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Chapter 10 Product, Price, and Place
MSRP is only a suggested price. Retailers are not usually required
to use it. However, some high-end manufacturers require retailers
to use the MSRP. Often, these manufacturers produce well-known
brands and do not want price competition among the retailers offering
the products. For example, distributors of video games are usually
required to use the MSRP so smaller stores can compete with larger
stores. Large stores can buy in large quantities to reduce per-unit cost.
If the large stores were not required to use the MSRP, they could set a
price below what the smaller stores pay to purchase the same games.
By requiring products to be sold at the MSRP, the brand name and
price is preserved.
Pricing Factors
All businesses have factors that impact their pricing decisions.
Expenses, competition, regulation compliance, a product’s life cycle,
and supply and demand may affect prices. Each business will need to
take into consideration some or all of these factors.
Expenses
All goods and services have certain expenses related to creating
them and getting them to the end users. Expenses such as employee
wages, shipping, utilities, rent, and other operating expenses affect
pricing. There are two basic types of expenses: fixed and variable.
Fixed expenses do not change and are not affected by the number
of products that are produced or sold. Fixed expenses include rent,
salaries, and loan payments. Whether 100 or 1,000 items are sold in a
month, fixed expenses remain the same.
Variable expenses change based on activity of the business. Variable
expenses include advertising, packaging, and shipping. The cost of
extending credit, which is discussed in a later chapter, may also be
included. Figure 10-2 shows examples of fixed and variable expenses.
Competition
Competitors are going to pay attention to your prices. You need
to also pay attention to their prices as well. Will you charge a higher
price, a lower price, or match the price of competitors? As discussed
in chapter 5, price competition is pricing a product lower than the
competition to encourage customers to buy your product. Nonprice
competition is positioning a product as more valuable to the customer
because of service, appearance, or other factors unrelated to its price.