Building the Price Foundation ● barter - exchanging goods and services for other goods and services rather than money ● price - the money or other considerations exchanged for ownership or use of a good or service o value - benefits / price o “Have you ever tried to sell a diamond?” ▪ must create a market for diamonds, but without a market for re-sellable diamonds ▪ benefits: buying into a story/emotional moment ▪ purchase task is high because people don’t want to assign value to certain things (life insurance, funeral, marriage/love, children) o factors that increase price : extra fees, extra charges, penalties o factors that decrease price : discounts, allowances, rebates o price = list price - (incentives + allowances) + extra fees 1. identify pricing objectives and constraints ● a business sets prices to meet objectives like: ○ generate a certain amount of sales ○ market share - maintain or increase firm's sales as percentage of its market ○ unit volume - maintain or increase the number of products sold ○ survival - mere survival in a competitive market ○ social responsibility - setting product price low enough to make product affordable to people that need it (i.e. pharmaceuticals) ● profit: return on investment/assets 1. managing for long-run profits - give up immediate profit by developing high-end products to penetrate competitive markets ● profits generated via market share 2. maximizing current profit - setting a short term profit (quarter, year, or less) 3. target return - firm sets specific profit goal ● price constraints ○ the number of potential buyers -- more demand, higher price can be charged ○ newness of product -- stage in product lifecycle, newer = higher ○ single product vs. product line -- must be consistent with other products in the market based on features ○ cost of producing and marketing product -- firm must cover costs ○ type of competitive markets -- higher competition = harder to change prices ○ competitors prices -- more difficult to change prices if competitors’ prices are “standard” ● market competition ○ pure competition - selling identical products; they can be perfectly replaced with another
○ monopolistic competition - competing producers sell products that are differentiated from one another and are as good but not perfect substitutes (some points of distinction could be: branding, quality, or location) ○ oligopoly - market or industry is dominated by a small number of sellers (i.e. cable, airlines, cell phone providers) ○ pure monopoly - a specific person or enterprise is the only supplier of a particular product 2. estimate demand and revenue ● translate consumer demand into expected revenue ● intuition: lower price, increased demand (BUT you would have to offset less profit per product with volume which isn’t possible) ● demand ○ in order for the demand curve to shift to the red line, favorable conditions would need to occur outside changes in price (i.e. changes in consumer tastes, loss of a competitor, increase of competitor prices, increase of consumer income) ● sales and revenue estimation ● price elasticity - how willing people are to pay an increased price ○ determined by: ■ substitutability -- more substitutes = more elastic ■
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