CHAPTER 14
Determining the
Best Price
Price as a Marketing Tool
 Price
is the value of money (or its
equivalent) placed on a good or service.
 Price is the amount of money a customer
must pay for a product.
 Price is one of the 4 elements of the
marketing mix, (the 4 P’s): product, price,
place (distribution), and promotion.
Frameworks 7.1
Price as a Marketing Tool
 Pricing
is defined as establishing and
communicating the value of products and
services to prospective customers.
 The price of a product can be adjusted
much more quickly than other marketing
decisions.
Frameworks 7.2
Price as an Economic Concept

If there is a small supply of a product or service
(real or perceived) but a very large demand, the
price will usually be quite high. This called a
shortage or a seller’s market.
Price as an Economic Concept

If there is a very large supply of a product or if
demand is low, the price will be low. This is
called a surplus or buyer’s market.
Price as an Economic Concept
The concept of economic utility demonstrates
that value is added through changes in:
 Form Utility
 Time Utility
 Place Utility, and
 Possession Utility
 In other words, the more value added to a
product, the more desirable that product is to
consumers.
Frameworks 4.3

Price as an Economic Concept
Elasticity of demand describes the relationship
between changes in a product’s price and the
demand for that product.
 With inelastic demand, a price decrease will
decrease total revenue.
 With elastic demand, a price decrease will
increase total revenue.

Frameworks 4.7
Products with Elastic Demand
Most products will
experience a
change in demand
when the price
increases or
decreases.
 Steak is not a
necessity and has
many substitutes.

Frameworks 4.7.1
Products with Inelastic Demand
Some products will
NOT experience a
change in demand
when the price
increases or
decreases.
 Insulin for a diabetic
is a necessity and
does not have a
substitute.

Frameworks 4.7.1
Products with Inelastic Demand
The law of diminishing
marginal utility states
that consumers will
buy only so much of a
given product, even
though the price is low.
 Some products will
have inelastic demand,
not because they are a
necessity, but because
the price is very low
and you use very little
of the product.

Government’s Effect on Prices
The government attempts to prevent unfair
competition by regulating businesses,
prohibiting unfair pricing, and using taxation
to discourage or encourage certain behaviors.
 New products are protected from competition
with patents granted to inventors for a period
of 20 years.
 The patent allows the inventor to have greater
control of the price charged for the product.

Can Human Genes Be Patented?
More About Patents
The Bird Mark 7 Respirator
A famous inventor you’ve
never heard of: Forrest Bird
Is This Price Discrimination?
Video: Hospitals: Is the Price Right?
Regulating Prices
Price Fixing – Business can not cooperate to
establish prices.
 Price Discrimination – Businesses cannot
charge different prices to other businesses. All
discounts must be offered to everyone.
 Price Advertising – Misleading advertising is
prohibited.

Regulating Prices
Bait-and-Switch – Businesses may NOT
advertise a low priced product with the
intention of selling the consumer a higher
priced product when the customer visits the
store.
 Unit Pricing – Some states require that the self
tag indicate the price per ounce or pound.

Taxation Effects Prices
An increase in the tax on a product makes it
less attractive to consumers.
 High taxes on tobacco and alcohol products
are designed to discourage use of those
products.
 By lowering taxes on alternative fuels, such as
ethanol, the government hopes to encourage
the use of those products.

Setting Pricing Objectives
Maximize Profits – The business carefully
studies the target market to determine what
customers will pay for the product.
 Increase Sales – The business wants to have
the highest possible sales volume. This usually
means low prices and a large share of the
market.
 Maintain an Image – Many consumers believe
that high prices equal higher quality.

Determining the Price Range
In order to set an effective price, maximum and
minimum prices for the product must be
determined.
 To determine the minimum price all production,
marketing, and administrative costs must be
calculated.
 The breakeven point is the quantity of a
product that must be sold for total revenues to
match total costs at a specific price.

Determining the Price Range

The breakeven point is calculated using:
Fixed Costs: The costs to the business that do not
change no matter how many products are produced.
Examples: Insurance, Rent
 Variable Costs: Those costs that are directly related to
the quantity of the product produced. Example: cost of
materials and labor.
 Total Costs: Fixed and Variable costs combined.
 Product Price: The price at which the product is sold.
 Total Revenue: The anticipated quantity of the product
that will be sold multiplied by the product price.

Frameworks 7.4
Calculating a Selling Price
Selling price is the price charged for a product or
service.
 Product cost is the cost to the business of
producing, or buying, the product.
 Gross margin is the difference between the cost of
the product and the selling price.
 Operating expenses are all the costs associated
with actual business operations. Examples include
buildings, equipment, utilities, salaries, taxes, and
other business expenses.

Frameworks 7.4
Calculating a Selling Price
Net profit is the difference between the selling
price and all costs and operating expenses
associated with the product sold.
 A markup is an amount added to the cost of a
product to determine the selling price.
 A markdown is a reduction from the original
selling price.

Frameworks 7.4
Pricing Based on Market Conditions
Price Skimming – is setting a very high price
designed to emphasize the quality or
uniqueness of the product.
 This usually results in higher profits, but
attracts many competitors.

Frameworks 7.3
Price Skimming

Estee Lauder’s Creme de la Mer costs as much
as $165 for 2 ounces.
Frameworks 7.3
Video: Is Face Cream Worth the Price?
Pricing Based on Market Conditions
A penetration price strategy is setting a very low
price designed to increase the quantity sold of
a product by emphasizing the value.
 Used to attract a large share of the market
early and discourage competition.

Frameworks 7.3
Price Penetration Strategy
A price penetration strategy is often necessary to introduce a
new brand in an already crowed product category.
Price Vs. Non Price Competition
Price competition focuses the competitive
strategy only on the product’s price.
 Non-price competition de-emphasizes price by
developing a unique product or service
offering.

 Non-price
competitive factors also include services
unrelated to the product’s price.
 Examples include delivery, gift wrapping,
knowledgeable sales staff, product selection,
credit terms, convenience of location, unique
shopping environment, and hours of operation.
Frameworks 5.4.2
Pricing Strategies

A one-price policy means that all customers pay
the same price. There is no negotiation
concerning the product’s price.
Frameworks 7.3
Pricing Strategies

A flexible pricing policy allows customers to
negotiate the price of the product.
Frameworks 7.3
Pricing Strategies

Price lines
are distinct
categories
of prices
based on
differences
in product
quality and
features.
Frameworks 7.3
Pricing Strategies

Price bundling is the practice of combining
several related services for one price.
Frameworks 7.3
Pricing Strategies

Psychological pricing refers to techniques that create an
illusion for customers or that make shopping easier for them.
Common psychological pricing techniques are:


Odd-even pricing involves setting prices that end in either odd or even
numbers. Odd numbers convey a bargain image; even numbers
convey quality.
Prestige pricing involves setting higher-than-average prices to suggest
status and prestige.

Multiple-unit pricing involves pricing items in multiples to suggest a
bargain and increase sales volume.

Loss-leader pricing provides items at cost to attract customers.

In special-event pricing, prices are reduced for a short period of time,
such as a holiday sale.

Everyday low prices (EDLP) are low prices that are set on a consistent
basis with no intention of raising them or offering discounts in the
future.
Frameworks 7.3
Odd –Even Pricing
Frameworks 7.3
Prestige Pricing
Frameworks 7.3
Multiple Unit Pricing
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Frameworks 7.3
Every Day Low Prices

In an attempt to
remove price as a
factor in the buying
decision, many
companies promise
to match competitor’s
prices.
Frameworks 7.3
Loss Leader Pricing
Frameworks 7.3
Pricing Strategies
FOB pricing identifies the location of from
which the buyer pays the transportation costs
and takes title to the products purchased.
 FOB Factory means that the customer pays all
transportation costs from the point where the
product is manufactured.
 FOB means “free-on-board.”

Pricing Strategies

Discounts and allowances are reductions in a
price given to the customer.
 Quantity
Discount – Offered to customers who buy
in large quantities.
 Seasonal Discounts – Offered to customers who
buy during times when normal sales are low.
 Cash Discount – Offered to customers who pay in
cash or pay their invoices quickly. Example: 2/10,
Net 30
Frameworks 7.1
Pricing Strategies

Discounts and allowances - continued
 Trade
Discount – Reductions in price offered to
businesses at various levels in a channel of
distribution.
 Trade-in Allowance – Reduction in price in
exchange for the customer’s old product when a
new one is purchased.
 Advertising Allowance – Price reduction or specific
amount of money given to channel members who
participate in advertising the product.
Frameworks 7.4
Pricing Strategies

Discounts and allowances - continued
 Coupon
– Price reduction offered by channel
member through a printed promotional certificate.
This is a common sales promotion activity.
 Rebate – Specific amount of money returned to
the customer after the purchase is made.
Offering Credit
Credit allows a business or individual to obtain
products or money in exchange for a promise
to pay later. Credit makes it possible for
expensive purchases to be made.
 Consumer credit (retail credit) is credit
extended by a retail business to the final
consumer.
 Trade credit is credit offered by one business
to another business.

Offering Credit
Bank credit cards, such as VISA and MasterCard,
are issued by banks.
 The bank receives a fee from the retailer (2%-5%
of the purchase price) for guaranteeing payment.
 Other fees include interest on unpaid balances,
services charges, and membership fees.

Offering Credit
Some businesses are big enough to offer their
own consumer credit cards.
 These business handle all of their own credit
processing and billing.
 These credit cards generate extra revenue and
help build customer loyalty toward the business.

Offering Credit

A debit card looks like a credit card, but it
allows the funds to be electronically
transferred from the customer’s account to
the business’s account.
Offering Credit

A regular charge account allows customers to
charge purchases during a month and pay the
balance in full at the end of the month. There
are no finance charges, this is offered as a
service to customers.
Offering Credit

Installment accounts allow customers to pay
for large purchases, at a set interest rate, with
equal monthly payments over a specific period
of time. These are usually secured loans.
Offering Credit
Revolving credit allows customers to continue to
charge on the account, up to the credit limit, as
long as the minimum monthly payment is made.
 The minimum monthly payment will change as
the account balance changes.


These accounts are usually
unsecured loans.
Offering Credit
In a secured loan, something of value, such
as property, cars, or machinery is pledged as
collateral, or security against the loan.
 An unsecured loan is simply a written promise
to repay the loan. These do not require any
security.
 If the borrower does not repay the loan, only in
a secured loan situation can the security (or
collateral) be repossessed.

Offering Credit

A business that plans to
offer credit must
consider the customer’s:
 Credit
History
 Available Resources
 Capacity to Repay the
Loan
Offering Credit
Effective collection procedures are an important
part of the business’s credit plan.
 Most businesses will have a small percentage of
their accounts that must be actively collected.

Video: Identity Theft
Approximately 15 million United States residents have their identities used
fraudulently each year with financial losses totaling upwards of $50 billion.
End of Chapter 14: Determining the Best Price
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