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M10 L4 Factors That Affect Pricing

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M10 L4 Factors That Affect Pricing

  1. 1. Factors that Affect Pricing
  2. 2. Pricing Terms <ul><li>Price : The amount charged to customers in exchange for goods and services. </li></ul><ul><ul><li>Price communicates value to customers and profit to business owners. </li></ul></ul><ul><li>Market Price : The price that prevails in the market for a particular good at a specific time. </li></ul><ul><ul><ul><li>For example, the price of gasoline posted at the gas stations around your town reflects the market price. </li></ul></ul></ul><ul><ul><ul><li>Supply, demand , and time are key elements of market price. For example, during oyster season, prices are lower because they are more abundant (there is more supply). Restaurants would not have to pay as much for them. During the spring and summer months, oysters aren’t “in season” so the prices are higher. </li></ul></ul></ul>
  3. 3. <ul><li>Costs </li></ul><ul><li>Fixed Costs: Costs that remain constant over a period of time regardless of sales volume. </li></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Rent/Mortgage </li></ul></ul><ul><ul><li>Salaries </li></ul></ul><ul><ul><li>Depreciation </li></ul></ul><ul><li>Variable Costs: Costs that vary based on sales volume or changes in business needs. </li></ul><ul><ul><li>Commissions </li></ul></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Office Supplies </li></ul></ul><ul><ul><li>Utilities </li></ul></ul>Factors that Affect Price
  4. 4. <ul><li>Competition </li></ul><ul><li>A rivalry between two or more businesses for scarce consumer dollars. </li></ul>Factors that Affect Price
  5. 5. Classifications of Competition <ul><li>Direct Competition: Competition between businesses that have similar formats and sell similar products. </li></ul><ul><ul><li>McDonald’s & Burger King </li></ul></ul><ul><ul><li>Coke & Pepsi </li></ul></ul><ul><ul><li>Hilton & Marriott </li></ul></ul><ul><ul><li>Nike & Reebok </li></ul></ul><ul><ul><li>Lowe’s & Home Depot </li></ul></ul><ul><li>Indirect Competition: Competition between businesses that have dissimilar formats and sell dissimilar products. </li></ul><ul><ul><li>A movie theatre & the mall </li></ul></ul><ul><ul><li>A restaurant & miniature golf course </li></ul></ul><ul><ul><li>An airline & a cruise line </li></ul></ul>
  6. 6. <ul><li>The option that is given up when a consumer chooses one product/service over another. </li></ul><ul><li>For example, if someone chooses airline travel instead of a cruise, the opportunity cost is not taking the cruise. </li></ul>Classifications of Competition Opportunity Cost
  7. 7. Two Major Types of Competition <ul><li>Price Competition : A competitive strategy in which businesses use price as a means to attract customers. The marketer assumes that all things being equal, the customer will choose the product with the lowest price. </li></ul><ul><li>For example: Walmart’s primary competition focus is offering their products at lower prices than their competitors. </li></ul><ul><li>Non-Price Competition : A competitive strategy in which businesses use factors other than price as a means to attract customers. </li></ul><ul><li>For example: a marketer who cannot compete with lower prices might use product quality, customer services, and business image to attract customers. </li></ul>
  8. 8. <ul><li>Supply and Demand </li></ul><ul><ul><li>Demand : The number of products consumers are willing to buy at a given time and at a given price. </li></ul></ul><ul><ul><li>Supply : The number of products manufacturers are willing to produce at a given time and at a given price. </li></ul></ul>Factors that Affect Price
  9. 9. Factors that Affect Demand <ul><li>Utility- how useful is the product </li></ul><ul><li>Price – the more expensive, the less demand </li></ul><ul><li>Advertising – making public aware increases demand </li></ul><ul><li>Personal selling – explaining the features and benefits to a customer to stimulate demand </li></ul><ul><li>Display- seeing what the product looks like or how it performs </li></ul><ul><li>Fashion- is the product in style </li></ul><ul><li>Consumer wants/needs – is the product/service a necessity or just a desire? </li></ul>
  10. 10. Factors that Affect Supply <ul><ul><li>Cost of production – will affect how much a producers supplies </li></ul></ul><ul><ul><li>Price – the more expensive the less that may be supplied </li></ul></ul><ul><ul><li>Consumer demand - the more demand, the more supplied </li></ul></ul><ul><ul><li>Profit goals – how much does the business want to make </li></ul></ul><ul><ul><li>Competition – is there any, if so price and supply are important </li></ul></ul><ul><ul><li>Government controls – may affect supply if government has quotas or restrictions </li></ul></ul><ul><ul><li>New technology – could increase supply or create a better product </li></ul></ul>
  11. 11. Elastic Demand Inelastic Demand <ul><li>A product is said to have elastic demand if demand for the product is sensitive to a change in price. </li></ul><ul><li>Non-essential products such as entertainment, specialty foods, fashion </li></ul>Factors that Affect Price <ul><li>A product is said to have inelastic demand if demand for the product is not sensitive to a change in price. These products are usually considered necessities to the customer. </li></ul><ul><li>Gasoline, milk, bread, and electricity </li></ul>
  12. 12. Other Factors That Affect Price <ul><li>Economic conditions : Economic health affects price by affecting consumer buying power. Consumers who experience changes (positively or negatively) in their buying power alter their spending habits in response to those changes. An individual who is laid off from his/her job will not tend to spend a great deal of money on non-essential items due to the uncertainty of his/her economic future. </li></ul><ul><li>Government regulation : Aside from federal and state laws that prohibit unfair pricing techniques, labor laws, environmental regulations, and tax policy can have an effect on how a business owner has to price products. </li></ul>
  13. 13. Other Factors That Affect Price <ul><li>Channel Members : The intermediaries in a channel of distribution all charge a fee for their services. These fees are affected by the same factors that affect retail price. As a result, channel members’ price changes reach the consumer by affecting the cost of products to businesses. </li></ul><ul><li>Company Objectives/Strategies : An organization whose sole objective is to survive the first critical year of business will look at price planning completely differently from an organization whose goal is to remain the market leader. Price planners must examine the objectives and strategies of the company and consider all of the various elements that combine to make a business successful. </li></ul>