ENTREPRENEURSHIP I

Ind. 5.01 – Develop a foundational knowledge of pricing to understand

its role in marketing. (Part I)

Warm-upTuesday, May 20th

What is Pricing?

Pricing is a marketing function that involves the determination of an exchange price at which the buyer and seller perceive optimum value for a good or service.

Effective pricing is important for: Customer satisfaction The continued success of a business

What is Pricing?

Pricing isn’t as simple as just placing a tag on an item that tells customers how much they owe. It involves: Perceiving Optimum Value

Buyers & sellers must feel they are receiving the most from the product

Determining the exchange price The amount of money the buyer is willing to pay and the

seller is willing to accept.

Pricing is a Tug of War

Buyers want low prices

Sellers want high prices

The trick is to find a balance!

If this doesn’t happen: Consumers spend their

money elsewhere A businesses sales will

decline – products will be discontinued or prices will change

PRODUCT LIFE CYCLE

Product Life Cycle Strategies

Introduction stage: stimulate consumer interest and create awareness.

Growth stage: stress benefits of a product over its competitor’s products.

Maturity stage: repositioning a product.

Decline stage: greatly reduce marketing or drop product due to poor sales.

MATURITY STAGEA business will stabilize a product's price

during the maturity stage

Strategies during this stage may include repositioning a product.

Choosing a different target market to position the product.

Factors Affecting Price

CostsSupply and demandEconomic conditionsCompetitionGovernment

regulationsChannel membersCompany objectives

and strategies

To remain competitive a manager of a local business keep track of the prices that similar businesses in the area are charging

FLEXIBLE PRICING POLICY

Method of selling where the prices are open to

negotiations between buyers and sellers, and allow for bargaining within a certain range.

Example: Lowering prices during bad economic times

costs of raw materials increase considerably, a business is likely to increase the selling price of a product.

How Pricing Affects Place Decisions

The price function often influences the place function by determining where the product is sold.

Goods and services with high prices will be carried by stores that sell higher priced items.

Pricing Objectives

some new companies set their selling prices as low as they can to get market share as fast as possible

SALES-ORIENTED PRICING OBJECTIVES

the purpose of sales-oriented pricing objectives to increase the total amount of sales income

One reason why the target market of a business affects its pricing is because consumers in each target market judge the value of products differently.

Prices have many names……

InterestWages/SalaryFeesDuesFareAdmissionService Charge TuitionRentEtc.

More About Pricing…

What is actually being priced? The product an all of

its associated services i.e. In the case of a

car, it’s not just the car itself. The price includes the car and all of the associated services—transportation and delivery charges, credit, etc.

Who sets prices? Depending on the size of the

business, many people may be involved in establishing prices. This person will check competitors’ prices and use the company’s own records to establish prices for the goods and services the business offers.

In a smaller business, the person most often responsible for setting prices is the manager or owner.

In larger companies, an entire department (part of marketing) is usually responsible for setting prices for the company.

How Pricing Affects Product Decisions

Research Research costs money!

Profit Decisions Can we make a profit by

selling this product? Can we achieve the return

in investment we want? Can we set our prices high

enough to answer the other two questions with a yes?

Materials used in production The quality of materials

used is reflected in the product's price

Customer Decisions A companies pricing

strategy will determine the type of customer it will attract

Company Image Pricing will help to

determine the businesses image

How Pricing Affects Promotion Decisions

Choice of Medium Products with low

profit margins are promoted in lower priced media (i.e. radio)

Products with higher profit margins are promoted in a combo of media (i.e. radio, tv, newspapers, & magazines)

The bigger the ad, the higher its cost

Amount of Money Spent The amount of money

spent on promotion is built into the cost of the product, therefore the more promotion=higher price

Time Allocated to the Promotion The longer the

promotion, the higher the price

How Pricing Affects Place Decisions

Choice of Transportation Channels Businesses choose the

type of transportation that fits in their budget & gets the product to the destination at the right time

The cost of this transportation will be built into the price of the product

Where the Product is Offered A product’s price

affects where it is sold. Goods and services

with high prices will be carried by stores that sell higher priced items.

If a product is priced inexpensively, it will sell at a different type of store.

Pricing Objectives

Pricing objectives are the goals a company hopes to accomplish through its pricing strategies

There are a number of pricing objectives companies may have, they may relate to: Profitability – making as much money as possible or

simply covering the cost Sales – selling as many as possible or gaining a

certain market share Competition Image/Prestige – setting prices to keep a certain

image in the customers mind

ENTREPRENEURSHIP I

Ind. 5.01 – Develop a foundational knowledge of pricing to understand

its role in marketing. (Part II)

What is a Selling Price?

The selling price the amount the seller charges for a product

Each business goes through its own process to determine prices.

Selling prices are dynamic – they do not remain the same, they fluctuate.

Components of the Selling Price

From selling price, the business must:

Pay all of the costs of the product

Pay operatin

g expenses

Obtain a profit

Importance of Selling Price

For Customer Helps them decide

how to allocate money People cannot buy

everything they want so price helps them to decide what they can afford

Helps them compare products Price = Quality

For Businesses Helps them determine

amount of income from sales They must include

enough mark-up to pay current expenses & provide for future growth

Helps them reach company goals

Pricing Objectives

A firm’s pricing objectives should be compatible with its marketing objectives. The business must know where it wants to go before it

can choose selling prices that will help it to get there. Sometimes, a business must use a combination of pricing

objectives to reach its goals. In all cases, the business should set its marketing

objectives first, and then select pricing objectives that seem most likely to help it meet its marketing objectives.

Pricing objective will change as circumstances inside & outside of the business change.

Sales-Oriented Pricing Objectives

Purpose – to increase the total amount of income from sales

Two ways to do this: Charge lower prices to increase sales volume Charge higher prices to increase the dollar value of its

salesSome specific objectives a business might

achieve: Creating an image Being more competitive (similar price, higher price, or

lower price) Obtaining, maintaining, & increasing market share

Profit-Oriented Pricing Objectives

Purpose – to create profits for the business Some businesses want to make the most profit possible but

most simply want to recover costs and make a reasonable profit

Some specific objectives a business might achieve: Surviving Maximizing profits Earning return on investment - specific % of profit based on

the amount of money put into the business Earning return on sales – basing the amount of profit they

want to earn on sales. Corporations often use this to avoid the government of accusing them of unfair trade practices or earning too much profit

Factors Affecting Selling Price

Costs (fixed & variable) Knowing the total

costs of a product is very important in setting selling prices because the business needs to recover those costs.

If it doesn’t, the business will eventually go broke.

Supply & Demand When consumer demand for a

product increases, producers make more of it, the supply increases.

As the supply increases, the number of buyers may decrease, and sellers will have to reduce the price of the game to get it off the shelves.

On the other hand, if the producer is not able to increase production, and the supply of the product does not increase, the price may go up.

Customers may be willing to pay the higher price to obtain the product.

However, if the selling price goes too high, customers may stop buying, and demand will drop.

Factors Affecting Selling Price

Economic Conditions The national economy

is always changing. Ups and downs in

economic activity are known as business cycles.

Factors Affecting Selling Price - Competition

Pure Competition In a pure competitive market, there are a great many buyers

and sellers of nearly identical products, and marketers have very little control over pricing.

More competition exists in this kind of market than in any other.

Most products are sold at market price—the actual price that prevails in a market at any particular moment.

Market price is controlled by supply and demand. Sellers can’t raise their prices above the market price because

buyers can obtain all they want of the product at the lower, market price.

Sellers also can’t lower the price to increase demand because buyers are already buying as much as they want of the product.

Factors Affecting Selling Price - Competition

Monopolistic Competition In a monopolistic competitive market, there are many

buyers and sellers, but there is a range of prices rather than one market price.

Demand for products may be elastic or inelastic. Companies make their products different from each

other in terms of quality, service, features, styles, as well as prices, so that competition is not based on price alone.

Customers decide which product to buy based on its difference from other products.

There are both big firms and small businesses competing in this kind of market.

Factors Affecting Selling Price - Competition

Oligopoly In an oligopolistic market, there are relatively few

sellers, and the industry leader usually determines prices.

Prices are fairly stable because not too many new firms can afford to enter the market.

If the industry leader raises or lowers prices, the other firms usually follow suit.

Sellers watch each other’s pricing because they know they will lose customers if the competition lowers prices.

Competition is more likely to be based on style or brand than on price.

Factors Affecting Selling Price - Competition

Monopoly In a pure monopoly, there is only one seller or provider

of a product, and no substitutes are readily available. Pure monopolies have been almost eliminated by the

federal government because monopolies control the pricing of their products.

This is unfair to customers who would have to pay whatever price was charged because they could not get the product they needed elsewhere.

The monopolies such as utility companies that exist today are either owned or controlled by the government.

Factors Affecting Selling Price

Government Regulation – state & federal laws Price Fixing - agreeing on a price or price range for a

product. This prohibited because it limits competition Price Discrimination - Businesses are not allowed to

charge different prices to similar customers in similar situations if doing so would damage competition. These laws were passed to protect small businesses in their competition with larger businesses. Without these laws, a drug wholesaler selling to two drugstores might charge the large drugstore much lower prices than it would charge the smaller drugstore because the large drugstore buys in larger quantities. This would put the smaller store at a competitive disadvantage.

Factors Affecting Selling Price

Government Regulation – state & federal laws (cont) Price Advertising – prohibits any kind of customer

deception. i.e. They may not use bait-and-switch advertising—promoting a low-priced item to attract customers to whom they then try to sell a higher priced item.

Unit Pricing - Unit pricing shows the price per unit (ounce, pound, etc.) along with the total price of the item. Some states have laws requiring businesses to use unit pricing. Unit pricing is an added expense for the business because of

the time required to calculate unit prices, print labels, and post prices.

However, unit pricing makes it easier for consumers to compare

Factors Affecting Selling Price

Channel Members Each member must make a profit Channel members who perform

certain duties in the process of selling products expect producers to provide them with such support as sales and service training, sales promotions, or cooperative advertising.

Producers must consider the cost of the supports they are expected to provide when they price their products. If they price the products too low to be

able to provide this kind of assistance, channel members may buy from another producer.

If they add too much to their prices to cover support activities, the price may be too high to encourage sales.

When manufacturers and producer raise their prices this is passed on the consumer

Company Objectives & Strategies Product Mix Product Life

Cycle Target Market