PRICE DETERMINATION

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ECONOMICS Price Determination

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Pricing is one of the 4Ps in the marketing mix. The 4Ps are as follows: Product, Promotion, Place, and Price. Of the 4Ps, price is the only revenue generating element. Defined as “the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, price prevailing on entry, and many others.” PRICING

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The answer is that there are two independent factors that determine price in competitive markets (demand and supply). If markets were not competitive by definition, a single seller or buyer could control and set price. Competition then needs flexible impersonal pricing. Suppliers must not work together to influence prices, and each supplier must be able to enter or exit a market at will. HOW ARE PRICES SET?

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How much to charge for a product/service? How to set the price? What prices are competitors charging? What sort of payments should be accepted? What image do you want the price to convey? How flexible can we be in pricing? What are the pricing objectives? SOME QUESTIONS INVOLVED IN PRICING:

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Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are in pricing is the first step in determining the price of a certain product. There are four things to consider when deciding on pricing objectives: The overall financial, marketing, and strategic objectives of the company. The objectives of your product or brand. Consumer price elasticity and price point. Available resources at hand. PRICING OBJECTIVES

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Maximize long-run and short-run profits. Increase quantity of sales. Company growth Match competitor’s prices Survival Be perceived as “fair” by customers and potential customers. Create interest and excitement about a product. Get competitive advantage COMMON PRICE OBJECTIVES

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A well-chosen price should do three things: Achieve the financial goals of the firm. Fit the realities of the marketplace (will customers buy at that price?) Support a product’s positioning and be consistent with the other variables in the marketing mix. WHAT A PRICE SHOULD DO

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From the marketer’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that shifts most of the consumer surplus to the producer. A good pricing strategy would be the one which could balance between the price floor (the price below which the organization ends up in losses) and the price ceiling (the price beyond which the organization experiences a no demand situation). EFFICIENT PRICE

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Consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. Producer surplus the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for. CONSUMER and PRODUCER SURPLUS

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The effective price is the price the company receives after accounting for discounts, promotions, and other incentives. A loss leader is a product that has a price set below the operating margin. This results in a loss to the enterprise on that particular item, but this is done in the hope that it will draw customers into the store and that some of those customers will buy other, higher margin items. EFFECTIVE PRICE and Loss Leader

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The price/quality relationship refers to the perception by most consumers that a relatively high price is a sign of good quality. The belief in this relationship is most important with complex products that are hard to test, and experiential products that cannot be tested until used (such as most services). The greater the uncertainty surrounding a product, the more consumers depend on the price/quality hypothesis and the more of a premium they are prepared to pay. THE PRICE-QUALITY RELATIONSHIP

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PROMOTIONAL PRICING refers to an instance where pricing is the key element of the marketing mix. PREMIUM PRICING (or prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. GOLDILOCKS PRICING is commonly used to describe the practice of providing a "gold-plated" version of a product at a premium price in order to make the next-lower priced option look more reasonably priced. TYPES OF PRICING

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Industry Level - Pricing at the industry level focuses on the overall economics of he industry, including supplier price changes and customer demand changes. Market Level - Pricing at the market level focuses on the competitive position of the price in comparison to the value differential of the product to that of comparative competing products. Transaction Level - Pricing at the transaction level focuses on managing the implementation of discounts away from the reference, or list price, which occur both on and off the invoice or receipt. THREE LEVELS/THREE APPROACHES TO PRICING

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