Pricing

Pricing—Discussion Guide Performance Indicator: Explain the nature and scope of the pricing function

THINK ABOUT IT

Pricing products isn’t always a straightforward task for marketers. Any person who wants to pursue a career in business or marketing must be thoroughly familiar with the function of pricing.

KEY CONCEPTS

Slide #3 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 and for the continued success of a business.

• Pricing is not as simple as just placing a tag on an item that tells customers how much they owe.

• Some of the important considerations involved in pricing are:

  • Determining an 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.

    • At this point, the buyer has decided that s/he is willing and able to pay that amount of money to obtain the product, while the seller has decided that s/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 that they are receiving the most, or optimum, value from the product.

    • Sellers also want to feel that 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 that the company will make.

• Pricing is something like a compromise that results from buyers and sellers each trying to get the most value from the good or service.

  • Both groups need to perceive that they are getting the best possible value they can.

  • If this doesn’t happen, customers will spend their money elsewhere (either on a similar product or an entirely different one), and the business’s sales will decline.

Slide #4 Marketers must consider a number of characteristics when setting effective prices. They should be:

• Realistic

  • Customers are skeptical of prices that are much higher or lower than their expectations.

• Flexible

  • Businesses must be willing to adjust their prices depending on a number of factors such as the economy, company finances, customer attitudes, location, time of year, and many others.

• Competitive

  • When a similar product is offered by competitors, a business needs to be aware of the prices others are charging.

Slide #5 Depending on the size and structure of a company, many people may be involved in establishing prices.

• Larger companies tend to analyze more information when setting prices such as market research, competitors’ prices, sales records, and trends of different kinds.

• Many factors, both internal and external, can affect pricing decisions, including:

  • Costs

  • Channel members

  • Company objectives and strategies

  • Competition

  • Economic conditions

  • Supply and demand

  • Government regulations

Slide #6 Pricing is a unique element of the marketing mix because it is the most adjustable of the four P’s.

• Pricing decisions can be changed much more quickly than decisions about product, promotion, or place.

• Because these elements are interrelated, pricing decisions can significantly affect the others.

  • Product decisions involve determining what goods, services, or ideas to produce or sell that will satisfy customers’ needs and wants. Pricing influences these decisions through:

    • Research

    • Materials

    • Profit decisions

    • Customer decisions

    • Company image

  • Promotion involves the various types of communications that marketers use to inform, persuade, or remind customers of their products. Pricing affects promotion through:

    • Cost of promotion

    • Choice of medium

    • Time allocated

  • Place involves shipping, handling, and storing products and determining when and where they will be available. Pricing affects place decisions through:

    • Transportation options

    • Selling locations

Slide #7 Each company has unique goals they hope to achieve with pricing strategies. These pricing objectives guide marketers in making pricing decisions.

• Pricing objectives often relate to:

• • Profitability

  • Sales

  • Competition

  • Image/Prestige

Business Ethics in Pricing—Discussion Guide Performance Indicator: Describe the role of business ethics in pricing

THINK ABOUT IT

Mia has been waiting to buy the newest mobile phone with advanced features.

• The phone’s launch price is $700, which Mia gladly pays.

• One month later, Mia is upset when she discovers the phone is now selling for $400.

• While high prices are common for the launch of products with cutting-edge technology,
  the practice is questionable.

• In this situation, the price drop was quite large and happened quickly after the launch.

• Ethical businesses price their products fairly and do not take advantage of customers.

KEY CONCEPTS

Slide #10 Fair pricing is important.

• Companies need to price their products in ways that allow them to profit.

• But, just how much profit a company should make from the sale of products can be controversial.

• When is a product’s price unethical?

  • Can’t a company charge whatever it wants for a product?

  • The answer is that it depends.

  • It depends on the situation and the company’s motivation for charging a particular price.

• At the core of ethical pricing is the concept of fairness.

  • Fair pricing allows a company to profit without taking advantage of customers or competitors.

  • When prices are set fairly, healthy competition occurs, and customers can purchase quality products that are affordable.

Slide #11 Some pricing practices are unethical.

• Price gouging occurs when a seller spikes the prices of goods, services, or commodities beyond what is considered reasonable or fair.

  • Some retailers, for example, charge excessive prices for food and water during disasters.

  • Price gouging is also known to occur in geographical areas that have little to no competition.

• Some companies use loss-leader pricing (pricing an item below its acquisition cost).

  • Loss leaders are low-priced products used to entice customers to buy.

  • Once customers are shopping, they often buy enough additional products to make up for any lost profit.

  • Loss-leader pricing is deceptive since customers often do not realize any savings on their total purchase.

  • Some states have laws against loss-leader pricing.

• Price discrimination occurs when the same product is sold at different prices to different groups of people, usually based on the maximum they are willing to pay.

  • For example, some travel companies have been found guilty of only showing expensive hotel rooms to wealthy customers who use their online search tools.

  • While price discrimination is legal in some states, it is unethical because it lacks transparency.

• Some companies use price skimming when they release new products.

  • A new product is sold at a high price to customers willing and able to pay more.

  • Then, the price is gradually lowered over time to encourage future customers.

  • This strategy is often seen in relationship to innovative technology for which some customers are willing to pay premium prices.

  • Some companies sell their products for a 40% price drop shortly after introducing them.

  • Situations like these take advantage of the first customers willing to buy.

  • While price skimming may be legal in some states, it is unethical since different prices are charged to different groups of consumers based on their ability to pay.

• Complex pricing that makes it difficult for customers to figure out the value of a product or compare it to competing products is problematic because it lacks honesty and transparency.

• Hidden fees and extra charges that are charged after customers make the commitment to buy are a dishonest pricing strategy.

Slide #12 Companies should exercise social responsibility.

• Businesses also have a moral obligation to price their products in socially responsible ways.

• When a product has the potential to help disadvantaged people or cure illness, a company should balance its need to make profit with the opportunity to improve and save lives.

• Life-saving drugs and water purification systems are examples of products that should be priced in socially responsible ways.

Slide #13 Businesses should follow these ethical pricing guidelines.

• Follow all laws.

• Use honesty and transparency.

• Don’t take advantage of customers.

• Do not limit competition.

• Treat all customers fairly.

• Give customers the power to make choices.

Legal Issues in Pricing—Discussion Guide Performance Indicator: Explain legal considerations in pricing

THINK ABOUT IT

Donzel runs an island shuttle service for summer visitors to a popular island.

• The shuttle’s price is higher than two competing ferry services.

• However, the shuttle is always booked full because island visitors enjoy the quick, fun trip.

• The ferry owners don’t lose many passengers to Donzel’s small shuttle service, but they fear the shuttle’s business will grow.

• To put the shuttle out of business, both ferry owners significantly lower their prices.

• This results in a huge business decline for the shuttle forcing Donzel to quit operating.

• The ferry owners are guilty of an illegal pricing practice called predatory pricing.

• They have conspired to set prices that force a competitor out of business.

KEY CONCEPTS

Slide #16 Some pricing practices are against federal law.

• Price-fixing occurs when competitors agree to set the same high price for a product they sell.

  • Since the product is not available anywhere at a lower price, customers must pay more for the product.

  • Price-fixing is illegal and companies found guilty of it can be prosecuted under the Sherman Anti-Trust Act which outlaws the formation of monopolies.

Slide #17

• When companies set very low prices to eliminate competition, they are guilty of using predatory pricing.

  • Extremely low prices allow a business to capture a large share of business and shut down competitors.

  • Predatory pricing is illegal under the Federal Trade Commission Act which bans businesses from limiting competition or harming consumers.

  • However, it is very difficult to prove a company’s intention for using low prices which may be based on other factors.

  • To comply with the law, a company should make sure low pricing is justified based on market conditions and is not unreasonably harmful to competitors.

Slide #18 Some pricing practices are against state laws.

• Price gouging occurs when a seller spikes the prices of goods, services, or commodities beyond what is considered reasonable or fair.

  • Some retailers, for example, charge excessive prices for food and water during disasters.

  • Price gouging is also known to occur in geographical areas that have little to no competition.

Slide #19

• Some companies use loss-leader pricing (pricing an item below its acquisition cost).

  • Loss leaders are used to entice customers to visit a business.

  • Once the customers are in the store, they often buy enough additional products to make up for any lost profit.

  • Some states consider loss-leader pricing to be deceptive and have laws against it.

Slide #20

• Price discrimination occurs when the same product is sold at different prices to different groups of people, usually based on the maximum they are willing to pay.

  • For example, some travel companies have been found guilty of only showing expensive hotel rooms to wealthy customers who use their online search tools.

  • Price discrimination is illegal in some states because it lacks transparency.

Slide #21

• Some companies use price skimming when they release new products.

  • A new product is sold at a high price to customers willing and able to pay more.

  • Then, the price is gradually lowered over time to encourage other customers to buy the product.

  • This strategy is often seen in relationship to innovative technology for which some customers are willing to pay premium prices.

• • Some companies have sold their products for a 40% price drop shortly after introducing them.

  • Situations like these take advantage of the first customers willing to buy.

  • Depending on the situation, price skimming may be viewed as a form of price discrimination which is illegal in some states.

Pricing Decisions—Discussion Guide Performance Indicator: Explain factors affecting pricing decisions

THINK ABOUT IT

Pricing is an important factor in customers’ buying decisions. Setting a price too high or too low can have real consequences for a company’s ability to generate sales or profits. Without sales, it is hard to imagine a company being able to exist for very long. There are many factors that go into pricing decisions that include company objectives, the national economy, and the type of market, just to name a few!

KEY CONCEPTS

Slide #24 The amount that a seller charges for a good or service is the selling price.

• Examples of selling price extend beyond the dollar figure shown on a price tag and can include:

  • Membership dues

  • Insurance premiums

  • College tuition

  • Bus fare

  • Legal fees

• Selling price helps customers compare products when making buying decisions.

  • Most customers feel that price indicates quality and use selling price as a guide to select the products they buy.

    • This is especially important when the customer must choose from a variety of similar products.

  • Selling price also helps customers allocate their money.

    • Since very few people can buy everything they want, selling price helps them decide which items they can afford.

• Selling price helps businesses because it determines the amount of income that is generated from sales.

  • Businesses should include enough markup in their selling prices to pay current expenses and provide for future growth.

Slide #25 Companies should base decisions about pricing objectives upon established marketing goals. Pricing objectives should be adaptable and may be changed to respond to circumstances both internal and external to the company. The two basic approaches to pricing objectives are:

• Sales-oriented pricing

  • The purpose of sales-oriented pricing objectives is to increase the total amount of income from sales.

  • One strategy for accomplishing this goal is to set lower prices in an effort to increase sales volume.

    • Even though the selling price is lower on a per-unit basis, the hope is that a higher volume of sales will lead to increased income.

  • Alternatively, a business might choose to set higher prices with the goal of generating a lot of income on a per-unit basis.

  • Sales-oriented pricing can help a company meet a number of objectives, including:

    • Crafting a company image

    • Gaining a competitive edge

    • Increasing market share

• Profit-oriented pricing

  • Profit-oriented pricing objectives focus on creating profits for a business.

  • Some businesses aim to generate the greatest amount of profit possible, while others prioritize covering costs and are satisfied as long as some amount of profit is generated.

  • Since market conditions are always changing, it is difficult to predict just what prices will be the most profitable over time.

  • Profit-oriented pricing can help in meeting objectives such as:

    • Profit maximization

    • Maximizing return on investment

    • Meeting a target return or return on sales

Slide #26 Each business must go through its own process when pricing its products. The selling price must be established in a way that the money generated from sales is enough to pay all product costs, pay all operating expenses, and obtain a profit. Internal factors that influence pricing decisions include:

• Costs

  • Knowing the total costs of a product is very important in determining its selling price.

  • Total costs are the combined amount of fixed and variable costs.

  • Fixed costs include expenses for machinery, mortgages, insurance, etc.

    • They are not affected by changes in sales volume.

  • Variable costs, such as utilities, wages, and transportation, change according to the sales volume.

    • When sales increase, variable costs also increase; when sales go down, so do variable costs.

  • The difference between the cost of a product and its selling price is called markup.

• Channel members

  • Channel members play an important role in pricing because each member is seeking to make a profit.

  • Certain channel members expect producers to provide them with support such as sales and/or service training, sales promotions, or cooperative advertising.

  • Producers must consider the cost of the support they are expected to provide when they price their products.

• Company objectives and strategies

  • Although no two companies have the same set of objectives and strategies, several common factors that affect pricing include:

    • Product mix

    • Product life cycle

    • Target market

Slide #27 Marketers monitor the ups and downs of economic activity, known as business cycles, to try to predict whether business conditions will get better or worse. Pricing is adjusted according to these changes in the national economy.

• In times of economic growth, as businesses and individuals increase their spending, demand typically goes up.

• As economic growth slows, demand tends to fall as consumers cut back on spending.

• Information about demand is crucial to setting prices.

  • When consumer demand for a product increases, producers create a greater supply of that product to match.

    • As the supply increases, the selling price typically decreases.

    • This is because of economies of scale—the cost-per-unit decreases as the number of products produced increases.

    • If the producer is unable to increase production, the price of the product may increase due to the demand being higher than the supply.

    • A high enough selling price may also lead to decreasing demand, however.

Slide #28 Because customers often compare the prices of similar products, most marketers watch their competitors’ pricing carefully.

• The market structure in which the business operates determines what kind of pricing will help the business be more competitive.

• • In a market structure with pure competition, marketers have little control over pricing because there are many businesses selling a lot of identical products to many buyers for about the same price.

    • Most of these products are sold at market price.

  • In a structure with monopolistic competition, there are many buyers and sellers of similar products, but there is a range of prices and not one market price.

    • These products tend to differ in terms of quality, service, features, and styles so competition is not based on price alone.

  • In an oligopoly, there are relatively few sellers of a product, and the industry leader usually determines prices, which are relatively stable because no new companies can afford to enter the market.

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

  • In a pure monopoly, the market for a product is controlled by one supplier, and there are no substitutes readily available.

    • Because monopolies have complete control over the pricing of their products, they are seen as unfair to consumers.

    • The federal government tries to eliminate these kinds of market structures.

Slide #29 Both federal and state laws affect pricing decisions. The major purpose of government regulation of pricing is to promote competition and prevent monopolies. Areas of pricing regulations include:

• Price-fixing

  • Price-fixing is an illegal agreement between businesses in which they agree to establish a price or price range for a product.

    • This is seen as limiting competition and customer choices.

  • Price discrimination

    • Businesses are not allowed to charge different prices to similar customers if doing so would damage competition.

    • This is called price discrimination, and it was made illegal to protect small businesses who compete with larger businesses.

  • Price advertising

    • Price advertising laws prevent companies from deceiving customers with bait-and-switch advertising, false claims about price reductions, or inaccurate information about competitors’ pricing.

  • Unit pricing

    • Some states have laws requiring businesses to use unit pricing, which shows the price per unit along with the total price of the product.

    • Unit pricing makes comparing products and prices much easier for consumers.