Price

The overall sacrifice a consumer is willing to make to acquire a product or service. Not limited to the money that must be paid. Can include other monetary costs (travel costs, taxes, shipping costs) and non-monetary costs (time).

The Barter System

A system of exchange in which goods or services are traded directly for other goods or services

Product Value

Setting price based on buyer's perceptions of value rather than on the seller's cost. Assess customer needs and value perceptions -> set target price to match customer perceived value -> determine costs that can be incurred -> design product to deliver desired value at target price

Forms of Price:

Fees

Remuneration: In contracts based on cost reimbursement pricing, the 'fee' represents an amount beyond the initial cost estimates, and reflects factors such as the risks involved. Fee is usually subject to statutory limitations, and may be either fixed (as in a cost plus fixed fee contract) or allowed to vary within a specified range (as in a cost plus incentive fee contract).

Forms of Price:

Charges

1. Accounting: To debit an account.

2. Commerce: To buy on credit.

Forms of Price:

Tuition

A coverage similar to business interruption insurance, specifically for schools. This coverage protects the school in the case of a loss that closes the school, causing the school to lose out on tuition fees.

Forms of Price:

Interest

Finance: A fee paid for the use of another party's money. To the borrower it is the cost of renting money, to the lender the income from lending it.

Interest on all debt is normally deductible before taxes are assessed on a company's income. Corporate legislation requires disclosure of interest payable on loans, and companies often show a single interest figure in the income statement while providing details in a note that may also include netting out of interest received or some other adjustments. In cost accounting, interest is normally excluded from cost computations on the grounds that (being a payment for capital) it is equivalent to dividend, and hence is a finance item and not a cost item.

Forms of Price:

Wages

Cost of using labor as opposed to cost of using capital or land. As a price of labor, it is subject to the forces of demand and supply in the labor market, which in turn is affected by productivity levels and ability of the employers to substitute labor with other factors of production such as machinery. See also wage.

Forms of Price:

Bonuses

Gratuity given as gift, or compensation earned as reward upon achieving a goal or milestone.

Importance of Price

A value that will purchase a finite quantity, weight, or other measure of a good or service.

As the consideration given in exchange for transfer of ownership, price forms the essential basis of commercial transactions. It may be fixed by a contract, left to be determined by an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved.

In commerce, price is determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept, and (3) the competition is allowing to be charged. With product, promotion, and place of marketing mix, it is one of the business variables over which organizations can exercise some degree of control.

6 Steps to Determine Price: Step 1

1.Establish Price Objectives

Fit with company goals: making profit, increase market share, stay competitive

Specific, measurable, realistic, time sensitive

Ex: Increase market share by 10% in the upcoming year.

6 Steps to Determine Price:

Step 2

2.Determine Costs – raw materials, labor, manufacturing, promotion, etc.

6 Steps to Determine Price:

Step 3

3.Estimate Demand – using market research

6 Steps to Determine Price:

Step 4

4.Study Competition – how much do they charge

6 Steps to Determine Price:

Step 5

5.Decide on a pricing strategy

6 Steps to Determine Price:

Step 6

6.Set price

Return on Investment (ROT)

A measure of an investment's profitability, expressed as a percentage

Return on Investment Examples

We both wanted to have a store that everyone can shop at. That way we can purchase produce and it will not go to waste, that is a good return on investment.

Break-Even Point

A pricing strategy which yields no profit. The sales price equals the expenses that are allocatable for a product. Often this strategy is used to sell slow-moving inventory.

Demand Elasticity:

Inelastic

A situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable situation because price and total revenue are directly related; an increase in price increases total revenue despite a fall in the quantity demanded. An example of a product with inelastic demand is gasoline.

Demand Elasticity:

Elastic

Demand that increases or decreases as the price of an item goes down or up. See also elasticity of demand.

Law of Diminishing Marginal Utility

A psychological generalization that the perceived value of, or satisfaction gained from, a good to a consumer declines with each additional unit acquired or consumed.

Price Fixing

Collusion among competitors to (1) sell a good or commodity at the same price, (2) use the same formulas for computing selling prices, (3) offer the same discounts, (4) keep the same price differentials between different order quantities, qualities, or types, and (5) not lower the prices without notifying other colluders. Also called price manipulation, it is a criminal offense.

Price Discrimination

Selling the same product to different buyers at different prices depending on order-size lot and/or their geographical location.

Clayton Anti-Trust Act 1914

An amendment, passed by the U.S. Congress in 1914, meant to further promote competition in U.S. businesses and discourage the formation of monopolies. This act prohibited price discrimination, price fixing, and exclusive sales contracts. The act also legalized peaceful strikes and boycotts against companies.

Robinson-Patman Act of 1936

A federal law passed in 1936 to outlaw price discrimination. The Robinson-Patman Act is an amendment to the 1914 Clayton Antitrust Act and is supposed to prevent "unfair" competition. The act requires a business to sell its products at the same price regardless of who the buyer is and was intended to prevent large-volume buyers from gaining an advantage over small-volume buyers. The act only applies to sales of tangible goods that are completed within a reasonably close timeframe and where the goods sold are similar in quality. The act does not apply to the provision of services such as cell phone service, cable TV and real estate leases.

1975 Consumer Goods Pricing Act

Repeals the provision of the Sherman Antitrust Act which permits contracts or agreements by the producer or distribution of such commodity prescribing minimum prices for the resale of a commodity bearing a trademark or tradename.

Government Regulations:

Minimum Price Laws/Predatory Pricing

Practice of temporarily selling below survival prices or giving goods away (as in software industry) to undermine or eliminate the existing competition. Predatory pricing is an abuse of dominant position, and is illegal in several countries. Compare with preemptory pricing.

Unit Pricing

Method in which a good is sold in fixed units at a price that includes all costs and profit margin.

Price Advertisement: Bait and Switch

A selfish marketing strategy used to allure consumers into purchasing products or services by offering one product but then changing to a more high-end product once the consumer agrees to make a purchase.

Competition-Oriented Pricing

A pricing method in which a seller uses prices of competing products as a benchmark instead of considering own costs or the customer demand.

Skimming Pricing

High price aimed at higher income groups for luxury or status goods, or at extracting maximum returns from a market for a new technology product before competitors emerge.