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1Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Prepared byPrepared byDeborah BakerDeborah Baker
Texas Christian UniversityTexas Christian University
Chapter 17
Pricing ConceptsPricing Concepts
2Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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.
3Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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.
4Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Discuss the importance of pricing decisions to the economy and to the individual firm.
11
On Linehttp://www.mlb.com
On Linehttp://www.mlb.com
5Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
In the broadest sense, In the broadest sense, price allocates resources price allocates resources in a free-market economyin a free-market economy
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
To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source
11
6Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
What Is Price?What Is Price?
Price is that which is given
up in an exchange to
acquire a good or service.
11
7Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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
11
8Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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
11
Revenue = Unit Price Number of units sold
Revenue pays for every activity. What’s left over is Profit.
9Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Trends Influencing Price Trends Influencing Price SettingSetting
11
Flood of new product introductions
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
10Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
List and explain a variety of pricing objectives.
22
11Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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
22
12Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Profit-Oriented Pricing Profit-Oriented Pricing ObjectivesObjectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
22
13Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Profit MaximizationProfit Maximization
Setting prices so that
total revenue is as large
as possible relative
to total costs.
22
14Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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
22
15Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Sales-Oriented Pricing Sales-Oriented Pricing ObjectivesObjectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
22
16Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Market ShareMarket Share
A company’s product sales
as a percentage of total
sales for that industry.
22
17Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Sales MaximizationSales Maximization
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
22
18Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Status Quo Pricing ObjectivesStatus Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
22
On Linehttp://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com
On Linehttp://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com
19Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Explain the role of demand in price determination.
33
20Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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.
33
21Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
The Demand CurveThe Demand Curve
D
DPri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120Quantity demanded
33
22Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linehttp://www.uBid.com
On Linehttp://www.uBid.com
The Supply CurveThe Supply Curve
Quantity supplied
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
33
23Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price EquilibriumPrice Equilibrium
The price at which demand
and supply are equal.
33
24Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Equilibrium PriceEquilibrium Price
Quantity demanded
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
33
25Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Elasticity of DemandElasticity of Demand
Consumers’ responsiveness or
sensitivity to changes
in price.
33
26Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Elasticity of DemandElasticity of Demand
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
33
27Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Elasticity of DemandElasticity of Demand
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
33
28Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Elasticity of DemandElasticity of Demand
Elastic Demand CurveElastic Demand CurveD
D
Quantity
Pri
ce
D
D
Quantity
Pri
ce
Inelastic Demand CurveInelastic Demand Curve
33
29Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Factors that Affect Factors that Affect Elasticity of DemandElasticity of Demand
Availability of SubstitutesAvailability of Substitutes
Price relative topurchasing power
Price relative topurchasing power
Product durabilityProduct durability
A product’s other usesA product’s other uses
33
On Linehttp://www.columbiahouse.com
On Linehttp://www.columbiahouse.com
30Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Understand the concept of yield management systems.
44
31Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Yield Management SystemsYield Management Systems
A technique for adjusting
prices that uses complex
mathematical software
to profitably fill
unused capacity.
44
32Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Yield Management SystemsYield Management SystemsPrice AdjustmentsPrice Adjustments
Discounting early purchases
Discounting early purchases
Limiting early sales atdiscounted prices
Limiting early sales atdiscounted prices
Overbooking capacityOverbooking capacity
44
33Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Describe cost-oriented pricing strategies.
55
34Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
The Cost Determinant of PriceThe Cost Determinant of Price55
Deviate with changes in level of output
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
Do not deviate as level of output changes
35Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
The Cost Determinant of PriceThe Cost Determinant of Price
Target-ReturnPricing
Target-ReturnPricing
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsMethodsUsed toUsed to
Set PricesSet Prices
MethodsMethodsUsed toUsed to
Set PricesSet Prices
55
36Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Markup PricingMarkup Pricing
Markup 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.
55
37Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Profit MaximizationProfit Maximization
ProfitMaximization
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.
55
38Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Break-Even PricingBreak-Even Pricing
QuantityQuantity
Pri
ceP
rice
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
55
39Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Break-Even PricingBreak-Even Pricing
Break-EvenQuantity = Total Fixed Costs
Fixed cost Contribution
Fixed costContribution = Price -- Avg. Variable Cost
55
40Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective 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.
66
41Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Other Determinants of PriceOther Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
66
42Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linehttp://www.fragrancenet.com
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
66
43Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Distribution StrategyDistribution Strategy
Offer a larger profit margin
Offer a larger profit margin
Convincing distributorsConvincing distributorsto carry productto carry product
Convincing distributorsConvincing distributorsto carry productto carry product
Give dealers a largetrade allowance
Give dealers a largetrade allowance
66
44Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Selling Against the BrandSelling Against the Brand
Stocking well-known
branded items at high
prices in order to sell
store brands at
discounted prices.
66
45Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Regaining Price ControlRegaining Price Control66
DEVELOP BRAND LOYALTY
DEVELOP BRAND LOYALTY
Package marked with selling price
Package marked with selling price
Avoid business withprice-cutting discounters
Avoid business withprice-cutting discounters
FranchisingFranchising
Exclusive distribution system
Exclusive distribution system
Place goods on consignmentPlace goods on consignment
46Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linehttp://www.botspot.com
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
66
47Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
ExtranetExtranet
A private electronic network
that links a company
with its suppliers
and customers.
66
48Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
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
49Chap. 17 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Dimensions of QualityDimensions of Quality66
VersatilityVersatility
DurabilityDurability
ServiceabilityServiceability
Ease of UseEase of Use
PerformancePerformance
PrestigePrestige
