PRICING

Lee SalyardsMark IehlBrian Gerdes

PRICINGPricing is not about money.

It is the value of an exchange.

Value = Perceived Benefits

Price

• What is the price to feed an African child for a month?

PRICE STRATEGIES WILLBE MORE EFFECTIVE IF THEY ARE BASED ON VALUERATHER THAN BASED ON COSTS.

PRICE OF AN ITEM CAN TAKE ON A DIFFERENT NAME DEPENDING ON WHAT YOU BUY

• Airport booking fee• Baggage fee• Banking fee• Delivery fee• Online service fee• Inspection fee• Appraisal fee• Survey fee• Property taxes• Biometric fee• Court fee

STAGES IN MANAGING PRICESPricing Objectives ProfitPrice has both direct and indirect effects on profit. The direct effect relates to

whether the price covers the cost of producing the product. Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale -- the relative benefit of selling more units. The primary profit-based objective of pricing is to maximize price for long-term profitability.

SalesSales-oriented pricing objectives seek to boost volume or market share. A volume

increase is measured against a company's own sales across specific time periods. A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily spur a change in the other.

Status QuoA status quo price objective is a tactical goal that encourages competition on

factors other than price. It focuses on maintaining market share, for example, but not increasing it, or matching a competitor's price rather than beating it. Status quo pricing can have a stabilizing effect on demand for a company's products.

SurvivalPrices are flexible. A company can lower them in order to increase sales enough to

keep the business going. The company uses a survival-based price objective when it's willing to accept short-term losses for the sake of long-term viability.

Analyzing target market’s assessment of price

Determination of demandAnalysis of demand, cost, and profit

relationshipsEvaluation of competitors’ pricesSelection of a basis for pricingSelection of a pricing strategyDetermination of a specific price

Stages in Managing Prices

FIVE MOST COMMON DECEPTIVE PRICING PRACTICES

Scenario 1) Jeff saw an ad for his favorite jeans at a clothing store that was advertised at a low price. When he arrived at the store, he was told that the jeans were no longer available. A salesperson pressured Jeff to buy a similar, higher priced item.

Scenario 2) Bill’s Apple Pies put up a buy one, get one free ad. Before customers came in, Bill doubled the price up his pies.

Scenario 3) Sheila sells sock s and posts a sign that says “Retail Value in area $10. Our price $5.” A lot of other sock stores in the area do not sell their socks for $10.

Scenario 4) Jenny’s Juicer Company has an ad that says they sell their juicers below the manufacturer’s price. Few or no sales occur at that price in the area.

Scenario 5) Jim’s Shoe store had a sign that listed all Nike shoes on sale for $100. Right before he posted the sign, he raised the price to $120. Three months before the regular price was $100.

• Comparable value comparisons• Comparisons with suggested

prices• Bait and switch• Former price comparisons• Bargains conditional on other

purchases

SHERMAN ANTITRUST LAW (1890)Main law regulating monopoliesCreated in response to Standard Oil actions“To protect the consumers by preventing arrangements

designed, or which tend, to advance the cost of goods to the consumer.”

ROBINSON-PATMAN ACTPrevents price discriminationOriginal draft written by US Wholesale Grocers AssociationLarge volume retailers cannot attain lower prices than smaller

volume retailersApplies only to goods, not servicesSales to military exchanges and commissaries are exempt from

the act.

EXAMPLE COMPANIESAT&T (1980)AdobeWendy’sHy-VeeFarmer

BrownJohn DeereHobby LobbyAT&T (2013)Wal-Mart

MonopolyMonopolyMonopolisticMonopolisticPure

Competition

MonopolisticMonopolisticOligopolyMonopolistic

WEBER’S LAW

SUPPLY AND DEMAND

SUPPLY AND DEMAND

Quantity

Pric e

Supply

Demand

“Market Clearing Price”

(Equilibrium)Price and Quantity Determined by the Intersection of the Supply Curve and the Demand Curve

SUPPLY AND DEMAND

Quantity

Pric e

Supply

Demand

“Market Clearing Price”

(Equilibrium)

Supply• Controlled by producers• As Price ↑, Quantity

Produced ↑

Moving the Supply Curve• Change in cost of inputs• Change in opportunity

costs• Change in profit

expectations• Change in taxes and

subsidies

SUPPLY AND DEMAND

Quantity

Pric e

Supply

Demand

Demand• Controlled by consumers• As Price ↓, Quantity

Produced ↑

Moving the Demand Curve• Change in income• Change in price of

substitutes• Change in price of related

goods• Change in preferences• Change in taxes

SUPPLY AND DEMAND

Quantity

Pric e

Supply

Demand

“Market Clearing Price”

(Equilibrium)

Price and Quantity Determined by the Intersection of the Supply Curve and the Demand Curve• Optimal for consumers and

producers• Perfect competition• Unrestricted trade• Efficient market• “Price taker” vs “price

setter”• Reality?

PRICE ELASTICITY

Quantity

Pric e

Demand

Elasticity - the change quantity relative to the change in price

Highly Elastic• small change in price

causes large change in quantity

Highly Inelastic• large change in price

causes only small change in quantity

The Shape of the Demand Curve Reflects the Price

Elasticity

ElasticInelastic

AB

A

B

EXERCISE: WHAT WOULD YOU PAY?

8 Volunteers

Instructions:• Sample 4 types of

chocolate• For each sample identify

the most you would be willing to pay for a large chocolate bar

• Record the amount ($X.XX) on the sheet provided

Most You Would be willing to Pay

Sample 1 $ X.XX

Sample 2 $ X.XX

Sample 3 $ X.XX

Sample 4 $ X.XX