriented Pricing• Is calculated based on the highest price

customers are willing to pay• Allows for changes in price based on

changes in demand– for example, a widget costs a company $10 to

produce and distribute, but people are willing to pay $25, so that is where the price is set until demand changes

• Is often used for new or trendy products

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Competition-Oriented PricingCompetition-Oriented Pricing

• Is used to price products above, below or at the same level as the competition

• Does not rely on cost- or demand-based methods– for example, a widget is priced by one company

at $25, so a competitor prices it at $20.99 to gain a competitive advantage without losing profitability

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Pricing PoliciesPricing Policies• Are either one price or flexible

– a one price policy requires all customers pay the same amount for the

same product is associated with price tags, signs and retail stores does not allow for price deviations or bargaining

– a flexible pricing policy allows customers to pay different rates for similar

products permits customers to negotiate sales prices is often used when purchasing cars, services,

antiques or bundled items

Law & EthicsLaw & Ethics

• Are important to consider in pricing• In pricing classify the following practices

as unacceptable:– price fixing– price discrimination– bait-and-switch advertising

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Price FixingPrice Fixing

• Occurs when two or more competing companies conspire to set prices for specific goods and agree not to raise prices

• Is illegal because it eliminates competition and consumer choice, but can be difficult to prove

• Most commonly occurs when gas stations agree to leave gas prices above a set price

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Price DiscriminationPrice Discrimination• Occurs when a company charges

customers in similar situations different prices for the same item

• Is illegal in some situations, but because of its various definitions and conditions, is commonly seen in other situations– for example, car dealerships are often accused, but

buyers vary in terms of needs and ability to pay, so discrimination can rarely be proven in these cases

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Bait-&-SwitchBait-&-Switch• Is a form of fraud in which customers are

enticed with a low-price product the seller does not actually intend to sell– seller baits customers with a seemingly great

deal and then tries to switch it for a more expensive item by claiming the bait is out of stock, of low quality, etc.

• Is illegal in most states, but is also very difficult to prove

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General Pricing StrategiesGeneral Pricing Strategies

• Include:– price skimming– penetration pricing– price lining– bundle pricing– geographical pricing

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Price SkimmingPrice Skimming• Sets a high price for a new product to

generate popularity or demand• Is used to stimulate excitement

and interest in a product• Should only be used in short-term

situations– for example, charging a high price for a new

brand of cologne in order to appear special

Penetration PricingPenetration Pricing• Is the opposite of price skimming• Sets a low price for a new product in order to

penetrate the market• Allows the mass market to try the product• Detracts attention from the competition• Should only be used with price-sensitive and

common household items – for example, charging $.25 for a new drink in order

to get people to try it

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Price LiningPrice Lining• Is a technique used to create standardized

price lines• Often consists of low, medium and high price

levels for a company’s product line based on features, benefits or quality– for example, one model of computer may come in

an economical version at $400, standard version at $500 or loaded version at $600

• Limits the number of prices used for specific groups of merchandise

Bundle PricingBundle Pricing• Offers complimentary products in a package

sold for a single price• Offers smaller or less expensive products at a

reduced rate if purchased with a larger, more expensive item– for example, a video game console may be

discounted when purchased with a number of games

• Is most common with services– for example, communication providers often offer

television, internet and phone services in a package

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Geographical PricingGeographical Pricing

• Refers to price adjustments made based on a customer’s location

• Accounts for varying costs of transportation of products– for example, many products are more expensive

in places which include higher transportation costs, such as Alaska and Hawaii

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Psychological PricingPsychological Pricing

• Is a marketing approach in which illusions are created with the use of strategies based on customer habits and motivation

• Include:– odd-even pricing– prestige pricing– multiple-unit pricing– everyday low prices (EDLP)

Odd-Even PricingOdd-Even Pricing

• Is a technique which involves setting prices which all end in either odd or even numbers

• Is based on the principle that odd numbers convey bargains and even numbers convey quality

• Examples include: – odd pricing- $9.99, $499, $79– even pricing- $10, $500, $80

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$999. 99

Prestige PricingPrestige Pricing

• Is when an artificially high price is set for a product or service in order to convey status or quality

• Is common for luxury goods and services

• Typically is most effective for well-known brands

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Multiple-Unit PricingMultiple-Unit Pricing

• Is a pricing technique used to suggest a special deal

• Combines more than one item in the sales price

• Often includes a higher price, if items purchased individually, showing savings– for example, 1 for $10 or 3 for $25

• Is common for household items, food and items normally purchased in quantity

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Everyday Low Prices (EDLP)Everyday Low Prices (EDLP)

• Are used to convey a message of price consistency

• Are not raised or lowered due to discounts, sales or coupons

• Are often associated with large multi-purpose retailers– for example, Walmart® claims to save customers

money and time with low prices offered everyday

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Promotional PricingPromotional Pricing

• Is a pricing method in which businesses offer a lower price temporarily

• Includes:– loss-leader pricing– special event pricing– rebates and coupons– discounts

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Limited Time Only!

Loss-Leader PricingLoss-Leader Pricing

• Is used to increase store traffic by offering one popular item at a price below its production cost

• Is used to increase sales of other products once the customer has entered the store

• Is illegal in some states

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Special Event PricingSpecial Event Pricing

• Is when special prices are established for certain dates or seasons

• Is usually associated with specific events or holidays

• Examples include Presidents’ Day sales, Black Friday sales, back-to-school sales, grand opening sales

Grand Opening!

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Rebates & CouponsRebates & Coupons

• Are partial refunds provided by a manufacturer or retailer

• Are used to attract customer interest

• Are only available for a limited time or in conjunction with specific products

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DiscountsDiscounts• Are reductions to regular pricing• Include the following types:

– employee– quantity (for large orders)– seasonal (for out-of-season items)– cash (for timely payments)– promotional (for specific items, such as old,

new or overstocked)

20% off!

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Determining PriceDetermining Price

• Consists of the following steps:1. establish pricing objectives

2. determine costs

3. estimate demand

4. study competition

5. select a pricing strategy

6. set a price point

7. monitor, evaluate and adjust the price

Price Adjustments Price Adjustments • Should account for the following:

– inflation– changes in trends or customer habits– changes in competition– increased or decreased costs– pricing strategies or company goals– grading standards and

product quality

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Inflation - a gradual increase in price due to economic factors

and purchasing power

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AssessmentAssessment1. (T/F) Price can be expressed in non-

monetary terms.2. List two goals of pricing.3. Describe two factors which affect price.4. What is the difference between elastic

and inelastic demand?5. Calculate the final sales price for a

bucket which cost $10 to manufacturer, if the markup percentage is 30 percent.

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AssessmentAssessment6. (T/F) Bait-and-switch advertising is legal

in most states.

7. What is prestige pricing?

8. What is the purpose of an odd-pricing strategy?

9. What does EDLP stand for?

10. What are two types of discounts?