1 chapter 19: pricing concepts prepared by amit shah, frostburg state university designed by eric...

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Chapter 19: Pricing Concepts

Prepared by Amit Shah, Frostburg State University

Designed by Eric Brengle, B-books, Ltd.

Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Learning Outcomes

2

LO1

LO2

LO3

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

List and explain a variety of pricing objectives

Explain the role of demand in price determination


Learning Outcomes

3

Understand the concept of yield management systems

Describe cost-oriented pricing strategies

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

LO5

LO6

LO4


The Importance of Price

4

Discuss the importance of pricing decisions to

the economy and to the individual firm.

LO1


The Importance of Price

5

Price allocates resources in a free-market economyPrice allocates resources in a free-market economy

To the consumer...Price is the cost

of something

To the consumer...Price is the cost

of something

To the seller...Price is revenueTo the seller...

Price is revenue


What is Price?

6

Price is that which is givenup in an exchange to acquire

a good or service.


The Importance of Price to Marketing Managers

7

Revenue - The price charged tocustomers multiplied by the

number of units sold.

Profit - Revenue minus expenses.


Trends Influencing Price

8

Flood of new productsFlood of new products

Increased availability of bargain-priced private and generic brandsIncreased availability of bargain-priced private and generic brands

Price cutting as a strategy to maintain or regain market sharePrice cutting as a strategy to maintain or regain market share

Internet used for comparison shoppingInternet used for comparison shopping


Review Learning OutcomeThe Importance of Pricing Decisions

9

LO1

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment


Pricing Objectives

10

List and explain a variety of

pricing objectives.

LO2


Pricing Objectives

11

Profit-Oriented

Sales-Oriented

Status Quo


Profit-Oriented Pricing Objectives

12

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment


Profit Maximization

13

Setting prices so that total

revenue is as large as possible

relative to total costs.


Return on Investment

14

Net profit after taxes divided by total assets.

ROI = Net profit after taxes Total assets


Sales-Oriented Pricing Objectives

15

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

Online

http://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com


http://www.target.com/

http://www.target.com/

http://www.walmart.com/

http://www.walmart.com/

http://www.jcpenney.com/

http://www.jcpenney.com/

Market Share

16

A company’s product sales

as a percentage of total sales

for that industry.


Sales Maximization

• Short-term objective to maximize sales

• Ignores profits, competition, and the marketing environment

• May be used to sell off excess inventory

17Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Status Quo Pricing Objectives

18

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives


Review Learning OutcomePricing Objectives

19

LO2

ProfitMaximization

SatisfactoryProfits

TargetROI

Profit-Oriented

Sales-Oriented

MarketShare

SalesMaximization

Status Quo

MaintainExisting Price


The Demand Determinant of Price

20

Explain the role of demand in

price determination.

LO3


The Demand Determinant of Price

21

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

specified period.

Online

http://www.ubid.com


http://www.ubid.com/

http://www.ubid.com/

The Demand Curve


The Supply Curve


How Demand and Supply Establish Price

24

Price equilibrium - The price at which demand and supply

are equal.

Elasticity of Demand - Consumers’ responsiveness or sensitivity to changes in price.


Price Equilibrium


Elasticity of Demand

26

Elastic Demand Elastic

Demand

Consumers buy more or lessof a product when the price changes.

InelasticDemand

InelasticDemand

An increase or decrease in price will not significantly affect demand.

UnitaryElasticityUnitary

Elasticity

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



27

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.



28

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


Factors that Affect Elasticity of Demand

30

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

Rate of inflationRate of inflation

Online

http://www.columbiahouse.com


http://www.columbiahouse.com/

http://www.columbiahouse.com/

Creating Pricing Power


Review Learning OutcomeRole of Demand in Price Determination

32

LO3


The Power of Yield Management Systems

33

Understand the concept of yield management systems.

LO4


Yield Management Systems

34

A technique for adjusting pricesthat uses complex mathematicalsoftware to profitably fill unused

capacity.


Yield Management Systems

35

Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity


Yield Management Systems• Rental property landlords use yield

management systems to raise rents at a faster pace.

• The “M/PF Yield-Star Price Optimizer” is similar to pricing systems used by airlines and car-rental companies.

• It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent.

• Tenants can also take advantage of the technology.


Review Learning OutcomeYield Management Systems

37

LO4


The Cost Determinant of Price

38

Describe cost-oriented pricing

strategies.

LO5



39

Varies with changes in level of output

Varies with changes in level of output

Types of CostsTypes of Costs

VariableCost

VariableCost Fixed CostFixed Cost

Does not change as level of output changes

Does not change as level of output changes



40

Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsUsed to

Set Prices

MethodsUsed to

Set Prices


Markup Pricing

41

Markup Pricing – The cost of buying the

product from the producer plus

amounts for profit expenses n

ot otherwise accounted for.

Keystoning – The practice of marking

up prices by 100%, or doubling the cost.


Profit Maximization

42

Profit Maximization – The 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.


Break-Even Pricing


Break-Even Pricing

44

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost


Review Learning OutcomeCost-Oriented Pricing Strategies

45

LO5


Other Determinants of Price

46

Demonstrate how the product life cycle, competition,

distribution and promotion strategies, guaranteed price

matching, customer demands, the Internet, and perceptions of

quality can affect price.

LO6


Other Determinants of Price

47

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle


Stages in the Product Life Cycle

48

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh


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


Distribution Strategy

• Offer a larger profit margin or trade allowance

• Use exclusive distribution

• Franchising

• Avoid business with price-cutting discounters

• Develop brand loyalty

50

ManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers

Sell against the brand

Buy gray-market goods


Distribution Strategy

51

Selling Against the Brand- Stockingwell-known branded items at

high prices in order to sell storebrands at discounted prices.


The Impact of the Internet

52

Internet auctionsInternet auctions

Shopping botsShopping bots

Second opinions from expert sitesSecond opinions from expert sites

Product selectionProduct selection


Promotion Strategy/Price Guarantee

Promotion Strategy • Price used as promotional tool

• Pricing can also be a tool for trade promotions

Price Guarantee• Match any competitor’s price

• Signals to target market it is positioned as a low-price dealer


The Relationship of Price to Quality

54Online

http://www.vivre.comhttp://www.ashford.com

Prestige Pricing - Charging a highprice to help promote a high-

quality image.


http://www.vivre.com/

http://www.vivre.com/

http://www.ashford.com/

http://www.ashford.com/

Dimensions of Quality

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige


Review Learning OutcomeFactors Affecting Price

56

LO6


1 chapter 19: pricing concepts prepared by amit shah, frostburg state university designed by eric...

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