Building the Price Foundation
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barter -
exchanging goods and services for other goods and services rather than money
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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
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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”
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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
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intuition: lower price, increased demand (BUT you would have to offset less profit per product with volume which isn’t
possible)
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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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