Transcript Chapter 17
Lamb, Hair, McDaniel MKTG2008-2009 17 CHAPTER Designed by Amy McGuire, B-books, Ltd. Chapter 17 Pricing Concepts Prepared by Deborah Baker, Texas Christian University Copyright ©2009 Cengage Learning Inc. All rights reserved 1 Learning Outcomes LO1 Discuss the importance of pricing decisions to the economy and to the individual firm LO2 List and explain a variety of pricing objectives LO3 Explain the role of demand in price determination Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 2 Learning Outcomes LO4 Understand the concept of yield management systems LO5 Describe cost-oriented pricing strategies LO6 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 3 LO1 The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 4 The Importance of Price To the seller... Price is revenue To the consumer... Price is the cost of something Price allocates resources in a free-market economy LO1 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 5 What Is Price? Price Price is that which is given up in an exchange to acquire a good or service. LO1 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 6 The Importance of Price to Marketing Managers Revenue Profit The price charged to customers multiplied by the number of units sold. Revenue minus expenses. LO1 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 7 Trends Influencing Price Flood of new products Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share LO1 Chapter 17 Internet used for comparison shopping Copyright ©2009 Cengage Learning Inc. All rights reserved 8 LO1 REVIEW LEARNING OUTCOME The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 9 LO2 Pricing Objectives List and explain a variety of pricing objectives Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 10 Pricing Objectives Profit-Oriented Sales-Oriented Status Quo LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 11 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 12 Profit Maximization Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 13 Return on Investment Return on Investment Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 14 Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Market Share http://www.target.com http://www.walmart.com http://www.jcpenney.com LO2 Chapter 17 Sales Maximization Online Copyright ©2009 Cengage Learning Inc. All rights reserved 15 Market Share Market Share A company’s product sales as a percentage of total sales for that industry. LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 16 Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 17 Status Quo Pricing Objectives Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices LO2 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 18 LO2 REVIEW LEARNING OUTCOME Pricing Objectives Profit-Oriented Profit Maximization Satisfactory Profits Target ROI Sales-Oriented Market Share Chapter 17 Sales Maximization Copyright ©2009 Cengage Learning Inc. All rights reserved Status Quo Maintain Existing Price 19 LO3 The Demand Determinant of Price Explain the role of demand in price determination Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 20 LO3 The Demand Determinant of Price Demand Supply The quantity of a product that will be sold in the market at various prices for a specified period. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. http://www.ubid.com Online Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 21 LO3 The Demand Curve Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 22 LO3 The Supply Curve Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 23 LO3 Chapter 17 How Demand and Supply Establish Price Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. Copyright ©2009 Cengage Learning Inc. All rights reserved 24 LO3 Price Equilibrium Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 25 LO3 Elasticity of Demand Chapter 17 Elastic Demand Consumers buy more or less of a product when the price changes. Inelastic Demand An increase or decrease in price will not significantly affect demand. Unitary Elasticity An increase in sales exactly offsets a decrease in prices, and revenue is unchanged. Copyright ©2009 Cengage Learning Inc. All rights reserved 26 LO3 Elasticity of Demand Elasticity (E) = Percentage change in quantity demanded of good A Percentage change in price of good A If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary. Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 27 LO3 Elasticity of Demand Price Goes... Revenue Goes... Demand is... Down Up Elastic Down Down Inelastic Up Up Inelastic Up Down Elastic Up or Down Stays the Same Unitary Elasticity Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 28 Biz Flix LO3 Chapter 17 The Money Pit Copyright ©2009 Cengage Learning Inc. All rights reserved 29 LO3 Elasticity of Demand Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 30 LO3 Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation http://www.columbiahouse.com Online Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 31 LO4 The Power of Yield Management Systems Understand the concept of yield management systems Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 32 Yield Management Systems Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO4 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 33 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity LO4 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 34 Beyond the Book LO4 Yield Management Systems Chapter 17 Yield Management Systems (YMS) make it possible for a company to: 1. stimulate demand when demand is low, and 2. maximize profits when demand is high. . Copyright ©2009 Cengage Learning Inc. All rights reserved 35 Beyond the Book LO4 Yield Management Systems Chapter 17 Supply Side of Product or Service High Office block House Airline seat Utilities Sport event Rental car Shirt Pencils Food Tropical fish Capital Intensity Low Low Perishability High SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007. Copyright ©2009 Cengage Learning Inc. All rights reserved 36 Beyond the Book LO4 Yield Management Systems Chapter 17 Demand Side of Product or Service High Utilities Highway use Telephone Airline seat Sport event Rental car Mobile phone Food Music CD Shirt Office block Laptop House Variability of Demand Low Low Variability of Value High SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007. Copyright ©2009 Cengage Learning Inc. All rights reserved 37 LO4 REVIEW LEARNING OUTCOME Yield Management Systems Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 38 LO5 The Cost Determinant of Price Describe cost-oriented pricing strategies Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 39 The Cost Determinant of Price Types of Costs Variable Cost Fixed Cost Varies with changes in level of output Does not change as level of output changes LO5 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 40 The Cost Determinant of Price Markup pricing Methods Used to Set Prices LO5 Chapter 17 Keystoning Profit Maximization Pricing Break-Even Pricing Copyright ©2009 Cengage Learning Inc. All rights reserved 41 Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Markup Pricing Keystoning The practice of marking up prices by 100%, or doubling the cost. LO5 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 42 Profit Maximization Profit Maximization Marginal Revenue A method of setting prices that occurs when marginal revenue equals marginal cost. The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output. LO5 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 43 Break-Even Pricing LO5 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 44 Break-Even Pricing Break-Even Quantity Fixed cost Contribution = = Total fixed costs Fixed cost contribution Price - Avg. Variable Cost LO5 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 45 LO5 REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 46 LO6 Other Determinants of Price Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 47 Other Determinants of Price Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy LO6 Chapter 17 Perceived Quality Copyright ©2009 Cengage Learning Inc. All rights reserved 48 Stages in the Product Life Cycle Introductory Stage Growth Stage Maturity Stage $ $ $ High Stable Decrease Decline Stage $ Decrease Stable High LO6 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 49 The Competition High prices may induce firms to enter the market Competition can lead to price wars Global competition may force firms to lower prices LO6 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 50 Distribution Strategy Manufacturers Offer a larger profit margin or trade allowance Wholesalers/Retailers Sell against the brand Buy gray-market goods Use exclusive distribution Franchising Avoid business with pricecutting discounters LO6 Chapter 17 Develop brand loyalty Copyright ©2009 Cengage Learning Inc. All rights reserved 51 Distribution Strategy Selling against the brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. LO6 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 52 The Impact of the Internet Product selection Second opinions from expert sites Shopping bots Internet auctions LO6 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 53 LO6 Impact of the Internet on Book Distribution Beyond the Book Online 13% Chapter 17 Online 2% Schools and Libraries 24% Schools and Libraries 27% Book Clubs 5% Book Clubs 16% Non-bookstore Retail 18% Non-bookstore Retail 13% Traditional Retail 42% Traditional Retail 38% [+ 2% direct-to-consumer sales] 1998 $22.5 Billion 2006 $28.5 Billion Net Publisher Revenue SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal, March 22, 2007 B1 Copyright ©2009 Cengage Learning Inc. All rights reserved 54 The Relationship of Price to Quality Prestige Pricing Charging a high price to help promote a highquality image. LO6 Chapter 17 http://www.vivre.com http://www.bluefly.com Online Copyright ©2009 Cengage Learning Inc. All rights reserved 55 Beyond the Book LO6 Prestige Pricing Chapter 17 When Tiffany & Co. created a line of more affordable silver jewelry to broaden its offerings to the upper-middle classes it took a gamble with its reputation as an upscale luxury brand. Tiffany’s managers began to worry about alienating its core clientele—the older, affluent, and conservative customer who prizes exclusivity. Tiffany decided to protect its brand equity by significantly raising prices on its silver jewelry beyond the reach of “aspirational” customers while aggressively courting its affluent customers. Still, Tiffany lost some wealthy customers who complained that “everyone has Tiffany jewelry now.” SOURCE: Ellen Byron “To Refurbish Its Image, Tiffany Risks Profits,” Wall Street Journal, 1/10/07 A1. Copyright ©2009 Cengage Learning Inc. All rights reserved 56 Beyond the Book LO6 Premium Pets Chapter 17 The pet-care market is a $47-billion industry in the United States 17.4 million of the 52.8 million pet-owning households qualify as “premium” or “uber” owners, sparing no expense on high-end products for their pets Uber owners tripled their pet-supply spending between 1995 and 2005 (from $5.2 billion to $18.6 billion) Products for pets that are made to resemble products for humans—with familiar brand names—are growing the most in popularity SOURCE: Tom Ehart, “’Functional Pampering’ by ‘Uber Owners’ to drive Premium Pet Products Market Growth,” Packaged Facts, August 31, 2007. Copyright ©2009 Cengage Learning Inc. All rights reserved 57 Dimensions of Quality 1. Ease of use 2. Versatility 3. Durability 4. Serviceability 5. Performance 6. Prestige LO6 Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 58 LO6 REVIEW LEARNING OUTCOME Factors Affecting Price Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 59