VALUE AND PRICE
When you decide to purchase a product, how do you determine what to pay? Do you always pay the price that is marked on the product by the seller? Do you compare prices of several businesses to find the lowest price? Do you consider how much money you have available to spend in determining what price to pay? Are you concerned whether the seller is making a profit and whether that profit is low or high? Buyers usually want to pay the lowest price possible and sellers want to charge the highest price possible. Determining the best price for a product is a difficult marketing challenge.
Pricing FactorsMany factors go into a decision about a fair price. What you might consider an appropriate price may be different from the decision of other customers. It probably is very different from the price the seller believes is appropriate. There are both general and specific factors that influence the price paid for a product.
Supply and Demand A product that has a ready supply will have a lower price than a product with a very limited supply. If demand for a product is high, prices will increase. Products with low levels of demand will have comparatively low prices.
Uniqueness When a product has few close competitors because it is unique, the price will be higher than products that are very similar to others.
Age When products are first introduced to the market, prices will be quite high. As products age, the price gradually decreases.
Season Many products are used at a particular time of the year. Winter apparel, air conditioners, and holiday decorations have high levels of sales for a short time and then almost no sales for the rest of the year. Prices will be highest just before and at the beginning of the season. Prices will be lower during other times of the year.
Complexity Highly complex and technical products have higher prices than simple products. Products with many features and options will also command higher prices.
Convenience People pay for convenience. If a product is easily available and the seller provides a high level of customer service, prices will go up. Customers expect to pay low prices if they shop at a large warehouse store that is not as conveniently located and offers little service.
Price a ProductPrice is the money a customer must pay for a product or service. The price of a product changes as it moves from producer to consumer. The manufacturer sets a price that is paid by other businesses that will sell the product to the final customer. The price is set by the business by adding together the product costs, operating expenses, and profit. The formula for calculating the selling price is shown in Figure 10-4.
Selling price is the price paid by the customer for the product.
Product costs are the costs to the manufacturer of producing the product or the price paid by other businesses to buy the product.
Operating expenses are all expenses of operating the business that are associated with the product. They can include salaries, storage and display equipment, facilities, utilities, taxes, and many others.
Profit is the amount of money available to the business after all costs and expenses have been paid.
Gross margin is an important factor in product pricing. The gross margin is the difference between the selling price and the product costs. It represents the amount of money on hand to pay for operating expenses and provide a profit.
Markup A pricing concept related to gross margin is markup. A markup is the amount added to the cost of a product to set the selling price. The markup is equal to the expected gross margin. A markup is stated as a percentage of the product's cost or as a percentage of the product's selling price. If a product costs $15 and has a 100 percent markup on cost, the markup is $15 and the selling price is $30. That $30 product would have a markup on selling price of 50 percent. The formulas for calculating markup on cost and markup on selling are shown in Figure 10-5.
Markdown Businesses are not always able to sell products at the original price they set. If customer demand is not as high as projected, if the selling season is ending, or if there is a flaw in the product, the business may have to take a markdown. A markdown is a reduction from the original selling price.
A markdown should be thought of as a pricing mistake because it reduces the amount of money the business has to cover operating expenses and profits. However, the original selling price can be set high because the product is new and there is higher demand. Small markdowns result in most of the remaining products being sold while still making a profit. The leftover products may need to be sold at large mark downs that still provide some money to cover the product cost and expenses.
When you decide to purchase a product, how do you determine what to pay? Do you always pay the price that is marked on the product by the seller? Do you compare prices of several businesses to find the lowest price? Do you consider how much money you have available to spend in determining what price to pay? Are you concerned whether the seller is making a profit and whether that profit is low or high? Buyers usually want to pay the lowest price possible and sellers want to charge the highest price possible. Determining the best price for a product is a difficult marketing challenge.
Pricing FactorsMany factors go into a decision about a fair price. What you might consider an appropriate price may be different from the decision of other customers. It probably is very different from the price the seller believes is appropriate. There are both general and specific factors that influence the price paid for a product.
Supply and Demand A product that has a ready supply will have a lower price than a product with a very limited supply. If demand for a product is high, prices will increase. Products with low levels of demand will have comparatively low prices.
Uniqueness When a product has few close competitors because it is unique, the price will be higher than products that are very similar to others.
Age When products are first introduced to the market, prices will be quite high. As products age, the price gradually decreases.
Season Many products are used at a particular time of the year. Winter apparel, air conditioners, and holiday decorations have high levels of sales for a short time and then almost no sales for the rest of the year. Prices will be highest just before and at the beginning of the season. Prices will be lower during other times of the year.
Complexity Highly complex and technical products have higher prices than simple products. Products with many features and options will also command higher prices.
Convenience People pay for convenience. If a product is easily available and the seller provides a high level of customer service, prices will go up. Customers expect to pay low prices if they shop at a large warehouse store that is not as conveniently located and offers little service.
Price a ProductPrice is the money a customer must pay for a product or service. The price of a product changes as it moves from producer to consumer. The manufacturer sets a price that is paid by other businesses that will sell the product to the final customer. The price is set by the business by adding together the product costs, operating expenses, and profit. The formula for calculating the selling price is shown in Figure 10-4.
Selling price is the price paid by the customer for the product.
Product costs are the costs to the manufacturer of producing the product or the price paid by other businesses to buy the product.
Operating expenses are all expenses of operating the business that are associated with the product. They can include salaries, storage and display equipment, facilities, utilities, taxes, and many others.
Profit is the amount of money available to the business after all costs and expenses have been paid.
Gross margin is an important factor in product pricing. The gross margin is the difference between the selling price and the product costs. It represents the amount of money on hand to pay for operating expenses and provide a profit.
Markup A pricing concept related to gross margin is markup. A markup is the amount added to the cost of a product to set the selling price. The markup is equal to the expected gross margin. A markup is stated as a percentage of the product's cost or as a percentage of the product's selling price. If a product costs $15 and has a 100 percent markup on cost, the markup is $15 and the selling price is $30. That $30 product would have a markup on selling price of 50 percent. The formulas for calculating markup on cost and markup on selling are shown in Figure 10-5.
Markdown Businesses are not always able to sell products at the original price they set. If customer demand is not as high as projected, if the selling season is ending, or if there is a flaw in the product, the business may have to take a markdown. A markdown is a reduction from the original selling price.
A markdown should be thought of as a pricing mistake because it reduces the amount of money the business has to cover operating expenses and profits. However, the original selling price can be set high because the product is new and there is higher demand. Small markdowns result in most of the remaining products being sold while still making a profit. The leftover products may need to be sold at large mark downs that still provide some money to cover the product cost and expenses.
Differences in Timing Businesses gain efficiency by producing large amounts of a product at one time. Some agricultural products can only be produced at a specific time of the year. Consumers may want to buy products at different times than when they are produced.Distribution channels develop to make adjustments in these differences. An effective channel of distribution takes the large quantities produced and breaks them into quantities customers want to buy. The channel gathers products from many producers to offer customers the array of products they need in convenient locations. They move products efficiently from where they are produced to where they can be sold. Distribution channels store products from the time they are produced until customers want to buy them.
Channels and Channel MembersThe businesses that take part in a channel of distribution are known as channel members . All marketing functions and activities are performed by a channel member or by the consumer. Businesses join a channel of distribution when either the producer or consumer does not want to perform one or more marketing activities or when the business can perform the activities better or at a lower cost.
Channels are either direct or indirect. In a direct channel of distribution, products move from the producer straight to the consumer with no other organizations participating. An indirect channel of distribution includes one or more other businesses between the producer and consumer. These other businesses provide one or more of the marketing functions.
Indirect distribution channels can include wholesalers . Wholesalers are intermediaries between manufacturers and retailers. They create an assortment by breaking larger bulks of producer's products into smaller units by repacking and redistributing in smaller lots for retailers and other industrial buyers. Wholesalers who take title , or ownership of goods, are called merchant wholesalers. Other types of wholesalers who don't take title include agents and brokers.
Retailing Retailers are a well-known and important part of distribution channels for consumer products. Retailers are the final business organization in an
indirect channel of distribution for consumer products. Retailers offer a range of products at convenient locations for consumers. They help consumers to select the best products. They can provide financing and delivery services. They may even offer repairs and other customer services. Retailers assist manufacturers by storing, displaying, and advertising the products and often paying the manufacturer well before final consumers buy the products.
Channels and Channel MembersThe businesses that take part in a channel of distribution are known as channel members . All marketing functions and activities are performed by a channel member or by the consumer. Businesses join a channel of distribution when either the producer or consumer does not want to perform one or more marketing activities or when the business can perform the activities better or at a lower cost.
Channels are either direct or indirect. In a direct channel of distribution, products move from the producer straight to the consumer with no other organizations participating. An indirect channel of distribution includes one or more other businesses between the producer and consumer. These other businesses provide one or more of the marketing functions.
Indirect distribution channels can include wholesalers . Wholesalers are intermediaries between manufacturers and retailers. They create an assortment by breaking larger bulks of producer's products into smaller units by repacking and redistributing in smaller lots for retailers and other industrial buyers. Wholesalers who take title , or ownership of goods, are called merchant wholesalers. Other types of wholesalers who don't take title include agents and brokers.
Retailing Retailers are a well-known and important part of distribution channels for consumer products. Retailers are the final business organization in an
indirect channel of distribution for consumer products. Retailers offer a range of products at convenient locations for consumers. They help consumers to select the best products. They can provide financing and delivery services. They may even offer repairs and other customer services. Retailers assist manufacturers by storing, displaying, and advertising the products and often paying the manufacturer well before final consumers buy the products.