Chapter 20 Overview Price the value of a good or service for both the seller and the buyer Price planning systematic decision making by an organization regarding all aspect of pricing The value of the good may have tangible and intangible factors associated with it If demand exceeds supply prices are usually bid up Then opposite Move towards equilibrium The Importance of Price and its Relationship to other Marketing Variables Importance of price increase because o Price is a component of the exchange process o Deregulation o Increase profit levels o The growth of the economy o Tech advances o Service based firms Price Based and Non price based approaches Price based sellers influence consumer demand primarily through changes in price levels move along the demand curve Non price based sellers downplay price as a factor in consumer demand by creating a distinctive good or service via promotion packaging deliver customer service etc shifts the demand curve Factors Affecting Pricing Decisions Consumers Law of demand consumers usually purchase more units at a low price than at a high price Price elasticity of demand the sensitivity of buyer to price changes in terms of the quantities they will purchase o change in the quantity demanded relative to a specific change is the price charged o Q1 Q2 Q1 Q2 P1 P2 P1 P2 o Elastic small changes in price result in large changes in quantity demanded 1 Total revenue goes up when prices are decreased o Inelastic price changes have little impact of the quantity demanded 1 Total revenue goes up when prices are raised o Unitary demand price elasticity equals 1 o Elasticity based on Availability of substitutes Urgency of need Substitutes and no urgency elastic No substitutes and urgency inelastic o Brand loyalty generates inelastic demand Price shoppers best deal Brand loyal customers their current brands are better fair prices Status seekers buy prestigious brands and pay high prices for them Service demand value service and product features Convenience value ease of shopping and pay above average prices Consumers perception of the price of a good or service is the subjective price Costs During rising costs a firm can o Leave product unchanged and pass along all of their cost increase to consumers o Leave product unchanged and pass along part of their increases and absorb some o Modify products to hold down costs prices o Modify products to raise prices If costs decline firms can drop prices or raise margins Low costs can actually have a long run neg impact Government Price fixing Horizontal price fixing agreements among manufacturers wholesalers or retailers to set prices at a given stage in a channel of distribution o Illegal due to Sherman act and FTC act Vertical price fixing when manufacturers or wholesalers seek to control the final selling prices of their goods or services o Miller Tyding act allowed this o FAIR trade o The consumer goods pricing act ended all interstate use fo resale price maintenance Price discrimination o Protects small retailers Minimum Prices Robinson Patman Act prohibits manufacturers and wholesalers from price discrimination in dealing with different channel member purchasers Unfair sales acts minimum price laws prevent firms from selling products for less Acts are intended to protect small firms from predatory pricing by larger competitors and than their cost plus a fixed percentage to limit the use of loss leaders by retailers o Predatory pricing large firms cut prices on product to blow their cost in selected geographic areas so as to eliminate small local competition Sherman and Clayton acts Difficult to prove o Loss leaders items priced below cost to attract customers to a seller Rarely enforced due to consumer benefit Consumers compare price per quantity for competing brands and for various sizes of the Unit pricing same brand Price advertising Channel members FTC guidelines establish standards for price ads o Bait and switch an illegal practice whereby customers are lured to a seller that advertises items at very low prices and then told the items are out fo stock or of poor quality Selling against the brand high prices for strong brands and low prices for other brands Gray market foods foreign made products imported into countries such as the US by suppliers that are not authorized by the products manufacturers To maximize channel member cooperation o Profit margins o Price guarantee maintain inventory values and profit assures resellers that the prices they pay are the lowest available new firms new products o Special deals o Impact of price increase Competition Market Controlled high comp similar goods little control over prices Company Controlled moderate comp well diff goods strong control over prices o Discounters can carve out a niche in the by attracting consumers interested in low prices Government controlled gov t set prices Price wars various firms continually try to undercut each other s prices to draw customers results include low profits losses out of business
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