9.00 Explain pricing strategies for making effective pricing decisions.

9.01 Explain factors that affect pricing.

D. MARKETING A SMALL BUSINESS

Pricing Terms

Price: The amount charged to customers in exchange for goods and services.– Price communicates value to customers and profit to

business owners.

Market Price: The price that prevails in the market for a particular good at a specific time.– For example, the price of gasoline posted at the gas

stations around your town reflects the market price.

Costs

Fixed Costs: Costs that remain constant over a period of time regardless of sales volume.– Insurance– Rent/Mortgage– Salaries– Depreciation

Variable Costs: Costs that vary based on sales volume or changes in business needs.– Commissions– Advertising– Office Supplies– Utilities

Factors that affect price

Competition

A rivalry between two or more businesses for scarce consumer dollars.

Factors that affect price

Classifications of Competition

Direct Competition: Competition between businesses that have similar formats and sell similar products.

– McDonald’s & Burger King

– Coke & Pepsi– Hilton & Marriott– Nike & Reebok

Indirect Competition: Competition between businesses that have dissimilar formats and sell dissimilar products.

– A movie theatre & the mall

– A restaurant & miniature golf course

– An airline & a cruise line

Opportunity Costs

The option that is given up when a consumer chooses one product/service over another.

For example, if someone chooses airline travel instead of a cruise, the opportunity cost is not taking the cruise.

Two major types of competition

Price Competition: Using price as a means to attract customers.

Non-Price Competition: Using factors other than price as a means to attract customers. Examples: quality, customer services, business image

Supply and Demand

– Demand: The number of products consumers are willing to buy at a given time and at a given price.

– Supply: The number of products manufacturers are willing to produce at a given time and at a given price.

Factors that affect price

Factors that affect demand

– utility– price– advertising– personal selling– display– fashion– consumer

wants/needs

Factors that affect supply

– cost of production– price– consumer demand– profit goals– competition– government

controls– new technology

Elastic Demand

A product is said to have elastic demand if demand for the product is sensitive to a change in price.

Non-essential products such as entertainment, specialty foods, fashion

Inelastic Demand

A product is said to have inelastic demand if demand for the product is not sensitive to a change in price.

Necessities such as gasoline, milk, bread, electricity

Other factors that affect price

Economic conditions: Economic health affects price by affecting consumer buying power.

Government regulation: There are federal, state and local laws that can have an affect on how a business owner must price products.

Channel members: Intermediary fees reach the customer by affecting the cost of products to resellers.

Company Objectives/Strategies: Planners must examine the goals of a company and consider the many elements that interact to make businesses successful.