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Marketing Essentials

n Chapter 25 Price Planning

Section 25.2 Factors Involved


in Price Planning

Chapter 25 n Price Planning 1


SECTION 25.2 Factors Involved in
Price Planning
What You'll Learn

The four market factors that affect price


planning
What demand elasticity is in relation to
supply and demand theory
The government regulations that affect
price planning

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SECTION 25.2 Factors Involved in
Price Planning
Why It's Important

Pricing a product may seem like an easy


task, but there are many factors affecting
that decision that must be taken into
consideration. Skipping even one aspect
of this process could cost a business
millions of dollars in lost sales, or even in
fines or lawsuits if the laws governing
pricing are not followed.

Chapter 25 n Price Planning 3


SECTION 25.2 Factors Involved in
Price Planning
Key Terms

break-even point
elastic demand
law of diminishing marginal utility
inelastic demand
price fixing
price discrimination
loss leader
unit pricing
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SECTION 25.2 Factors Involved in
Price Planning
Market Factors Affecting Prices

Pricing decisions are not necessarily easy.


Most price planning begins with an analysis of
costs and expenses, many of which are related
to current market conditions. An organization's
goals also must be considered.

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SECTION 25.2 Factors Involved in
Price Planning
Costs and Expenses

Businesses constantly monitor, analyze, and


project prices and sales in the light of costs
and expenses because sales, costs, and
expenses together determine a firm's profit.

Chapter 25 n Price Planning 6


SECTION 25.2 Factors Involved in
Price Planning
Responses to Declining Profit Margins

When profits decline, some businesses


increase price. Others feel that price is so
important in the marketing strategy of a
product that instead of making price
changes, they will change the product to
maintain profit margin.

Chapter 25 n Price Planning 7


SECTION 25.2 Factors Involved in
Price Planning
Responses to Lower Costs/Expenses

Prices may occasionally be lowered


because of decreased costs and expenses.
Improved technology and less expensive
materials may help create better-quality
products at lower costs.

Chapter 25 n Price Planning 8


SECTION 25.2 Factors Involved in
Price Planning
Break-Even Point

The break-even point is the point at which


sales revenue equals the costs and
expenses of making and distributing a
product. This is especially important to
consider when marketing a new product or
establishing a new price.

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SECTION 25.2 Factors Involved in
Price Planning
Supply and Demand

The degree to which demand for a product is


affected by its price is called demand
elasticity. Demand elasticity is affected by:
brand loyalty
price relative to income
availability of substitutes
luxury vs. necessity
urgency of purchase
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SECTION 25.2 Factors Involved in
Price Planning
Supply and 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.
Elastic Demand A change in price creates
a change in demand.
Inelastic Demand A change in price has
very little effect on demand for a product.

Slide 2 of 2 Chapter 25 n Price Planning 11


SECTION 25.2 Factors Involved in
Price Planning
Consumer Perceptions

Price planning is affected by the following


consumer perceptions about price:
Some consumers equate quality with price.
Some consumers are willing to pay more
for status, prestige, and exclusiveness, as
well as extra services.
Subjective price is the price consumers see as
the value they are getting for the price.
Chapter 25 n Price Planning 12
SECTION 25.2 Factors Involved in
Price Planning
Competition

Price must be evaluated in relation to the


target market and is one of the four Ps of the
marketing mix. Companies can compete with:
price competitionoffering lower prices
nonprice competitionattracting
customers with prestige, service, or quality

Slide 1 of 2 Chapter 25 n Price Planning 13


SECTION 25.2 Factors Involved in
Price Planning
Competition

Marketers change prices to reflect:


consumer demand
cost
competition
Similar products sometimes differ only in
price, so when one company changes its
prices, others usually react. Sometimes price
wars produce financial losses that can ruin
businesses.
Slide 2 of 2 Chapter 25 n Price Planning 14
SECTION 25.2 Factors Involved in
Price Planning
Government Regulations Affecting Price

Federal and state governments have enacted


laws regarding:
price fixing
price discrimination
resale price maintenance
minimum pricing
unit pricing
price advertising
Slide 1 of 4 Chapter 25 n Price Planning 15
SECTION 25.2 Factors Involved in
Price Planning
Government Regulations Affecting Price

Price fixing occurs when competitors agree


on certain price ranges within which they set
their own prices.
Price discrimination occurs when a firm
charges different prices to similar customers
in similar situations.

Slide 2 of 4 Chapter 25 n Price Planning 16


SECTION 25.2 Factors Involved in
Price Planning
Government Regulations Affecting Price

Resale price maintenance occurs when a


manufacturer forces retailers to sell an item
at a minimum price.
Minimum price laws prevent retailers from
selling goods below cost plus a percentage for
expenses and profit. Some states do not have
minimum price laws and allow loss leaders,
items sold at cost to attract customers.

Slide 3 of 4 Chapter 25 n Price Planning 17


SECTION 25.2 Factors Involved in
Price Planning
Government Regulations Affecting Price

Unit pricing allows consumers to compare


prices in relation to a standard unit or
measure, such as an ounce or a pound.
The Federal Trade Commission (FTC)
price advertising guidelines forbid
fraudulent and misleading pricing
advertisements.

Slide 4 of 4 Chapter 25 n Price Planning 18


25.2 ASSESSMENT

Reviewing Key Terms and Concepts


1. Name four market factors that affect price
planning.
2. In response to increased costs and expenses,
what three pricing options might a business
consider to maintain their profit margins?
3. What is demand elasticity, and how does it
apply to the theories of supply and demand?
4. What is the difference between price fixing and
price discrimination? What laws govern each?

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25.2 ASSESSMENT

Thinking Critically
Many people with diabetes depend on insulin
to stay alive. If the price of insulin went up
$10, would the demand for insulin go down
as is suggested by the theory of supply and
demand? Explain your answer in terms of
demand elasticity.

Chapter 25 n Price Planning 20


25.2 Graphic Organizer

Market Factors Affecting Prices

Costs
and
Expenses

Consumer
Perceptions
PRICES Competition

Supply
and
Demand

Chapter 25 n Price Planning 21


Marketing Essentials

End of Section 25.2

Chapter 25 n Price Planning 22