Why does someone pay a given price for a product and why does someone think a given price is a good deal? For that matter, why does any product cost what it does? Why are diamonds so expensive, while salt is so cheap? Certainly salt is more useful than diamonds. The price of diamonds is high because the demand for diamonds exceeds its supply. The price of salt is low because demand is low relative to its huge supply. No matter what pricing theories you hear, this is an essential fact: Prices are determined by supply and demand.

You can see that a company that makes something can have an impact on the supply side of supply and demand. If they keep the rubber chicken plant running for 6 days rather than 5, they have helped put more rubber chickens into the always volatile rubber chicken market. Without a corresponding increase in demand, this can cause prices to drop.

But while the plant is manufacturing more rubber chickens, marketers are busy trying to increase the demand for rubber chickens. If rubber chickens are suddenly featured on the Big Bang Theory by some clever marketer, demand goes up, and therefore price goes up. Lets look at pricing throughout a products lifetime as a way of illustrating this point. Almost every product goes through the same four stages of life: introduction, growth, maturity and decline.

The above chart shows that when the product is first introduced, revenue is usually slow growing, and profits lag. Frequently during introduction, there is a single firm selling a new product think of the advent of the e-reader. If a single company has all of the market, and can sell all they can produce, they can afford to set the price high, especially if there are no competitors on the horizon. This is known as a skimming strategy. On the other hand, if a firm had a product that will soon have lots of competition, they might introduce the product at a low cost, hoping to capture a large market share and hold on to their top position. This is known as a penetration strategy. As the market enters the growth stage, prices begin to fall slowly per unit, as it is easier and cheaper to make more and more of something (economies of scale), and because competitors, attracted by increasing demand during the introductory phase, begin to enter the market. This is the most profitable of the product life cycle stages.

At the maturity stage, revenues begin to fall because of increased competition. At this point, the adept marketer begins to make small (or not so small) adjustments to the original product, to improve it, and to keep it hard to compare to other similar products in other words, to increase demand.

Whatever decisions are made by a marketer regarding price, the essential thing to remember is that since the pricing aspect of the marketing mix is the easiest for consumers to compare, the marketers job is to find a way to make sure price is not the only focus of the buying decision. Whether by developing a superior product, by having that product at the right place at the right time, or by creating a buzz and fanning the flame of demand, keeping price from being the sole decision factor is a large part of a marketers job.

In this assignment, you will complete another key section of your marketing plan:

Write a 1 page recommendation for the pricing strategy necessary to successfully market your health care product or service. Be sure to include an estimate of the costs associated with the product or service, and the profits that are expected with the recommended pricing.

You will need to make some educated estimates to complete this assignment; please follow a format like this to demonstrate that your recommended pricing will result in profits:

New Product	Per Unit	20,000 units (1st year sales forecast)
Suggested retail price	$100.00	$2,000,000
Cost to retailer **	$50.00	$1,000,000
Retailer margin	$50.00	$1,000,000
Cost of Goods Sold
Components/raw materials	$10.00	$200,000
Labor	$10.00	$200,000
Overhead	$5.00	$100,000
Marketing costs	$7.00	$140,000
Manufacturer profit	$18.00	$360,000
** Cost to retailer is the same as Manufacturers sales revenue

New Service	Per Day	200 days per year (1st year sales forecast)
Service Charges**	$250.00	$500,000
Cost of Goods Sold
Labor	$100.00	$200,000
Materials	$20.00	$40,000
Overhead	$30.00	$60,000
Marketing costs	$10.00	$20,000
Service provider profit	$90.00	$180,000
** Service Charge is the expected sales revenue from the new service

As a starting point to estimating costs, visit Bplans and search for a sample plan in a similar line of business to the one you are proposing. Look for the Pro Forma Profit and Loss chart within the Financial Plan section of the business plan, and make note of the expected costs in relation to forecasted sales. You can also do an Internet search for income statement (insert your product or service here) and review the samples that you find.

Within this section draft, please demonstrate your grasp of the marketing terminology and concepts related to pricing strategy. For example, it would be appropriate to identify whether you have chosen a penetration, skimming, or followership price strategy, and why you believe that strategy is appropriate.

Product Life Cycle IntroductionGrowth Maturity Decline Revenue Profit Time Product Life Cycle IntroductionGrowth Maturity Decline Revenue Profit Time