PRICING
Lee Salyards
Mark Iehl
Brian Gerdes
PRICING
Pricing is not about money.
It is the value of an exchange.
• What is the price to feed an African child for a
month?
Value =
Perceived Benefits
Price
PRICE STRATEGIES WILL
BE MORE EFFECTIVE IF THEY ARE BASED ON VALUE
RATHER THAN BASED ON COSTS.
PRICE OF AN ITEM CAN TAKE ON A DIFFERENT
NAME DEPENDING ON WHAT YOU BUY
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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 PRICES
Pricing Objectives
Profit
Price 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.
Sales
Sales-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 Quo
A 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.
Survival
Prices 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.
Stages in Managing Prices
Analyzing target market’s assessment of price
Determination of demand
Analysis of demand, cost, and profit
relationships
Evaluation of competitors’ prices
Selection of a basis for pricing
Selection of a pricing strategy
Determination of a specific price
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.
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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 monopolies
Created 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 ACT
Prevents price discrimination
Original draft written by US Wholesale Grocers Association
Large volume retailers cannot attain lower prices than smaller volume retailers
Applies only to goods, not services
Sales to military exchanges and commissaries are exempt from the act.
EXAMPLE COMPANIES
AT&T (1980)
Monopoly
Adobe
Monopoly
Wendy’s
Monopolistic
Hy-Vee
Monopolistic
Farmer Brown
Pure Competition
John Deere
Monopolistic
Hobby Lobby
Monopolistic
AT&T (2013)
Oligopoly
Wal-Mart
Monopolistic
WEBER’S LAW
SUPPLY AND DEMAND
SUPPLY AND DEMAND
“Market Clearing Price”
(Equilibrium)
Price and Quantity Determined by the
Intersection of the Supply Curve and the
Demand Curve
Price
Supply
Demand
Quantity
SUPPLY AND DEMAND
Supply
• Controlled by producers
• As Price ↑, Quantity Produced ↑
(Equilibrium)
Supply
Price
Moving the Supply Curve
• Change in cost of inputs
• Change in opportunity costs
• Change in profit expectations
• Change in taxes and subsidies
“Market Clearing Price”
Demand
Quantity
SUPPLY AND DEMAND
Demand
• Controlled by consumers
• As Price ↓, Quantity Produced ↑
Price
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
Demand
Quantity
SUPPLY AND DEMAND
Price and Quantity Determined by the
Intersection of the Supply Curve and the
Demand Curve
“Market Clearing Price”
(Equilibrium)
Supply
• Optimal for consumers and producers
• Unrestricted trade
• Efficient market
Price
• Perfect competition
Demand
• “Price taker” vs “price setter”
• Reality?
Quantity
PRICE ELASTICITY
The Shape of the Demand Curve
Reflects the Price Elasticity
Elasticity - the change quantity
relative to the change in price
A
Highly Elastic
• small change in price causes
large change in quantity
Price
Highly Inelastic
• large change in price causes
only small change in quantity
B
Inelastic
Elastic
A
B
Demand
Quantity
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