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Factors that affect pricing

In this lesson student will learn the definition to pricing, marketing pricing and what factors affect how businesses determine pricing their products/services.
OBJECTIVE: 9.01 Explain factors that affect pricing.


A.Define price: The amount charged to customers in exchange for goods and services. Price communicates value to customers and profit to sellers.
B.Define market price: The price that prevails in the market for a particular good at a specific time.
C.Explain factors that affect price.
1.Costs
a.Fixed costs: Costs that remain constant over a period of time regardless of sales volume. For example: insurance, rent, salaries, and depreciation
b.Variable costs: Costs that vary based on sales volume or changes in business needs. For example: commissions, advertising, and office supplies
2.Competition
a.Define competition: A rivalry between businesses to attract scarce consumer dollars.
b.Identify classifications of competition.
(1)Direct competition: Competition between businesses that have similar formats and sell similar products. For example: McDonald’s and Burger King, Coke and Pepsi
(2)Indirect competition: Competition between businesses that have dissimilar formats and sell dissimilar products. For example: a movie theatre and a mall, an airline and a cruise line
(3)Opportunity cost: The option that is given up when a consumer chooses one product/service over another. For example: If someone chooses to go to a movie rather than to go shopping, the opportunity cost is a shopping trip to the mall.
c.Define the two major types of competition.
(1)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.
(2)Non-price competition: A competitive strategy in which businesses use factors other than price as a means to attract customers. For example: A marketer who cannot compete with lower prices might use product quality, customer services, and business image to win customers.
3.Supply and demand
a.Define demand: The number of products consumers are willing to buy at a given time and at a given price.
b.Define supply: The number of products manufacturers are willing to produce at a given time and at a given price.
c.Identify factors that influence demand.
(1)Utility
(2)Price
(3)Advertising
(4)Personal selling
(5)Display
(6)Fashion
(7)Consumer wants and needs
d.Identify factors that influence supply.
(1)Cost of production
(2)Price
(3)Consumer demand
(4)Profit goals
(5)Competition
(6)Governmental controls
(7)New technology
e.Define elastic and inelastic demand.
(1)A product is said to have elastic demand if demand for the product is sensitive to a change in price. Such products tend to be non-essential products such as entertainment, specialty foods, and fashion.
(2)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. For example: gasoline, milk, bread, and electricity
4.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.
5.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.
6.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.
7.Company objectives and 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.
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