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In this unit you will find Chapter 25Price Planning Chapter 26Pricing Strategies Chapter 27Pricing Math522

A N A LY Z E T H E A DOrbitz, an online company, provides travelservices on its Web site. What does thisad say to you? How is Orbitz competing forLinda’s business?Market Talk Travel companies such asExpedia.com, Hotel.com, or Travelocity attractcustomers with competitive rates, powerfulvisuals, and fast, 24-hours-a-day service.Which of these three elements do you see inthis Orbitz ad?Think and WriteRead the travel section ofyour local newspaper, browse the Internet toresearch competing travel Web sites. Makea list of companies in this market. Select twocompanies from your list and pick a traveldestination. Find out about airfares, hoteland rental car rates from these two sites.Write a paragraph to explain which companyyou would select for your trip and why.Go to marketingessentials.glencoe. com/u8/ad for an extended TCost of SalesCost of PromotionIncomes and ExpensesCONTROLEvaluationPerformance MeasuresPerformance AnalysisIn this unitFoundations of MarketingEconomicsBusiness, Management, EntrepreneurshipFunctions of MarketingPricingmarketingessentials.glencoe.com523

CHAPTER25Price PlanningChapter ObjectivesAfter reading this chapter, you should beable to: Recognize the different forms of pricing Discuss the importance of pricing Explain the goals of pricing Differentiate between market share andmarket position List the four market factors that affectprice planning Analyze demand elasticity and supplyand demand theory Explain how government regulationsaffect price planningGUIDE TO THE PHOTOMarket TalkCell phone companies advertisein various ways to target very specific markets.Family plans that allow parents and children tostay connected during the day are very popular;so are plans geared toward college students.Quick ThinkThe first cell phone cost about 600. Now you can get a phone for free or for amodest sum when signing up for a plan. Thinkof three reasons why the price of cell phoneshas changed so much in recent years.524 UNIT 8 - PRICING

Performance indicators represent key skills andknowledge. Relating them to the concepts explainedin this chapter is key to success in DECA events.These acronyms represent DECA events that involveknowledge of pricing QSRMRMALRMMLSMDMTMDMTSEVPMIn all these DECA events, you should be able tofollow these performance indicators: Explain the nature and scope of the pricing function Describe the role of business ethics in pricing Explain the use of technology considerationsfor pricingSome events include additional performanceindicators. These are:BSMExplain the concept of price in servicesmarketingADCExplain the concept of price in theadvertising industryEMDM Describe Internet pricing modelsFMDM Explain the concept of price in the financialservices industryHMDM Explain the concept of price in thehospitality industrySMDM Explain the concept of price in sports andentertainment marketingTMDM Explain the concept of price in the traveland tourism industryCheck your understanding of DECA performance indicators with the DECA activity in thischapter’s review. For more information andDECA Prep practice, go to sentials.glencoe.comChapter 25 - Price Planning525

SECTION 25.1O B J E C T IVE S Recognize the differentforms of pricing Discuss the importance ofpricing Explain the goals of pricing Differentiate betweenmarket share and marketpositionKEY TERMS price return on investment (ROI) market sharePrice PlanningConsiderationsBEFORE YOU READPredict What do you already know about pricing?THE MAIN IDEAPrice—one of the four Ps of the marketing mix—is anessential element in marketing a product to the correct targetmarket. Price comes in a variety of forms. Pricing goals aredirectly related to a company’s goals.STUDY ORGANIZERUse a chart like the one below to take notes about the scopeand significance of pricing and the major goals of pricing.Scope and SignificanceGoalsWhat Is Price?Analyze Find threemain ideas in thissection and jot themdown on a piece ofpaper.526 UNIT 8 - PRICINGPrice is the value in money (or its equivalent) placed on agood or service. It is usually expressed in monetary terms, suchas 40 for a sweater. It may also be expressed in non-monetaryterms, such as free goods or services in exchange for the purchaseof a product. The oldest form of pricing is the barter system. Bartering involves the exchange of a product or service for anotherproduct or service, without the use of money. For example, a

business might exchange some of its productsfor advertising space in a magazine or newspaper. Some companies also will exchangeadvertising spots on their Web pages as a formof bartering, or an equal trade.Relationship of Product ValueThe value that a customer places on anitem or service makes the difference in themspending 25,000 or 80,000 on a new autoor 20 or 150 on a concert ticket. Value is amatter of anticipated satisfaction—if consumers believe they will gain a great deal of satisfaction from a product, they will place a highvalue on it. They will also be willing to pay ahigh price.A seller must be able to gauge where aproduct will rank in the customer’s estimation—whether it will be valued much, valuedlittle, or valued somewhere in between. Thisinformation can then be considered in the pricing decision. The seller’s objective is to set aprice high enough for the firm to make a profitand yet not so high that it exceeds the valuepotential customers place on the product.Various Forms of PricePrice is involved in every marketingexchange. The fee you pay a dentist to cleanyour teeth, the amount you pay for a new pairof shoes, and minor charges such as bridgetolls and bus fares are all prices. Rent is themonthly price of an apartment. Interest is theprice of a loan. Dues are the price of membership. Tuition is the price you pay for aneducation. Wages, salaries, commissions, andbonuses are the various prices that businessespay workers for their labor. Price comes inmany forms and goes by many names.Importance of PricePrice is an important factor in the successor failure of a business. It helps establish andmaintain a firm’s image, competitive edge,and profits.Many customers use price to make judgments about products and the companiesthat make them. A higher price means betterquality from an upscale store or company tosome customers; to other customers, a lowerprice means more for their money.Let Your Fingers Do the Comparison ShoppingPriceGrabber.com is a fast, convenient way to locate and compare products, merchants, andprices online. Since 1999, PriceGrabber’s innovative comparison shopping technology hasmade online shopping informative and effective. Savvy shoppers save time, money, and effortby using PriceGrabber to find the right product from the best merchant at the best price.Ratings and CostsBesides product pictures, descriptions, andspecifications, PriceGrabber offers merchantand product ratings with narratives thatgive customers the lowdown on productsand merchants.A site feature called BottomLinePriceestimates total delivery costs, includingapplicable sales tax and shipping chargesbased on the delivery address.marketingessentials.glencoe.comCould a comparison shop site be usefulto a marketing manager working for anelectronics company? Explain your answer.Go to marketingessentials.glencoe.com/25/net to find a project on pricing sites.Chapter 25 - Price Planning527

Advertising strategies are closely alignedto a firm’s image. Wal-Mart’s slogan, “AlwaysLow Prices. Always.” is a perfect example ofhow a company can use price as the mainthrust of its advertising strategy. Some retailersstress that they offer the lowest prices in townor promise that they will beat any other store’sprices. In such cases, price plays an importantrole in establishing the edge a firm enjoys overits competition.Finally, price helps determine profits. Marketers know that sales revenue is equal to pricetimes the quantity sold. In theory, sales revenue can be increased either by selling moreitems or by increasing the price per item.However, the number of items sold may notincrease or even remain stable if prices areraised. Figure 25.1 shows what may happen.It is also important to remember thatan increase in price can increase profits onlyif costs and expenses can be maintained.You will explore this limitation later in thechapter.25.1Goals of PricingMarketers are concerned with earning aprofit, or return on investment, as their primary goal of doing business. There are times,however, when two other pricing goals becomeimportant: gaining market share and meetingthe competition.Earning a ProfitReturn on investment (ROI) is a calculation that is used to determine the relativeprofitability of a product. The formula forcalculating rate of return on investment is asfollows:Rate of Return Profit/InvestmentProfit is another word for return, whichexplains the expression return on investment.Assume your company sells watchesto retailers for 9 each. Your cost to makeand market the watches is 7.50 per unit.Remember that profit is money earned by aProjected Effects of Different Prices on Sales Increased Price or Increased Sales? An increase in the price of an item may not produce an increase insales revenue.Explain why an increase in price does not always mean an increase in revenue.Price per Itemⴛ Quantity Soldⴝ Sales Revenue 50200 10,000 45250 11,250 40280 11,200 35325 11,375 30400 12,000 25500 12,500Go to marketingessentials.glencoe.com/25/figure/1to find a project on pricing and sales.528 UNIT 8 - PRICINGmarketingessentials.glencoe.com

THE 99-CENT HAMBURGER Wendy’sand other fast-food chains all compete forcustomers. They offer similar menus andsimilar prices.Could a fast-food chain set its prices muchlower or higher than its competitors? Why orwhy not?business minus costs and expenses, so that yourprofit on each watch is 1.50: 9 7.50 1.50and your rate of return is 20 percent: 1.50/ 7.50 .20Your rate of return on investment is 20 percent.A company may price its products toachieve a certain return on investment. Let’ssay that your watch company wants to achievea return on investment of at least 25 percenton a new model. To determine the price atwhich the new watch would have to sell,you would work backward. Start with a targetprice, the price at which you want to sellthe new watch. Then, determine how yourcompany can get costs down so that that pricewill generate your target return. When youtake into consideration the suggested retailprice you think consumers are willing to payfor the watch, target pricing takes on anotherdimension. You will learn more about targetpricing for the final consumer in Chapter 26.Gaining Market ShareA business may forgo immediate profitsfor long-term gains in some other area. Onegoal, for example, might be to take businessaway from competitors. The business is tryingto increase its market share in this case. Forexample, Nintendo’s GameCube systemssold for 80 less than other similar systems,which helped to increase its market share from19 percent to 37 percent in 2003. Marketshare is a firm’s percentage of the total salesvolume generated by all competitors in a givenmarket. Businesses constantly study their market share to see how well they are doing with agiven product in relation to their competitors.Visualize the total market as a pie. Each sliceof the pie represents each competitor’s share ofthat market. The biggest slice of the pie represents the firm that has the largest percentage ofChapter 25 - Price Planning529

the total sales volume. Marketers are also interested in their market position. Market position is the relative standing a competitor has ina given market in comparison to its competitors.Improving Market Share and Market PositionTo monitor market position, a firm mustkeep track of the changing size of the marketand the growth of its competitors. Competitorsare ranked according to their total sales volume.Thus, the company or brand with the highestsales volume would be ranked number 1.Pricing is one means of improving marketshare and market position. Other means ofaccomplishing the same goals may involveincreased advertising expenditures, changes inproduct design, and new distribution outlets.Meeting the CompetitionSome companies simply aim to meet theprices of their competition. They either followthe industry leader or calculate the averageprice and then position their product close tothat figure. Airline pricing appears to followthis pattern. Most airlines charge around thesame price for the service provided.How else do you compete when you don’twant to rely on price alone? You compete onthe basis of other factors in the marketingmix. These nonprice competing factors mightinclude quality or uniqueness of product, convenience of business location or hours, andlevel of service. For example, Commerce Bankis open seven days a week and offers hoursfrom 8:30 A.M. until 8:00 P.M. during weekdays.Automobile manufacturers are now competing with warranties and maintenance agreements, some offering coverage for five or tenyears, or 50,000 or 100,000 miles, respectively.A computer store may offer free installation ofsoftware and training to teach you how to useyour new software.25.1 AFTER YOU READReviewing Key Terms and Concepts1. Provide an example of how pricing is related to a firm’s image andpromotion of that image.2. What means, other than price, do marketers have to accomplish thegoal of improving market share or market position?3. Provide two examples of how businesses compete when they don’twant to compete on price.Integrating Academic SkillsMath4. A cosmetic company has de