Copyright, 1996 © Dale Carnegie & Associates, Inc.

PRICE PLANNINGPART 2

Factors

Four Market Factors Affecting Price

• Costs and Expenses

• Supply and Demand

• Consumer Perceptions

• Competition Costs and Expenses

Responses to Declining Profit Margins

• Change Prices

• Change Package Sizes

• Drop Features that aren’t Valued

• Improving Products

Responses to Lower Costs/Expenses

• Lower prices

• Higher profits

Sales!

Break-even Points

• The break-even point is the point at which sales revenue equals the costs and expenses of making and distributing a product. After reaching this point, businesses make a profit on additional sales.

• Break-even Point = Total costs + expenses/Selling price

Supply and Demand

• Demand for a product goes up as prices go down and demand goes down as prices go up.

• If supply is low then prices tend to be high, if supply is high then prices tend to be low.

Action Plan

• Describe the following (where additional information is needed assign responsibility to the logical person)– Action steps.– Materials needed.– Training needed.– Schedules.– Costs.

Demand Elasticity

• Elastic Demand means that demand responds to price changes - high prices = low demand; low prices = high demand

• Inelastic Demand means that change in price has little effect on demand.

The Law of Diminishing Marginal Utility

• Consumers will only buy so much of a given product, even though price is low.

• Consumers will usually purchase more at lower prices, but not a lot more than they really need or can afford, no matter how low the price.

What has Inelastic Demand?

• GAS!

• Staples

• Water

• Electricity

• Cars

• Tires

• Oil

Factors Affecting Demand Elasticity

• Availability of Substitutes

• Price Relative to Income

• Brand Loyalty

• Luxury vs. Necessity

• Urgency of Purchase

Consumer Perceptions

• People pay a price according to their perceived value.

• Higher price = Quality

• Exclusivity

• Customer Service

Competition

• If consumers are price conscious then price competition is effective.

• If consumer perceive the product is unique, price is not as much a factor.

• Similar products must be very price competitive to sell their product.

Price War

• When businesses lower prices to attract customers from the competition, sometimes to the detriment of profits.

Price Fixing

• When competitors agree to a certain price range to charge customers

• Price Fixing is illegal because it eliminates competition.

• The Sherman Antitrust Act of 1890 outlawed monopolies.

Price Discrimination• When a company charges different

prices to similar customers in similar situations.

• Illegal - The Clayton Antitrust Act of 1914

• The Robinson-Patman Act (1936)

• You can’t charge small retailers more than large retailers or give large retailers special services not offered to small retailers.

When can Price Discrimination be Used?• When products purchased are

different

• If non-competing buyers are involved

• If prices do not hurt competition

• If costs justify the differences in prices

• If production costs go up

• If prices are changed to meet another supplier’s bid

Resale Price Maintenance

• Manufacturers can’t tell retailers that they cannot sell below a certain price point. It is illegal for manufacturers to coerce retailers to sell at a particular price.

• Manufacturers can tell retailers “in advance” that they can’t sell below a certain price, not “coerce”.

Minimum Price Laws

• Some states have laws against retailers selling goods below cost.

• Where there are no laws prohibiting it retailers have “loss leaders”. These are popular items priced below cost (at a loss) to entice customers into the store.

Unit Pricing

• Some states have laws requiring unit pricing.

• Unit pricing is when a store puts on the price sticker how much the item is per unit (i.e. 2.3 cents per ounce)

• Unit pricing allows consumers to comparison shop to get the best value.

Price Advertising• FTC has guidelines for advertising

prices.– A price reduction can only be

advertised if the product was offered to the public at the regular price for a reasonable time.

– You must be able to prove your prices are lower than a competitors to advertise it.

– A regular price cannot be used for a reference point unless the item has actually sold for that price.

– No bait-and-switch advertising.