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Chapter 13 Pricing concepts. Learning objectives 1Discuss the importance of pricing decisions to the economy and to the individual organisation 2List.

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Presentation on theme: "Chapter 13 Pricing concepts. Learning objectives 1Discuss the importance of pricing decisions to the economy and to the individual organisation 2List."— Presentation transcript:

1 Chapter 13 Pricing concepts

2 Learning objectives 1Discuss the importance of pricing decisions to the economy and to the individual organisation 2List and explain a variety of pricing objectives 3Explain the role of demand in price determination 4Describe cost-oriented pricing strategies

3 Learning objectives (cont.) 5Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price 6Describe the procedure for setting the right price 7Identify the legal and ethical constraints on pricing decisions 8Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price

4 Learning objective 1 Define the term marketing Discuss the importance of pricing decisions to the economy and to the individual organisation

5 What is price? Price is that which is given up in an exchange to acquire a good or service. 1

6 The importance of price In the broadest sense, price allocates resources in a free-market economy 1 To the seller… Price is revenue and profit source To the consumer… Price is the cost of something

7 The importance of price to marketing managers Revenue The price charged to customers multiplied by the number of units sold. ProfitRevenue minus expenses. 1

8 The importance of price Revenue pays for every activity. Whats left over is profit. Marketers must select a price that is not too high is not too low equals the perceived value to target consumers 1 Revenue = Unit price number of units sold

9 Learning objective 2 Describe four marketing management philosophies. List and explain a variety of pricing objectives

10 Trends influencing price setting 2 High rate of new product introduction Increased availability of bargain- priced dealer and generic brands Price-cutting as a strategy to maintain or regain market share More efficient and better-informed buyers

11 Pricing objectives 2 Profit-oriented pricing objectives Sales-oriented pricing objectives Status quo pricing objectives

12 Profit-oriented pricing objectives 2 Profit maximisation Satisfactory profits Target return on investment

13 Profit maximisation Setting prices so that total revenue is as large as possible relative to total costs. 2

14 Return on investment (ROI) Net profit after taxes divided by total assets. ROI = net profit after tax total assets 2

15 Sales-oriented pricing objectives 2 Market share Sales maximisation

16 Market share A companys product sales as a percentage of total sales for that industry. 2

17 Sales maximisation 2 Short-term objective to maximise sales Ignores profits, competition and the marketing environment May be used to sell off excess inventory

18 Status quo pricing Advantages Simplicity Safest route to long-term survival for small firms Disadvantages Strategy may ignore demand or cost 2

19 Learning objective 3 Explain the role of demand in price determination

20 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. 3

21 Elasticity of demand Consumers responsiveness or sensitivity to changes in price. 3

22 Elasticity of demand (cont.) 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 3

23 Elasticity of demand (cont.) Price goes…Revenue goes…Demand is… downupelastic down inelastic up inelastic updownelastic 3

24 Factors that affect elasticity 3 Availability of substitutes Price relative to purchasing power Product durability Products other uses

25 Learning objective 4 Describe cost-oriented pricing strategies

26 The cost determinant of price Types of costs 4 Variable costs Deviate with changes in level of output Fixed costs Do not deviate as level of output changes

27 The cost determinant of price (cont.) 4 Methods used to set price Markup pricing Break-even pricing

28 Markup pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Example: If a pen costs $1.80 and sells for is $2.20, the markup is $0.40 or 22% of cost. 4

29 Break-even pricing 4 Quantity Price Fixed costs Loss Profit Total revenue Total costs Break-even point 6 000

30 Learning objective 5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

31 Other determinants of price 5 Stages of the product life cycle Competition Distribution strategy Promotion strategy Perceived quality

32 Stages in the product life cycle Introductory stage Growth stage Decline stage $ High $ Stable $ Decrease Maturity stage $ Decrease Stable High 5

33 Distribution strategy 5 Offer a larger profit margin Give dealers a large trade allowance Convincing distributors to carry product

34 The impact of the Internet 5 Allows price and product comparisons. Prices are coming down. Data collection allows sellers to tailor products and prices.

35 Extranet A private electronic network that links a company with its suppliers and customers. 5

36 Prestige pricing Charging a high price to help promote a high- quality image. 5

37 Indicators of quality 5 Retailer reputation Appearance Price Brand name

38 Learning objective 6 Describe the procedure for setting the right price

39 Steps in setting the right price 6 Results lead to the right price Establish pricing goals Estimate demand, costs and profits Choose a price strategy Fine-tune base price with pricing tactics

40 Pricing objectives 6 Profit-oriented pricing objectives Sales-oriented pricing objectives Status quo pricing objectives

41 Price strategy A basic, long-term pricing framework which establishes the initial price for a product and the intended direction for price movements over the product life cycle. 6

42 Choosing a price strategy 6 Basic strategies for setting prices Price skimming Status quo Penetration pricing

43 Price skimming 6 Situations when price skimming is successful Inelastic demand Superior product Legal protection of product Technological breakthrough Limited production

44 Penetration pricing A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market. 6

45 Penetration pricing (cont.) Advantages Discourages or blocks competition from market entry Disadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail 6

46 Learning objective 7 Identify the legal and ethical constraints on pricing decisions

47 The legality and ethics of price strategy 7 Issues that limit pricing decisions Unfair trade Price fixing Price discrimination Predatory pricing

48 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price Learning objective 8

49 Tactics for fine-tuning the base price 8 Discounts Geographic pricing Special pricing tactics

50 Tactics for fine-tuning the base price (cont.) 8 Quantity discounts Cash discounts Functional discounts Seasonal discounts Promotional allowances Rebates Value-based pricing

51 The price is set at a level that seems to the customer to be a good price compared to the prices of other options. 8

52 Geographic pricing 8 FOB pricing Uniform delivered pricing Zone pricing Freight absorption pricing Basing-point pricing

53 Special pricing tactics Single-price tactic Flexible pricing Professional services pricing Leader pricing Bait pricing Odd-even pricing Price bundling Two-part pricing All goods offered at the same price. Different customers pay different price. Used by professionals with experience, training or certification. Sell product at near or below cost. Lure customers through false or misleading price advertising. Odd-number prices imply bargain. Even-number prices imply quality. Combining two or more products in a single package. Two separate charges to consume a single good. 8


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