1Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Prepared by Deborah...

Prepared byPrepared byDeborah BakerDeborah Baker

Texas Christian UniversityTexas Christian University

Chapter 17

Pricing ConceptsPricing Concepts

Learning ObjectivesLearning 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.

Learning Objectives Learning Objectives (continued)(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.

Learning Objective Learning Objective

Discuss the importance of pricing decisions to the economy and to the individual firm.

On Linehttp://www.mlb.com

In the broadest sense, In the broadest sense, price allocates resources price allocates resources in a free-market economyin a free-market economy

The Importance of PriceThe Importance of Price

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

What Is Price?What Is Price?

Price is that which is given

up in an exchange to

acquire a good or service.

The Importance of PriceThe Importance of Priceto Marketing Managersto Marketing Managers

RevenueRevenue

ProfitProfit

The price charged to customers multiplied by the

number of units sold.

The price charged to customers multiplied by the

number of units sold.

Revenue minus expensesRevenue minus expenses

The Importance of PriceThe Importance of Price

To earn a profit, To earn a profit, marketers must select a price marketers must select a price

that is not too highthat is not too high or not too low, or not too low,

a price that equals a price that equals the perceived value to target consumersthe perceived value to target consumers

Revenue = Unit Price Number of units sold

Revenue pays for every activity. What’s left over is Profit.

Trends Influencing Price Trends Influencing Price SettingSetting

Flood of new product introductions

Increased availability ofbargain-priced private and

generic brands

Increased availability ofbargain-priced private and

generic brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

A general decline in consumer confidence after terrorist attacksA general decline in consumer

confidence after terrorist attacks

Trends Trends in thein the

MarketMarket

Trends Trends in thein the

MarketMarket

List and explain a variety of pricing objectives.

Pricing ObjectivesPricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

Profit-Oriented Pricing Profit-Oriented Pricing ObjectivesObjectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

ProfitMaximization

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

Profit MaximizationProfit Maximization

Setting prices so that

total revenue is as large

as possible relative

to total costs.

Return on InvestmentReturn on Investment

Net profit after taxes

divided by total assets.

ROI = ROI = Net Profit after taxesNet Profit after taxes Total assetsTotal assets

Sales-Oriented Pricing Sales-Oriented Pricing ObjectivesObjectives

MarketShare

SalesMaximization

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Market ShareMarket Share

A company’s product sales

as a percentage of total

sales for that industry.

Sales MaximizationSales Maximization

Short-term objective to maximize sales

Ignores profits, competition, and the marketing environment

May be used to sell off excess inventory

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

On Linehttp://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com

Explain the role of demand in price determination.

Demand and SupplyDemand and Supply

DemandDemand

SupplySupply

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 sold in the market at various

prices for a specified period.

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The Demand CurveThe Demand Curve

0 20 40 60 80 100 120Quantity demanded

On Linehttp://www.uBid.com

The Supply CurveThe Supply Curve

Quantity supplied

0 20 40 60 80 100 120

Price EquilibriumPrice Equilibrium

The price at which demand

and supply are equal.

Equilibrium PriceEquilibrium Price

Quantity demanded

0 20 40 60 80 100 120

SurplusSurplus

ShortageShortage

PricePriceEquilibriumEquilibrium

Elasticity of DemandElasticity of Demand

Consumers’ responsiveness or

sensitivity to changes

in price.

Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

UnitaryUnitaryElasticityElasticityUnitaryUnitary

ElasticityElasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity

Elastic Demand CurveElastic Demand CurveD

Quantity

Inelastic Demand CurveInelastic Demand Curve

Factors that Affect Factors that Affect Elasticity of DemandElasticity of Demand

Availability of SubstitutesAvailability of Substitutes

Price relative topurchasing power

Product durabilityProduct durability

A product’s other usesA product’s other uses

On Linehttp://www.columbiahouse.com

Understand the concept of yield management systems.

Yield Management SystemsYield Management Systems

A technique for adjusting

prices that uses complex

mathematical software

to profitably fill

unused capacity.

Yield Management SystemsYield Management SystemsPrice AdjustmentsPrice Adjustments

Discounting early purchases

Limiting early sales atdiscounted prices

Overbooking capacityOverbooking capacity

Describe cost-oriented pricing strategies.

The Cost Determinant of PriceThe Cost Determinant of Price55

Deviate with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

The Cost Determinant of PriceThe Cost Determinant of Price

Target-ReturnPricing

Break-EvenPricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices

Markup PricingMarkup Pricing

Markup Pricing

The cost of buying the product from the producer plus amounts for

profit and for expenses not otherwise accounted for.

The cost of buying the product from the producer plus amounts for

profit and for expenses not otherwise accounted for.

KeystoningKeystoning The practice of marking up pricesby 100%, or doubling the cost.The practice of marking up pricesby 100%, or doubling the cost.

Profit MaximizationProfit Maximization

ProfitMaximization

A method of setting prices that occurs when marginal revenue

equals marginal cost.

A method of setting prices that occurs when marginal revenue

equals marginal cost.

MarginalRevenueMarginalRevenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a

one-unit change in output.

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a

one-unit change in output.

Break-Even PricingBreak-Even Pricing

QuantityQuantity

2,0002,000

00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000

4,0004,000

Fixed costsFixed costs

LossLoss

ProfitProfitTotal RevenueTotal Revenue

Total CostsTotal CostsBreak-even pointBreak-even point

Break-Even PricingBreak-Even Pricing

Break-EvenQuantity = Total Fixed Costs

Fixed cost Contribution

Fixed costContribution = Price -- Avg. Variable Cost

Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price.

Other Determinants of PriceOther Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

On Linehttp://www.fragrancenet.com

Stages in the Stages in the Product Life CycleProduct Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh

Distribution StrategyDistribution Strategy

Offer a larger profit margin

Convincing distributorsConvincing distributorsto carry productto carry product

Give dealers a largetrade allowance

Selling Against the BrandSelling Against the Brand

Stocking well-known

branded items at high

prices in order to sell

store brands at

discounted prices.

Regaining Price ControlRegaining Price Control66

DEVELOP BRAND LOYALTY

Package marked with selling price

Avoid business withprice-cutting discounters

FranchisingFranchising

Exclusive distribution system

Place goods on consignmentPlace goods on consignment

On Linehttp://www.botspot.com

The Impact of the InternetThe 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

ExtranetExtranet

A private electronic network

that links a company

with its suppliers

and customers.

Prestige PricingPrestige Pricing

Charging a high price to

help promote a high-quality

image.

66On Linehttp://www.debeers.comhttp://www.rolex.com

On Linehttp://www.debeers.comhttp://www.rolex.com

Dimensions of QualityDimensions of Quality66

VersatilityVersatility

DurabilityDurability

ServiceabilityServiceability

Ease of UseEase of Use

PerformancePerformance

PrestigePrestige

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