3.06 The Price is Right

3.06

The Price is Right

OPTIMUM VALUE

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

OPTIMUM VALUE

• Effective pricing is important for customer satisfaction and for the continued success of a business. Pricing isn’t as simple as justplacing a tag on an item that tells customers how much they owe.

DETERMINING THE EXCHANGE PRICE

When a good or service is sold, the buyers and sellers have agreed on a value for the product. That initial value is usually stated as a monetary amount, such as $39.99.


At this point, the buyer has decided that she is willing and able to pay that amount of money to obtain the product, while the seller has decided that he will accept that

• amount as payment. This amount of money is known as the exchange price.


Before sellers can set this exchange price, they must consider a number of factors.

Perceiving optimum value. Buyers and sellers must feel they are receiving the most, or optimum, value from the product.


When you buy something, you want to make sure it is the best purchase you can make for your money. After all, when you spend your money on one product, youwill no longer have it available to buy something else.


Likewise, sellers want to feel they are selling their products at the best price—the highest price that will still attract the most buyers.

The price that the seller sets will affect the number of sales and the amount of income the company will make.

TUG OF WAR

• Pricing is like a tug of war between buyers and sellers trying to get the most value from the good/service. Naturally, buyers want low prices, while sellers want highprices.

SATISFYING BOTH GROUPS

• The trick to pricing comes in balancing and satisfying both groups. Both buyers and sellers need to perceive they are getting the best possible value they can.

SPEND $$$’s ELSEWHERE

If this doesn’t happen, several things might occur:

• Customers will spend their money elsewhere, either on a similar product (if one is available) or on an entirely different product.

DECLINE OF SALES

• A business’s sales will decline. The business will be forced to discontinue offering the product or to change its prices.

Effective pricing, therefore, is important for both customer satisfaction and the continued success of the business.

CHARACTERISTICS OF PRICING

• No single factor makes an effective price. Marketers must keep a number ofcharacteristics in mind when setting effective prices. These include beingrealistic, flexible, and competitive.

REALISTIC PRICING

• Believe it or not, prices can be set too low! Many businesses have found if their prices are not what customers expect to pay, even if that price is lower than expected, customers will not buy.

• When these businesses increased their prices, their sales actually increased as well. Why would this happen?

PRICE & QUALITY

• Customers associate price with quality—ifthe price is high, the quality is high; if the price is low, the quality is low.

• So, businesses must set prices that are realistic to customers—neither toohigh nor too low.

COMPANY IMAGE• What type of image does a company want to

project? Pricing will help determine that image. Stores that have low prices are thought of as discount stores. Considerretailers such as Wal-Mart or a dollar store.

COMPANY IMAGE

On the other hand, stores with very high prices usually are perceived as havingmore prestigious name brands and higher quality products.

WHERE PRODUCT IS OFFERED

• 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. Take haircuts for example. A $100 haircut is a service you will most likely find at a fine salon or day spa. A $10 haircut is a service you will most likely find at a discount salon.

FLEXIBLE PRICING

• Marketers must understand the prices they set are written on paper—not in stone. Because pricing is a tug-of-war and a constant quest for balance, businesses must be willing to adjust their prices as necessary.

• These adjustments may be increases or decreases, depending on the circumstances the business faces.

FLEXIBLE PRICING

• Nearly all businesses lower prices from time to time in an attempt to sell more products and attract more customers.

• Marketers must stay on their toes to keep prices in line with current promotions and sales.

ODD-CENTS PRICING

• Odd-cents pricing is used to give the illusion that a price is slightly lower than it is. For example, many consumers perceive $4.99 as closer to $4.00 than to $5.00.

• Below-cost pricing would mean selling products for less than what the business paid for them, which would lose money for the business.

COMPLEX PRICING STRUCTURE

• Some businesses develop complex pricing structures that are very difficult for customers to understand. Customers buying from such businesses are seldom able to figure out how to get a lower price and end up spending more than they should.

• Although this practice is not illegal, it is considered unethical because customers don't have a fair chance to obtain the best price.

COMPLEX PRICING STRUCTURE

• Providing a reference price is ethical because it gives customers a comparison price. It is ethical for businesses to match the prices of competitors as long as they don't meet in advance and agree to set the prices.

• The purpose of business is to earn a profit, which involves marking up prices.

ADJUSTING PRICING

• For example, during bad economic times, customers are quite cautious about how they spend their money. To attract these customers, businesses may need to lower prices.

• However, when economic conditions are good, businesses might increase prices because customers are less cautious with spending.

COMPETITIVE PRICING

• Would you pay $4.00 for a can of Pepsi? Under normal circumstances, probably not. You would know that you could get the same product for a much lower price at another store.

• When a similar product is offered by competitors, a business needs to be aware

• of the prices others are charging. If not, the business will probably lose customers because its prices are not competitive.

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ACTUALLY BEING PRICED?

• 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. This makes pricing more difficult because marketers must look beyond the cost of the immediate product to consider its associated services.

ACTUALLY BEING PRICED?

• Another important part of the pricing process is communicating prices to customers and clients. Not all prices can be conveyed using a tag or a sticker. Prices can also be communicated through catalogs, price sheets, web sites, and salespeople.

PREDATORY PRICING• Predatory pricing is the practice of selling a

product at a very low price in an attempt to drive competitors out of the market.

• In many countries, including the US, this practice is illegal. However, some people, even economists, consider the concept of predatory pricing to be a myth—they believe it is nothing but fair competition.

PREDATORY PRICING

• They claim in a private enterprise system, businesses should be allowed to price their products as low as they want. If businesses price their products irrationallylow, then they are only hurting themselves and will soon be out of business.

WHO SETS PRICING?

• Depending on the size of the business, many people may be involved in establishing prices. In a smaller business, the person most often responsible for setting prices is the manager or owner. This person will check competitors’ prices and use the company’s own records to establish prices for the goods andservices the business offers.

WHO SETS PRICING?In larger companies, an entire department (part of marketing) is usually responsible for setting prices for the company. The department may use more sophisticated means to determine prices for the company’s products. It may analyze market research, conduct customer surveys, study competitors’ prices, and analyze current and past sales records and trends to help with pricing decisions.

BAR CODESBar codes that include price information can be scanned into a register terminal where the price is read and recorded. When a business needs to change a price, such as to offer a sale price, an employee can enter the change into the scanning system computer, and the change is made for every item.

BAR CODES

This is a faster and more economical method than manually changing prices on every item. Customers will need a scanning device to read the price.

TECHNOLOGY & PRICINGTechnology makes it possible for online businesses to store previous sales information in databases and to use a point-of-sale system to obtain current sales information. Then, online businesses can use certain software programs to analyze the information to determine the best time to adjust prices.

TECHNOLOGY & PRICINGFor example, an analysis of historical and current sales data might indicate the time is right to reduce prices on certain products that are beginning to lose popularity.

Deciding how much to spend on advertising, calculating the cost of hiring more employees, or generating profit-and-loss statements are not factors that impact the pricing function.

PRICE DISCRIMINATION• Price discrimination is an illegal activity in which

a business charges different customers different prices for similar amounts and types of products.

• A business that charges a small company a higher price for a product than it charges a large company for the same product is involved in price discrimination.

PRICE DISCRIMINATION

• Businesses are expected to offer comparable prices to all customers for the same product. However, there are some exceptions if the price differences do not restrict competition.

PRICE FIXING

• Price fixing is an unethical activity in which businesses agree on the prices of their goods and services resulting in little choice for the consumer.

• In some countries, price fixing is illegal because it restricts competition.

NOT PRICE FIXINGBait and switch refers to an advertising scheme in which a business promotes a low-priced item to attract customers to whom the business then tries to sell a higher priced item.

Loss leader pricing involves pricing a product below cost to attract customers to the business. Gray markets involve selling goods to unauthorized dealers for very low prices.

MARKET SHARE

• Businesses may use selling price to obtain a share of the market, to enlarge the share they already have, or to maintain that share.

• For example, some new companies set low prices in order to get as much of the market as possible right from the start. They feel that they will benefit over time because the customers who are attracted by the low prices will become regular customers.

MARKET SHARE

• Because the selling prices are low, the business will not make a large profit or earn a high return on investment.

• It is illegal for businesses to deliberately set prices so low that they eliminate all competition.

FACTORS• When working with prices, you’ll need to know

that many factors, both internal and external, affect the final price decision. Theseinclude important influences, such as the following: • Costs • Supply and demand

• Economic conditions • Competition • Government regulations • Channel members • Company objectives and strategies

SUMMARY PRICING OBJECTIVES

• Each company wants or needs something unique from its pricing strategies. These pricing objectives or goals are theguiding influences in how marketers go about making pricing decisions. There are a number of different types of pricing objectivesthat companies have.

PRICING OBJECTIVES

• They may relate to profitability—making as much profit as possible or simply covering costs. They may relate to sales—selling as many units as possible or gaining a certain market share.

PRICING OBJECTIVESObjectives may also relate to the competition—keeping prices competitive is very importantin many industries, such as the airline industry.

Objectives may relate to image/prestige. Companies may set prices that will help maintain a certain image in customers’ minds such as luxury cars or jewelry. Companies may use any combination of these pricing objectives when setting prices.

REVIEW

• 69 (2) How do companies make brand promises to their customers?

A. They provide customers with a sworn statement B. They meet or exceed customer expectations on a consistent basis C. Salespeople verbally make brand promises to each customer D. They fulfill special requests for customers

• 79 (2) How do companies make brand promises to their customers?

A. They provide customers with a sworn statement B. They meet or exceed customer expectations on a consistent basis C. Salespeople verbally make brand promises to each customer D. They fulfill special requests for customers

• 70 (2) What would be the most appropriate pricing strategy for a business in a small town where unemployment has skyrocketed and the economy is in a downturn?

• A. Below-cost pricing • B. High-level pricing• C. Odd-cents pricing• D. Flexible pricing

• 70 (2) What would be the most appropriate pricing strategy for a business in a small town where unemployment has skyrocketed and the economy is in a downturn?

• A. Below-cost pricing • B. High-level pricing• C. Odd-cents pricing• D. Flexible pricing

• 71 (2) What pricing tactic might be considered questionable by some businesses?

• A. Matching the price of a competitor• B. Developing a complex pricing structure• C. Marking up prices to earn a profit• D. Providing a reference price

• 71 (2) What pricing tactic might be considered questionable by some businesses?

• A. Matching the price of a competitor• B. Developing a complex pricing structure• C. Marking up prices to earn a profit• D. Providing a reference price

• 72 (2) What is an example of an unethical pricing practice?

• A. A company prices it products low in an attempt to drive its competitors out of business

• B. A business increases its prices when the cost of the materials to make the products increases

• C. A firm sets a business objective to increase its profit margins over the next five years

• D. A business prices a new product line to reflect high quality and status

• 72 (2) What is an example of an unethical pricing practice?

• A. A company prices it products low in an attempt to drive its competitors out of business

• B. A business increases its prices when the cost of the materials to make the products increases

• C. A firm sets a business objective to increase its profit margins over the next five years

• D. A business prices a new product line to reflect high quality and status

• 73 (2) What is the advantage to a business of using bar-code pricing?

• A. Easier for customers to read• B. Reduces required business security• C. Easier to change prices• D. Reduces number of employees needed for sales

• 73 (2) What is the advantage to a business of using bar-code pricing?

• A. Easier for customers to read• B. Reduces required business security• C. Easier to change prices• D. Reduces number of employees needed for sales

• 74 (2). How does technology help businesses when it enables them to obtain and analyze vast amounts of information that impacts the pricing function?

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• A. By generating profit and loss statements• B. By deciding how much to spend on advertising• C. By calculating the cost of hiring more employees• D. By determining the best time to adjust prices

• 74 (2). How does technology help businesses when it enables them to obtain and analyze vast amounts of information that impacts the pricing function?

•

• A. By generating profit and loss statements• B. By deciding how much to spend on advertising• C. By calculating the cost of hiring more employees• D. By determining the best time to adjust prices

• 75 (2) A business charges a small company a higher price for a product than it charges a large company for the same product. What does this represent?

• A. Price discrimination• B. Controlled pricing• C. Price competition• D. Regulated pricing

• 75 (2) A business charges a small company a higher price for a product than it charges a large company for the same product. What does this represent?

• A. Price discrimination• B. Controlled pricing• C. Price competition• D. Regulated pricing

• 76 (2) Companies A, B, and C sell similar products. Together they recently decided to sell their products at the same prices. In what unethical activity are the businesses engaging?

• A. Bait & Switch• B. Price fixing• C. Loss-leader pricing• D. Gray markets

• 76 (2) Companies A, B, and C sell similar products. Together they recently decided to sell their products at the same prices. In what unethical activity are the businesses engaging?

• A. Bait & Switch• B. Price fixing• C. Loss-leader pricing• D. Gray markets

• 77 (2) What is an external factor that affects the price that a business charges for its products?

• A. Operating costs• B. Variable expenses• C. Economic conditions• D. Employee benefits

• 77 (2) What is an external factor that affects the price that a business charges for its products?

• A. Operating costs• B. Variable expenses• C. Economic conditions• D. Employee benefits

• 78 (2) Why do some new companies set their selling prices as low as they can?

• A. To eliminate all possible competition• B. To get market share as fast as possible• C. To earn a high return on investment• D. To quickly make a large profit

• 78 (2) Why do some new companies set their selling prices as low as they can?

• A. To eliminate all possible competition• B. To get market share as fast as possible• C. To earn a high return on investment• D. To quickly make a large profit

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3.06 The Price is Right