PERFORMANCE INDICATOR 3.06

DEVELOP A FOUNDATIONAL KNOWLEDGE OF PRICING TO UNDERSTAND ITS ROLE IN

MARKETING.

Worksheet

Warm-up Do you equate value to price? Yes No

What’s the most expensive thing you have ever bought?

List item & Price

PART ADescribe the characteristics of effective pricing.

Attracts the customer’s attention

Enforces the idea of “value” for the money

Takes into account:◦ Cost to produce◦ What competitors are charging◦ What customers are willing to pay

Example University of Kentucky Basketball Sweatshirt

◦ #1 College Bball team in country◦ Lost last night to #2 Michigan State

◦ Best recruiting class ever?

Cost to produce a Nike Sweatshirt◦ $13.99

$49.99 $20.00

Kentucky Sweatshirt Nike v. Adidas v. Old Varsity Brand

How much would Nike charge for the sweatshirt they created?

Boston Red Sox’s Won 2013 World Series

Collectors Item / Date Specific

World Series T-Shirt

Cost $5.75 to make t-shirt

‘47 Brand v. Nike v. Majestic

$39.99 $27.99 $__________

Explain what is being priced when prices are set for products.

The good or service

Any services and warranties

Consider not only the cost of making but the benefit to the customer◦ Think about the price of a diamond, rare baseball card,

limited edition car

What Goes Into Cost of Car

Cost of the car◦ $31,395.00

Option Packages◦ $2,000.00

Destination Charges◦ $795.00

Warranty, Extended Service Plans, etc..

◦ My car payment increased $44.00/months for added plan

How much do these 2 cards cost?

Factors that Affect Price Costs

Supply & Demand

Economic Conditions

Government Regulation

Channel Members

Company objectives & strategies

List factors that affect a product's price

Perfect competition:Many buyers and many sellers all dealing in an identical product. Neither producer nor user has any market power and both must accept the prevailing market price.

Monopoly:One seller who dominates many buyers. The monopolists can use his market power to set a profit-maximizing price.

Monopolistic competition:A large number of suppliers offer similar, but not identical products. The similarities ensure elastic demand whereas the slight differences give some monopolistic power to the supplier.

Common in restaurant, cereal, clothing, books, music, movies, & shoes industries

Monopolistic Competition

Basically brand loyalty is what differentiates & keeps the business going.

Example would be shaving kits. There are a lot of shaving manufacturers on market that offer

similar products. Many people only buy Gillette Fusion Power

Gillette’s High Level of Brand Loyalty gives it more “power” in the market

Companies have the freedom to create a product to compete against Gillette but they have to build brand loyalty in order to

stay in business.

List factors that affect a product's price.

Oligopoly Monopolies “little brother”

Industries with only 2-3 businesses. Boeing & Airbuss are two main airline manufactures. Each have 50% of market.

Not a monopoly because there is some competition that prevents one company from doing whatever it wants.

Each firm has the ability to influence market prices

Not good for consumers because prices are high & competition low.

Cost to produceCompanies need to make a profit so the cost to product an item is a key factor in affecting price

Describe how pricing affects product decisions.

Pricing affects whether customers will be a product and how much customers will buy

Decisions on whether to expand a product line or close it

are related to what price can be charged.

Explain how pricing affects place (distribution) decisions. Shipping products long distances can significantly increase the price of an item

◦If a company has to fly a product to consumer it will cost more◦Why do you think products in Hawaii are more expensive?

Describe how pricing affects promotion decisions. When setting prices and promotion plans and company must consider:–Is the company trying to break into an existing market?–Is it trying to expand into new markets?–What is the competition doing?–Type of Medium you choose (Radio v. Print) & Length of promotion

Affects of Pricing

Explain pricing objectives.

Pricing objectives are the goals a company hopes to achieve through it pricing decisions. ◦ Profit goals

◦ Set a price that gives you the most profit◦ Sales goals

◦ Set a price that leads to most quantity sold◦ Competition

◦ Set a price that is based off of a competitor◦ Company Image

◦ Used mainly in luxury items

Price is Right

Grades◦ Price Worksheets

◦ Branding Project Present Ideas

◦ Worksheet from Cultural & Social Media

◦ Price is Right Game◦ 3 Examples

◦ Quiz Review

Do you think its fair for colleges to charge higher rates to students who are from

out-of-state?

Be able to identify & differentiate between the various type of pricing policies

businesses take.

Price Fixing Two Examples:

General Electric & Westinghouse got caught price fixing in the 1950’s. The Tennessee Valley Authority was going over records and noticed bids submitted by 47 companies were almost always identical. Heads of companies would get together at restaurants and pick out a winning bid & losing bids.

British Airways & Virgin AtlanticIn 2004, the airline entered into secret talks with its rival Virgin Atlantic to simultaneously bump up their fuel surcharges, a practice that continued into 2006. Over the course of the collusion, fuel surcharges rose from an average of five pounds a ticket to over 60 pounds a fare.

Predatory Pricing Wal-Mart has been sued numerous times over this issue. Lawsuits from government officials in Wisconsin & Germany have sued Wal-Mart over their selling prices.

Example:

Wal-Mart sells butter, milk, laundry detergent & other staple goods below cost to force other businesses out of business. After other companies go out of businesses; Wal-Mart raises prices to recoup losses.

Bait-and-Switch Advertising

◦ One of a Kind ◦ Car for sale but in limited stock

◦ While Supplies Last◦ Sell you something else

◦ Financing◦ Only excellent credit scores

◦ Actual item Not Pictured

Deceptive Pricing

Dumping For example:

Suppose there are two companies selling identical products;

company Y is a domestic firm and company X is a foreign firm.

Company X wants to drive company Y out of the market,

so it prices its product far below the cost of producing it.

Company Y must compete by lowering its prices,

which eventually causes the company to lose money and exit the market.

Loss Leader

Price Discrimination Price Discrimination occurs when a firm charges different prices to similar customers in similar situations

Example:◦ Adult Movie price is

higher than kids◦ In-state college tuition

is less than out-of-state college tuition

Describe laws affecting pricing.

American consumers have the right to expect the benefits of free and open competition — the best goods and services at the lowest prices.

Public and private organizations often rely on a competitive bidding process to achieve that end.

The competitive process only works, however, when competitors set prices honestly and independently.

When competitors collude, prices are inflated and the customer is cheated.

Price fixing, bid rigging, and other forms of collusion are illegal and are subject to criminal prosecution by the Antitrust Division of the United States Department of Justice.

Describe laws affecting pricing.

Explain positive effects of pricing laws.

•Customers know that they aren’t being taken advantage of

•Pricing is consistent

Discuss negative effects of pricing laws.

•Prices become less like to be modified (even down) because the law might see the change in a negative manner.

•Companies worry about sales & price promotions they offer because of how government perceives it

Identify ethical considerations in setting prices.

Ethical considerations include the importance of accessibility to the company’s product(s).

Think about the price for medicine that is required to keep ill people alive (like insulin)

How much profit does the company need to stay in business to provide jobs for its employees?

Explain ethical concerns associated with the use of complex prices that are confusing to consumers.

Ethically, making pricing so complex that customers don’t understand how it works means that the company might be taking financial advantage of customers.– This ultimately results in customers looking for different suppliers– Think about the complexity of taking an airline flight vs. renting a car

Explain how pricing tactics can relate to social responsibility.

Since products often help improve the standard of living for the customers, pricing has a direct effect on society.

Pricing should consider both the welfare of society & the supplier.

What if I buy 12 Vitamin Waters?

PART BTechnology & Pricing

Identify ways that the use of technology impacts the pricing function and explain specific applications of technology in pricing.•Technology allows data to be easily collected, collated and analyzed. This means that pricing decisions can be effectively reviewed with solid information.

•Pricing can also be inputted into the computer cash register system reducing the number of input pricing errors at the cash register.

Describe benefits of automating the pricing process.

•Instead of having to price every item in the store, one person can easily change prices with a change in the programming and signs that inform the customer of the price.

Transformation of Price Tags

Customers Item Pricing

http://rivergrandrapids.com/price-stickers-on-grocery-items-going-away/

Taco Bell: Overpriced Burritos

http://www.youtube.com/watch?v=HcrDmfGCWfA

Discuss risks associated with automating the pricing process.

Errors in the programming might be hard to catch, especially if the price is off by only a few cents or dollars (depending on the overall price of the item).

Cashiers don’t have to learn the prices and therefore can’t check that they are charging the correct prices on the register.

Item Pricing Laws (8 States have such laws) Michigan has enacted over price law; where you get back the overcharged amount plus 10x the difference ($1.00 - $5.00)

If charged $1.25 for $1.00 item they have to give you $.25 + 10*.25.

Refund = $2.75

Explain how automating pricing facilitates targeted pricing.

•Targeted pricing allows a company to charge different prices to new customers it is trying to entice than to established customers who need no other incentive to by the company’s brand.

•Automated pricing allows the programmer to set the qualifications and then the system awards the targeted price when the conditions have been met.

Targeted Customer: Sprint

Automated Pricing:Best Buy v. Amazon v. Sears

Friday 11/15 = Monday 11/18

Monday Warm Up

Objectives to be Answered

a. Define the term selling price. b. Distinguish between price and selling price. c. Describe the importance of selling price. d. Identify factors affecting selling price. e. Explain how consumers can affect selling price. f. Describe how government affects selling price. g. Discuss how competition can affect selling price. h. Explain how the nature of a business can affect selling price. i. Identify pricing objectives. j. Explain how pricing objectives affect selling price.

3.06: Pricing Define the term selling price. The Selling Price is the Price At Which A Product Is ACTUALLY Sold To The Customer

Distinguish between price and selling price. (Retail Price Vs. Selling Price)

–Retail Price Is The initial amount that the company would like to charge for an item (suggested retail price)

–Selling Price Is the actual price for which it is sold to the customer (sale price)

3.06: Pricing Describe the importance of selling price. The Selling Price Must Bring Enough Profit To The Seller So The Company Can Stay In Business

Identify factors affecting selling price.–Competitors’ Prices–What Customers are Willing To Pay (demand)–What The Item Costs to Produce, Transport, and Sell–External factors such as current economic conditions

3.06: Pricing Explain how consumers can affect selling price.–It is all about what they are willing to pay

Describe how government affects selling price.–Regulations and laws can affect what companies will charge. –Tariffs and additional taxes (think gasoline) can significantly change prices

• Sales tax may affect selling price• The Price Of Gas In NC vs. SC

State Taxes

for Gasoline

NC: 57.6%

SC: 35.2%

3.06: Pricing Discuss how competition can affect selling price.–If competition raises its prices, a company might be able to

make more profit by raising prices–The opposite is true for lowering prices

Explain how the nature of a business can affect selling price–How much competition does your business have in the area

or online?–Are you selling big ticket or inexpensive items?–Are your products seasonal?–Are you the industry leader or a follower?

3.06: PricingIdentify pricing objectives.

•Increase market share

•Enter a new market

•“Cash cow” phase• Cash Cow: Product with high market share in an industry with little growth• Example: Pepsi and Coke

Explain how pricing objectives affect selling price.

•Is the company trying to break into an existing market? Lower prices usually help.

•Is it trying to expand into new markets? Target pricing for new customers. Predict what the customer will spend

•Trying to build market share? Match competitors or lower prices below theirs.