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Pricing and Strategies
Section 5.2
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Pricing
Price: the value placed on the goods or services being exchanged
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Pricing and Profit
Price is important in a business because it helps determine a companies profit or loss A company sells 1,000 baseball bats They are sold at $175 The company bought them for $90 each
Cost of goods sold equals $90,000 Cost of operating business is $60,000 How much profit did they make?
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Pricing and Profit
$175,000-$150,000 $25,000 in profit
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Pricing and the Marketing Mix
What a person in the target market is willing to pay becomes a major question Lower price attracts value oriented Higher price attracts serious buyers
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Pricing Considerations and Strategies Consumer Perception
Many consumers believe the higher the priced item the better the quality
A very good quality product at a low price may not sell as well as it would at a higher price
Attract people that have this perception
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Consumer Perception
Prestige Pricing: pricing based on consumer perception Very expensive sports watches, sports
equipment, apparel priced above the average market price to attract customers who may judge a product’s quality by its price
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Consumer Perception
Odd-even pricing: pricing goods with either an odd number or an even number to match a product’s image $29.99 Odd pricing indicates “bargain” $100 Even priced items reflect a quality item
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Consumer Perception
Target Pricing: pricing goods according to what the customer is willing to pay Manufactures estimate this price and then work
backward to determine how much to charge wholesalers and retailers
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Demand
Demand is related to price in many ways High demand and limited supply=price will be high
Popular sporting events Limited edition baseball cards
Low demand and a lot of supply of the product=price will decrease
Lower the price of the item to increase the demand for it Retailers do at the end of the season to get rid of merchandise
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Demand
As a general rule, demand will be lower for a higher-priced item, because fewer people can afford to buy it
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Cost
The price of an item must be higher than the cost a business paid for it
Two pricing strategies Markup: the difference between the retail or
wholesale price and the cost of an item Must be high enough to cover expenses and
ensure a profit
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Cost
Cost-plus pricing: pricing products by calculating all costs and expenses and adding desired profit The cost of making the item or providing the
service is determined first
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Newness of the Product
When introducing a new product, a company may decide to price the item high to recover the costs of development
Or they may price the product low to stimulate demand
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Competition
Businesses find out what their competitors are charging for the same items they are selling
If a company does not want to compete on price they use non-price competition Competition between businesses based on
quality, service and relationships
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Pricing Objectives and Strategies
Pricing objectives are the goals that a company wants to achieve through pricing
Two common pricing objectives involve Increasing profit Improving market share
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Profit Objective
A company usually has an objective to earn a higher profit
Sometimes costs increase but a company knows that it cannot increase the price Introduce surcharges Reduce some unneeded features or size of the
product
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Market Share Objective
Market Share: the percentage of the total sales of all companies that sell the same type of product Gatorade
80% market share of sports drink industry
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Special Pricing Strategies
Price Lining: selling all goods in a product line at specific price points $39.99, $59,99 and $79.99 Makes it easier for customers to make
purchasing decisions
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Special Pricing Strategies
Loss-leader pricing: pricing an item at cost or below cost to draw customers into the store They will then buy other products while at the
store Total of shopping visit will more than cover
money lost on lost leader item
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Special Pricing Strategies
Yield-Management Pricing: pricing items at different prices to maximize revenue when limited capacity is involved Some seats being priced higher than others Best seats cost more Tiered Pricing: charging more for tickets to
home games against more competitive opponents
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Price Adjustments and Regulations
Discounts and Allowances: may be used to change a published price
Offer discounts for buying in large quantities Or buying prior to the buying season
Regulatory Factors Sherman Anti-Trust Act
Prohibits price fixing and predatory pricing Price Fixing: illegal practice whereby competitors
conspire to set the same prices Predatory Pricing: setting a very low price in order to
drive competition out of business
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Pricing Regulations
Price Discrimination: The practice of charging different prices to similar buyers Is legal as long as the price discrimination does
not lesson competition Was originally prohibited by the Clayton Act