Transcript Document

Pricing Concepts
Chapter 17
Prepared by
Deborah Baker
Texas Christian University
Chap. 17 Marketing 7e Lamb Hair McDaniel
©2004 South-Western/Thomson Learning
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Learning Objectives
1. Discuss the importance of pricing
decisions to the economy and
to the individual firm.
2. List and explain a variety of pricing
objectives.
3. Explain the role of demand in price
determination.
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Learning Objectives (continued)
4. Understand the concept of yield
management systems.
5. Describe cost-oriented pricing strategies.
6. Demonstrate how the product life cycle,
competition, distribution and promotion
strategies, customer demands, the Internet
and extranets, and perceptions of quality
can affect price.
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Learning Objective
On Line
http://www.mlb.com
Discuss the
importance of
pricing decisions to
the economy and to
the individual firm.
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The Importance of Price
To the seller...
Price is revenue
and profit source
To the consumer...
Price is the cost
of something
In the broadest sense,
price allocates resources
in a free-market economy
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What Is Price?
Price is that which is given
up in an exchange to
acquire a good or service.
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The Importance of Price
to Marketing Managers
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Revenue
The price charged to customers
multiplied by the
number of units sold.
Profit
Revenue minus expenses
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The Importance of Price
Revenue = Unit Price  Number of units sold
 Revenue pays for every activity.
 What’s left over is Profit.
To earn a profit,
marketers must select a price
that is not too high
or not too low,
a price that equals
the perceived value to target consumers
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Trends Influencing Price Setting
Flood of new
product introductions
Trends
in the
Market
Increased availability of
bargain-priced private and
generic brands
Price cutting as a strategy to
maintain or regain
market share
A general decline in consumer
confidence after terrorist attacks
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Learning Objective
List and explain a
variety of pricing
objectives.
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Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
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Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
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Target
Return on
Investment
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Profit Maximization
Setting prices so that
total revenue is as large
as possible relative
to total costs.
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Return on Investment
Net profit after taxes
divided by total assets.
ROI = Net Profit after taxes
Total assets
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Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Share
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Sales
Maximization
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Market Share
A company’s product sales
as a percentage of total
sales for that industry.
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Sales Maximization
 Short-term objective to maximize sales
 Ignores profits, competition, and the
marketing environment
 May be used to sell
off excess inventory
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Status Quo Pricing Objectives
On Line
http://www.target.com
http://www.walmart.com
http://www.jcpenney.com
Status Quo Pricing Objectives
Maintain
existing
prices
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Meet
competition’s
prices
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Learning Objective
Explain the role of
demand in price
determination.
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Demand and Supply
Demand
The quantity of a product that
will be sold in the market at various
prices for a specified period.
Supply
The quantity of a product
that will be offered to the market
by a supplier at various prices
for a specific period.
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The Demand Curve
2.50
D
Price
2.00
1.50
D
1.00
.50
0
20
40
60
80
Quantity demanded
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120
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The Supply Curve
On Line
http://www.uBid.com
S
2.50
2.00
Price
3
1.50
1.00
S
.50
0
20
40
60
80
Quantity supplied
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Price Equilibrium
The price at which demand
and supply are equal.
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Equilibrium Price
2.50
S
Surplus
D
Price
2.00
Price
Equilibrium
1.50
1.00
Shortage
S
.50
0
20
40
60
80
100
D
120
Quantity demanded
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Elasticity of Demand
Consumers’ responsiveness
or sensitivity to changes
in price.
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Elasticity of Demand
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
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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
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Elasticity of Demand
Elastic Demand Curve
D
Inelastic Demand Curve
Price
Price
D
D
D
Quantity
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Quantity
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Factors that Affect
Elasticity of Demand
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On Line
http://www.columbiahouse.com
Availability of Substitutes
Price relative to
purchasing power
Product durability
A product’s other uses
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Learning Objective
Understand the
concept of yield
management
systems.
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Yield Management Systems
A technique for adjusting
prices that uses complex
mathematical software
to profitably fill
unused capacity.
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Yield Management Systems
Price Adjustments
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Discounting
early purchases
Limiting early sales at
discounted prices
Overbooking capacity
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Learning Objective
Describe cost-oriented
pricing strategies.
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The Cost Determinant of Price
Types of Costs
Variable
Costs
Fixed Costs
Deviate with changes
in level of output
Do not deviate
as level of output changes
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The Cost Determinant of Price
Markup pricing
Keystoning
Methods
Used to
Set Prices
Profit Maximization
Pricing
Break-Even
Pricing
Target-Return
Pricing
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Markup Pricing
Markup
Pricing
The cost of buying the product from
the producer plus amounts for
profit and for expenses not
otherwise accounted for.
Keystoning
The practice of marking up prices
by 100%, or doubling the cost.
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Profit Maximization
Profit
Maximization
A method of setting prices that
occurs when marginal revenue
equals marginal cost.
Marginal
Revenue
The extra revenue associated with
selling an extra unit of output, or
the change in total revenue with a
one-unit change in output.
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Break-Even Pricing
Total Revenue
Total Costs
Break-even point
Price
4,000
2,000
Fixed costs
0
1,000
2,000
3,000
4,000
5,000
6,000
Quantity
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Break-Even Pricing
Break-Even
Quantity
=
Fixed cost
Contribution
=
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Total Fixed Costs
Fixed cost Contribution
Price -- Avg. Variable Cost
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Learning Objective
Demonstrate how the
product life cycle,
competition, distribution
and promotion strategies,
customer demands, the
Internet and extranets,
and perceptions of
quality can affect price.
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©2004 South-Western/Thomson Learning
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Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
Perceived Quality
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Stages in the
Product Life Cycle
On Line
http://www.fragrancenet.com
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
$
$
$
$
High
Stable
Decrease
Decrease
Stable
High
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Distribution Strategy
Convincing distributors
to carry product
Offer a larger
profit margin
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Give dealers a large
trade allowance
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Selling Against the Brand
Stocking well-known
branded items at high
prices in order to sell
store brands at
discounted prices.
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Regaining Price Control
Exclusive
distribution system
Franchising
Avoid business with
price-cutting discounters
Package marked with
selling price
Place goods on consignment
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DEVELOP
BRAND LOYALTY
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On Line
http://www.botspot.com
The Impact of the Internet
 Buyers can compare products and prices
 Sellers can collect detailed customer data
 Online merchants can compare other
merchant’s prices and adjust their own
easily
 Bargaining power is created between
buyers and sellers
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Extranet
A private electronic network
that links a company
with its suppliers
and customers.
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Prestige Pricing
On Line
http://www.debeers.com
http://www.rolex.com
Charging a high price to
help promote a high-quality
image.
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Prestige Dimensions of Quality
Performance
Serviceability
Durability
Versatility
Ease of Use
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