Concept of Pricing

8/6/2019 Concept of Pricing

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CONCEPT OF PRICING


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The Importance of Price

To the seller...Price isrevenue

and profit source

To the seller...Price isrevenue

and profit source

To the consumer...

Price is the cost

of something

To the consumer...

Price is the cost

of somethingWHAT IS PRICE?

Revenue

RevenueThe price charged to customers

multiplied by the

number of units sold.

The price charged to customers

multiplied by thenumber of units sold.

Profit

Profit Revenue minus expenses

Revenue minus expenses

Price is that which is given up in an exchange to acquire a

good or service


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The Importance of Price

Revenue = Unit Price Number of units soldRevenue pays for every activity

Whats left over is 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

TrendsTrendsin thein the

MarketMarket

TrendsTrendsin thein the

MarketMarket

High rate ofnew product introduction

High rate ofnew product introduction

Increased availability ofbargain-priced dealer and

generic brands

Increased availability of

bargain-priced dealer andgeneric brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

More efficient and betterinformed buyers

More efficient and betterinformed buyers


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Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives


Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives


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Profit-Oriented Pricing Objectives



Profit

Maximization

Profit

Maximization

Satisfactory

Profits

Satisfactory

Profits

TargetReturn on

Investment

TargetReturn on

Investment


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Profit Maximization: Setting prices so that total revenue

is as large as possible relative to total costs

Return on Investment:Net profit after taxes divided by

total assets

ROI =ROI = Net Profit after taxesNet Profit after taxes

Total assetsTotal assets


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Sales-Oriented Pricing

Objectives

Market

Share

Market

Share

Sales

Maximization

Sales

Maximization

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


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Market Share: A companys product sales as apercentage of total sales for that industry

Sales Maximization

Short-term objective to maximize sales

Ignores profits, competition, and the marketingenvironment

May be used to selloff excess inventory


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Status Quo Pricing Objectives

Maintainexistingprices

Maintainexisting

prices

Meetcompetitions

prices

Meetcompetitions

prices

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


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Role of demand

in price determinationDemand and Supply

DemandDemandThe quantity of a product that

will be sold in the market at various

prices for a specified period.

The quantity of a product thatwill be sold in the market at various

prices for a specified period.

SupplySupplyThe quantity of a product

that will be offered to the market

by a supplier at various prices

for a specific period.

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 & Supply

CurvePrice

D

D

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100120Quantity demanded Quantity supplied

S

S

.50

1.00

1.502.00

2.50

0 20 40 60 80 100120

PricePrice


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Price Equilibrium

The price at which demand and supply

are equal

S

S

Pr

ice

.50

1.00

1.50

2.00

2.50D

D

SurplusSurplus

ShortageShortage

PricePrice

EquilibriumEquilibrium


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Elasticity of Demand

Consumers responsiveness or sensitivity

to changes in price

ElasticElasticDemandDemand

ElasticElasticDemandDemand

Consumers buy more orless of a product whenthe price changes

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in

price will not significantlyaffect demand

UnitaryUnitary

ElasticityElasticity

UnitaryUnitary

ElasticityElasticity

An increase in sales exactlyoffsets a decrease in prices,

and revenue is unchanged


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Elasticity 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


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Yield Management Systems

A technique for adjusting prices that uses

complex mathematical software to profitably fill

unused capacity.

Discountingearly purchases

Discountingearly purchases

YMS

PriceAdjustments

YMS

PriceAdjustments Limiting early sales atdiscounted prices

Limiting early sales atdiscounted prices

Overbooking capacityOverbooking capacity


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The Cost Determinant of Price

Deviate with changesin level of output

Deviate with changesin level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed Costs

Fixed CostsFixed Costs

Do not deviateas level of output changes

Do not deviateas level of output changes


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Target-Return

Pricing

Target-ReturnPricing

Break-EvenPricing

Break-EvenPricing

Profit MaximizationPricing

Profit MaximizationPricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices


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Other Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

Other FactorsOther FactorsThatThat

InfluenceInfluencePricePrice

Other FactorsOther FactorsThatThat

InfluenceInfluencePricePrice


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Regaining Price Control

DEVELOPBRAND LOYALTY

DEVELOPBRAND LOYALTY

Package marked withselling price

Package marked withselling price

Avoid business withprice-cutting discounters

Avoid business withprice-cutting discounters

FranchisingFranchising

Exclusivedistribution system

Exclusivedistribution system

MethodsMethodsUsed toUsed toRegainRegain

Price ControlPrice Control

MethodsMethodsUsed toUsed toRegainRegain

Price ControlPrice Control


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The Impact of the Internet

Allows price and product comparisons

Prices are coming down

Data collection allows sellers to tailor

products and prices

Documents

Concept of Pricing