1. CHAPTER 19 Pricing Concepts
Lamb, Hair, McDaniel
Chapter 19 Pricing Concepts
CHAPTER 19
Pricing Concepts
Trying to set the right price is one of the most stressful and pressure-filled tasks of the marketing manager.
© iStockphoto.com/ktsimage

2. Chapter 19 Pricing Concepts
Learning Outcomes
LO 1 Discuss the importance of pricing decisions to the economy and to the individual firm
LO 2 List and explain a variety of pricing objectives
LO 3 Explain the role of demand in price determination

3. Chapter 19 Pricing Concepts
Learning Outcomes
LO 4 Understand the concept of yield management systems
LO 5 Describe cost-oriented pricing strategies
LO 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

4. The Importance of Price
Chapter 19 Pricing Concepts
The Importance of Price
Discuss the importance of pricing decisions to the economy and to the individual firm
LO1

5. The Importance of Price
Chapter 19 Pricing Concepts
The Importance of Price
To the consumer... Price is the cost of something
To the seller... Price is revenue
Notes:
Price means one thing to the consumer and another to the seller. To the consumer, the price is the cost of something; to the seller, price is the source of profits. Marketing mangers find the task of setting prices a challenge.
Price allocates resources in a free-market economy
LO1

6. Chapter 19 Pricing Concepts
What Is Price?
Price
Price is that which is given up in an exchange to acquire a good or service.
Notes:
Price is typically money exchanged for a good or service; however, it may include other costs such as time lost while waiting to acquire the good or service.
Consumers are interested in obtaining a “reasonable price,” which means a “perceived reasonable value” at the time of the transaction. The price paid is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction they actually receive.
Price can relate to anything with perceived value, not just money. When goods or services are exchanged, the trade is called barter.
LO1

7. What is Price? LO1 Sacrifice Effect of Price
Chapter 19 Pricing Concepts
What is Price?
Sacrifice Effect of Price
What is sacrificed to get a good or service
Money, Time, Dignity
Information Effect of Price
Infer quality information based on price
Higher quality = higher price
Convey status
Value Based upon Perceived Satisfaction
Reasonable Price = Perceived Reasonable Value
Exchange based on expectation of satisfaction
LO1

8. The Importance of Price to Marketing Managers
Chapter 19 Pricing Concepts
The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by the number of units sold.
Profit
Revenue minus expenses.
Notes:
Prices are the key to revenues, which are the key to profits for an organization.
Revenue is what pays for every activity of the company. What’s left over is profit. The price is set to earn a profit for the company.
Managers strive to charge a price that will earn a fair profit.
LO1

9. Trends Influencing Price
Chapter 19 Pricing Concepts
Trends Influencing Price
Flood of new products
Increased availability of bargain-priced private and generic brands
Price cutting as a strategy to maintain or regain market share
Notes:
Setting the right price can be a stressful task of marketing managers, as demonstrated by the above trends in the consumer market.
Consumers are using the Internet to make wiser and more informed purchasing decisions.
Competition in general is increasing, and consequently many installations, accessories, and parts are being marketed like indistinguishable commodities.
Internet used for comparison shopping
U.S. recession from late 2007 to 2009.
LO1

10. List and explain a variety of pricing objectives
Chapter 19 Pricing Concepts
List and explain a variety of pricing objectives
LO2

11. Pricing Objectives LO2 Profit Oriented Sales Oriented Status Quo
Chapter 19 Pricing Concepts
Pricing Objectives
Profit Oriented
Sales Oriented
Status Quo
Notes:
Pricing objectives must be specific, attainable, and measurable to survive in today’s competitive market.
Pricing objectives can be divided into the three categories shown above and described in the following slides.
LO2

12. Profit-Oriented Pricing Objectives
Chapter 19 Pricing Concepts
Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory Profits
Target Return on
Investment
Notes:
Profit-oriented pricing objectives include profit maximization, satisfactory profits, and target return on investment. A discussion of each of these follows.
LO2

13. Profit Maximization LO2 Profit Maximization
Chapter 19 Pricing Concepts
Profit Maximization
Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
Notes:
Although profit maximization aims at setting prices for a large total revenue, it does not always signify unreasonably high prices. Both price and profits depend on the competitive environment and the product’s perceived value. Remember, too, that a firm cannot charge a price higher than the product’s perceived value.
Satisfactory profits represent a reasonable level of profits that is consistent with the level of risk an organization faces.
LO2

14. ROI = Net Profit after taxes
Chapter 19 Pricing Concepts
Return on Investment
Return on Investment
(ROI)
Net profit after taxes divided by total assets.
Notes:
The most common profit objective is a target ROI, or the return on total assets. It represents a firm’s effectiveness in generating profits with the available assets. The higher the firm’s ROI, the better off the firm is. ROI puts a firm’s profits into perspective by showing profits relative to investment.
ROI needs to be evaluated in terms of the competitive environment, risks in the industry, and economic conditions. In general, firms seek ROIs in the 10- to 30-percent range, depending on the industry.
ROI = Net Profit after taxes
Total assets
LO2

15. Sales-Oriented Pricing Objectives
Chapter 19 Pricing Concepts
Sales-Oriented Pricing Objectives
Market
Share
Sales
Maximization
Sales-Oriented Pricing Objectives
Online
Target vs. Walmart vs. JC Penney
Shop for some kind of electronic device (DVD player, digital camera, MP3 player, etc.) on the Target, Walmart, and JCPenney Web sites. How do the prices for the same product compare at the three retailers? Do they all even carry the same product? Compare the price on the Web with the price offered at the physical store and explain any discrepancies.
Notes:
Sales-oriented pricing objectives are based either on market share or on dollar or unit sales.
LO2

16. Chapter 19 Pricing Concepts
Market Share
Market Share
A company’s product sales as a percentage of total sales for that industry.
Notes:
Market share can be reported in dollars or units of product, and the results may be different.
Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Larger market shares often mean higher profits, thanks to economies of scale, market power, and ability to compensate top-quality management. However, this conventional wisdom is not always reliable.
Many companies with low market share survive if they are in a slow growth industry and experience few product changes.
LO2

17. Sales Maximization LO2 Short-term objective to maximize sales
Chapter 19 Pricing Concepts
Sales Maximization
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
Notes:
Maximization of cash should never be a long-run objective because cash maximization may mean little or no profitability. Without profits, a company cannot survive.
LO2

18. Status Quo Pricing Objectives
Chapter 19 Pricing Concepts
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
Status Quo Pricing Objectives
Notes:
Status quo pricing seeks to maintain existing prices or to meet the competition’s prices.
This category requires little planning, and is essentially a passive policy.
LO2

19. Exhibit 20.1 New-Product Development Process
Chapter 20 Setting the Right Price
Exhibit 20.1 New-Product Development Process
Fine-tune with pricing tactics
Choose a price strategy
Estimate demand, costs, and profits
Establish pricing goals
Results lead to the right price
Notes:
Setting the right price is a four-step process as shown in Exhibit 20.1.
LO1

20. Establish Pricing Goals
Chapter 20 Setting the Right Price
Pricing objectives fall into three categories:
Profit-Oriented
Sales-Oriented
Status Quo
Notes:
The first step in setting the right price is to establish pricing goals. In Chapter 19, we learned that pricing objectives fall into three categories—profit oriented, sales oriented, and status quo. These pricing goals are derived from the firm’s overall objectives.
A good understanding of the marketplace and of the consumer can tell a manager if a goal is realistic.
All pricing objectives have trade-offs. Reaching the desired market share often means sacrificing short-term profit, because without careful management, long-term profit goals may not be met.
Meeting the competition is the easiest pricing goal to implement. But demands and costs, the life-cycle stage, and other considerations can not be ignored when creating pricing objectives.
LO1

21. Choose a Price Strategy
Chapter 20 Setting the Right Price
Price Strategy
A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle.
Notes:
The price strategy sets a competitive price in a specific market segment. Consequently, changing a price strategy can require dramatic alterations in the marketing mix, including the product itself.
Pricing a new product depends on the market conditions and the other elements of the marketing mix. For example, introducing a product resembling several others in the marketplace will have restricted pricing freedom. In contrast, introducing a product with no close substitutes will have considerable pricing freedom.
Most companies do not do a good job of researching price strategies.
LO1

22. Choose a Price Strategy
Chapter 20 Setting the Right Price
Status Quo Pricing
Price Skimming
Penetration Pricing
Charging a price identical to or very close
to the competition’s price.
A firm charges a high introductory price,
often coupled with heavy promotion.
A firm charges a relatively low price for a
product initially as a way to reach the
mass market.
Notes:
Companies that plan for creating a price strategy can select from three basic approaches: price skimming, penetration pricing, and status quo pricing. A discussion of each type follows.
LO1

23. Price Skimming LO1 Situations When Price Skimming Is Successful
Chapter 20 Setting the Right Price
Situations
When
Price Skimming
Is Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
Notes:
Price skimming is a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The term is derived from the phrase “skimming the cream off the top.”
Companies often use price skimming for new products when the product is perceived as having unique advantages. Over time the price will be lowered.
Additional situations when price skimming is successful are listed on this slide.
Firms often feel it is better to test the market at high prices and then lower the price if sales are too slow.
A price skimming strategy will encourage competitors to enter the market.
Discussion/Team Activity:
List companies and/or products that utilize a price skimming strategy.
LO1

24. Penetration Pricing LO1 Advantages Disadvantages
Chapter 20 Setting the Right Price
Advantages
Disadvantages
Can lead to lower cost per unit as production expands
Discourages or blocks competition from market entry
Boosts sales and provides large profit increases
Requires gear up for mass production
Selling large volumes at low prices
Strategy to gain market share may fail
Notes:
Penetration pricing is at the opposite end of the spectrum from price skimming.
By charging a low price for a product, a larger share of the market is captured, resulting in lower production costs.
It does, however, mean lower profit per unit, and a higher volume of sales is required to reach the break-even point. Penetration pricing does tend to discourage competition and is effective in a price-sensitive market.
LO1

25. Status Quo Pricing LO1 Advantages Disadvantages Simplicity
Chapter 20 Setting the Right Price
Advantages
Disadvantages
Simplicity
Safest route to long- term survival for small firms
Strategy may ignore demand and/or cost
Notes:
Status quo pricing means meeting the competition’s prices by charging an identical price or very close to the competition’s price.
It is a simple method of pricing, but the strategy may ignore demand and/or cost. However, if the firm is small, meeting the competition’s prices may be the safest route to long-term survival.
LO1

26. The Demand Determinant of Price
Chapter 19 Pricing Concepts
The Demand Determinant of Price
Explain the role of demand in price determination
Notes:
After pricing goals are established, specific prices are set.
The price set for products depend on two factors: the demand for the good and the cost to the seller for that good.
LO3

27. The Demand Determinant of Price
Chapter 19 Pricing Concepts
The Demand Determinant of Price
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.
LO3

28. Exhibit 19.2 Demand Curve and Demand Schedule for Gourmet Cookies
Chapter 19 Pricing Concepts
Exhibit 19.2 Demand Curve and Demand Schedule for Gourmet Cookies
Notes:
The quantity of a product that people will buy depends on its price. The higher the price, the fewer goods or services consumers will demand, and vice versa.
LO3

29. Exhibit 19.3 Supply Curve and Supply Schedule for Gourmet Cookies
Chapter 19 Pricing Concepts
Exhibit 19.3 Supply Curve and Supply Schedule for Gourmet Cookies
Notes:
Exhibit 17.3 demonstrates the supply curve. At higher prices, manufacturers will obtain more resources and produce more product to sell.
LO3

30. How Demand and Supply Establish Price
Chapter 19 Pricing Concepts
How Demand and Supply Establish Price
Price
Equilibrium
The price at which demand and
supply are equal.
Elasticity of Demand
Consumers’ responsiveness or
sensitivity to changes in price.
Notes:
The concepts of supply and demand are combined to see how competitive market prices are determined.
LO3

31. Exhibit 19.4 Equilibrium Price for Gourmet Cookies
Chapter 19 Pricing Concepts
Exhibit 19.4 Equilibrium Price for Gourmet Cookies
Notes:
Exhibit 17.4 shows how an equilibrium price is reached when supply and demand are equal.
A price below equilibrium results in a shortage because the demand is greater than the available supply. A shortage puts upward pressure on price.
At a price above equilibrium, the demand is less than the available supply, and a surplus is created. A surplus lowers the price.
Establishing an equilibrium price may not be possible all at once. Prices may fluctuate as the market for a good moves toward equilibrium; however, demand and supply will eventually settle into the proper balance.
LO3

32. Elasticity of Demand LO3 Elastic Demand
Chapter 19 Pricing Concepts
Elastic Demand
Consumers buy more or less of a product when the price changes.
Inelastic Demand
An increase or a decrease in price will not significantly affect demand.
Notes:
1. To appreciate demand analysis, the concept of elasticity should be understood.
Unitary Elasticity
An increase in sales exactly offsets a decrease in prices, so total revenue remains the same.

33. Elasticity of Demand LO3 Elasticity (E) =
Chapter 19 Pricing Concepts
Elasticity of Demand
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.
LO3

34. Elasticity of Demand LO3 Price Goes... Revenue Goes... Demand is...
Chapter 19 Pricing Concepts
Price Goes...
Revenue Goes...
Demand is...
Down Up
Elastic
Inelastic
Up or Down
Stays the Same
Unitary Elasticity
Notes:
Elasticity can be measured by observing the changes in total revenue shown on this slide.
Discussion/Team Activity:
Identify products and/or services which illustrate the elasticity of demand.
LO3

35. Factors that Affect Elasticity of Demand
Chapter 19 Pricing Concepts
Factors that Affect Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
Notes:
Factors that affect elasticity of demand are:
Availability of substitutes: When many substitutes are available, it is easy to switch products, making demand elastic. The same is true in reverse, if no substitutes are available.
Price relative to purchasing power: If a price is so low that it is an inconsequential part of an individual’s budget, demand will be inelastic.
Product durability: Repairing durable products rather than replacing them prolongs their useful life. Thus, people are sensitive to the price increase, and the demand is elastic.
A product’s other uses: The greater the number of uses for a product, the more elastic demand tends to be. If a product has only one use, the quantity purchased probably will not vary as price varies.
Rate of inflation: when inflation is high, demand becomes more elastic—rising price levels make consumers more price sensitive.
Discussion/Team Activity:
Discuss examples of price inelasticity and elasticity. Include zero percent automobile financing, the price of vehicle models, cell phone rates, prestige watches, cigarettes, health care, etc.
A product’s other uses
Rate of inflation
LO3

36. The Power of Yield Management Systems
Chapter 19 Pricing Concepts
The Power of Yield Management Systems
Understand the concept of yield management
systems
LO4

37. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Yield Management Systems
A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
Notes:
When competitive pressures are high, a company must know when it can raise prices to maximize its revenues.
Yield management systems, which were first developed by the airline industry, utilize complex mathematical software to profitably fill unused capacity.
Yield management systems have spread beyond the service industries and are used by companies to set prices based on a number of variables.
LO4

38. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
Notes:
The software employs techniques such as discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity.
LO4

39. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Yield Management Systems (YMS) make it possible for a company to:
stimulate demand when demand is low, and
maximize profits when demand is high. .
An example of the effect of YMS on the customer is that when people on tight budgets buy air fare, they usually accept the inconvenience of planning ahead and staying over on a Saturday night to get cheaper fares. The last-minute planner pays more for their fare and (essentially) subsidizes the cost-sensitive customer
LO4

40. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Supply Side of Product or Service
High
Office block
House
Airline seat
Utilities
Sport event
Rental car
Low
Shirt
Pencils
Food
Tropical fish
Capital Intensity
Beyond the Book
YMS is particularly applicable when the supply side product or service is characterized as capital intensive and perishable.
Perishability
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at accessed November 7, 2007.
LO4

41. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Demand Side of Product or Service
High
Utilities
Highway use
Telephone
Airline seat
Sport event
Rental car
Mobile phone
Low
Food
Music CD
Shirt
Office block
Laptop
House
Variability of Demand
Beyond the Book
YMS is particularly applicable when the demand side product or service is characterized with both variability of demand and value.
Variability of Value
LO4
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at accessed November 7, 2007.

42. The Cost Determinant of Price
Chapter 19 Pricing Concepts
The Cost Determinant of Price
Describe cost-oriented pricing strategies
LO5

43. The Cost Determinant of Price
Chapter 19 Pricing Concepts
Varies with changes
in level of output
Types of Costs
Variable
Cost
Fixed Cost
Does not change
as level of output changes
Notes:
Sometimes the importance of demand is ignored when prices are decided, based largely or solely on the basis of costs.
Prices set on the basis of cost may be too high for the target market. On the other hand, if prices are set too low, the firm will earn a lower return than it should.
Costs should be determined as part of any price determination, in part to determine the floor below which a good or service must not be priced in the long run.
4. Variable and fixed costs are important aspects of price determination.
LO5

44. The Cost Determinant of Price
Chapter 19 Pricing Concepts
The Cost Determinant of Price
Average Variable Cost (AVC) – total variable cost divided by quantity of output
Average Total Cost (ATC) – total costs divided by quantity of output
Notes:
To compare the cost of production to the selling price of a product, it is helpful to calculate costs per unit, or average costs.
Marginal Cost (MC) – the change in total costs associated with a one-unit change in output

45. The Cost Determinant of Price
Chapter 19 Pricing Concepts
Break-Even
Pricing
Profit Maximization Pricing
Keystoning
Markup pricing
Methods
Used to
Set Prices
Notes:
Costs can be used to set prices in a variety of ways. Markup pricing is fairly simple. The others—profit maximization pricing and break-even pricing--use more complicated concepts of costs. A description of these methods is shown on the following slides.
LO5

46. Markup Pricing LO5 Markup Pricing Keystoning
Chapter 19 Pricing Concepts
Markup
Pricing
The cost of buying the product
from the producer plus amounts
for profit and for expenses not otherwise accounted for.
Keystoning
The practice of marking up prices
by 100 percent, or doubling the cost.
Notes:
Markup pricing is the most popular method to establish a selling price. Instead of using the costs of production to set price, markup pricing uses the costs of buying the product from the producer, plus amounts for profit and expenses. The total determines the selling price.
Keystoning is a method based on experience, with many small retailers doubling the cost. Other factors that influence markups are the merchandise’s appeal to customers, past response to the markup, the item’s promotional value, the seasonality of the goods, their fashion appeal, the product’s traditional selling price, and competition.
LO5

47. Profit Maximization LO5 Profit Maximization Marginal Revenue (MR)
Chapter 19 Pricing Concepts
Profit
Maximization
A method of setting prices that
occurs when marginal revenue
equals marginal cost.
Marginal
Revenue (MR)
The extra revenue associated with selling an extra unit of output,
or the change in total revenue with
a one-unit change in output.
Notes:
Profit maximization occurs when marginal revenue equals marginal cost.
Marginal cost is the change in total costs associated with a one-unit change in output. Marginal revenue is the extra revenue associated with selling an extra unit of output. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing and selling the product.
LO5

48. Exhibit 19.7 Costs, Revenues, and Universal Sportswear
Chapter 19 Pricing Concepts
Exhibit 19.7 Costs, Revenues, and Universal Sportswear
Notes:
Break-even analysis determines what sales volume must be reached before the company breaks even and no profits are earned. (Its total costs equal total revenue.)
LO5

49. Fixed cost contribution Price - Avg. Variable Cost
Break-Even Pricing
Chapter 19 Pricing Concepts
Break-Even
Quantity =
Total fixed costs
Fixed cost contribution
Fixed cost
Contribution
Price - Avg. Variable Cost
Notes:
Break-even analysis determines what sales volume must be reached before the company breaks even and no profits are earned. A typical break even model assumes a given fixed cost an a constant AVC.
The advantage of break-even analysis is that it provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is obtained.
Sometimes, however, it is hard to know whether a cost is fixed or variable. Furthermore, simple break-even analysis ignores demand.
LO5

50. Other Determinants of Price
Chapter 19 Pricing Concepts
Other Determinants of Price
Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price
LO6

51. Other Determinants of Price
Chapter 19 Pricing Concepts
Other Determinants of Price
Perceived Quality
Promotion Strategy
Distribution Strategy
Competition
Stages of the
Product Life Cycle
Notes:
Other factors besides demand and costs can influence price.
LO6

52. Stages in the Product Life Cycle
Chapter 19 Pricing Concepts
Stages in the Product Life Cycle
Introductory stage – prices high
Growth stage – prices stabilize
Maturity stage – price decreases
Notes:
See Chapter 11 for a review of the Product Life Cycle. As a product moves through its life cycle, the demand for the product and the competitive conditions change:
During the introductory stage, prices are set high to recover development costs. Demand originates in the core of the market and is relatively inelastic.
As the product enters the growth stage, prices tend to stabilize due to the increased product supply from competitors, increased product appeal to a broader market, and decreased costs from economies of scale.
Maturity brings about further decreases in price, as competition increases and high-cost firms are eliminated. However, distribution channels become a significant cost factor because of the need to offer wide product lines. Usually, only the most efficient manufacturers remain.
The decline stage may see further price decreases until only one firm is left in the market. At that time, prices begin to stabilize and may even increase as the product moves into the specialty goods category.
Discussion/Team Activity:
Identify and discuss products in various stages of the product life cycle. Relate the pricing of these products to the product life cycle shown above.
Decline stage – price decreases
LO6

53. The Competition LO6 High prices may induce firms to enter the market
Chapter 19 Pricing Concepts
The Competition
High prices may induce firms to enter the market
Competition can lead to price wars
Notes:
Competition varies during the product life cycle. Although a firm may not have competition at first, the high prices obtained may induce other firms to enter the market.
Sometimes competition can lead to price wars.
LO6

54. Distribution Strategy
Chapter 19 Pricing Concepts
Distribution Strategy
Manufacturers
Wholesalers/Retailers
Offer a larger profit margin or trade allowance
Use exclusive distribution
Franchising
Avoid business with price-cutting discounters
Develop brand loyalty
Sell against the brand
Buy gray-market goods
Notes:
Adequate distribution for a new product can be obtained by offering a larger-than-usual profit margin to distributors, or by offering a large trade allowance to defray the costs of promotion.
However, some distributors use selling against the brand strategies to promote their own private-label brands. They place well-known brands one the shelf at high prices next to other brands—usually private label brands—at lower prices.
Distributors may also go outside traditional channels and buy “gray-market goods” at lower prices so they can sell the goods with a large markup or at a reduced price.
LO6

55. Distribution Strategy
Chapter 19 Pricing Concepts
Distribution Strategy
Selling against the brand
Stocking well-known branded items at high prices in order to sell store brands at discounted prices.
LO6

56. The Impact of the Internet
Chapter 19 Pricing Concepts
The Impact of the Internet
Shopping Bots
A program that searches the Web for the best price for a particular item.
Internet Auctions
Business-to-business auctions are likely to be the dominant form of online auctions in the future.
Notes:
The Internet connects sellers and buyers quickly, and allows product and price comparison, putting them in a better bargaining position.
Shopping bots search the Web for the best price. The two types of shopping bots are broad-based types and niche-oriented types. Most shopping bots give preferential listings to e-tailers who pay for the privilege, and not necessarily the lowest-priced retailer.
Internet auctions, such as eBay, are huge. Business-to-business auctions are likely to be the dominant form in the future.
LO6

57. Chapter 19 Pricing Concepts
Promotion Strategy
Price is often used as a promotional tool to increase consumer interest. Examples:
Pittsburgh Zoo – $5 admission for wearing a tie-dye shirt
Crested Butte Ski Resort – free skiing between Thanksgiving and Christmas
Bugle Boy – uncut competition by offering pants to retailers at wholesale prices
Source: The Associated Press, “Sporting a Mullet Pays off at Pittsburgh Zoo,” Boston Herald, July 6, 2010,

58. Demands of Large Customers
Chapter 19 Pricing Concepts
Demands of Large Customers
Require suppliers to pay cash rebates if stores’ profit margins aren’t met.
Fines for violations of ticketing, packing, and shipping rules.
Notes:
Manufacturers find that their large customers often make specific pricing demands that the suppliers must agree to.

59. The Relationship of Price to Quality
Chapter 19 Pricing Concepts
The Relationship of Price to Quality
Prestige Pricing
Charging a high price to help promote a high-quality image.
Online
Vivre vs. Bluefly
Vivre is a luxury lifestyle catalog and Web site. Visit Vivre.com and review the product offerings. Pick a product and then see if you can get it cheaper at Bluefly.com, a luxury brand discounter. What luxury brands are offered on both sites? How do the prices compare? Can you identify tiers of luxury brands?
Notes:
When a purchase decision involves uncertainty, consumers tend to rely on a high price as a predictor of good quality. Consumers assume that “you get what you pay for.”
Prestige pricing takes these consumer attitudes into account when devising price strategies. A successful prestige pricing strategy requires a retail price that is reasonably consistent with consumers’ expectations.
LO6

60. Dimensions of Quality LO6 Ease of use Versatility Durability
Chapter 19 Pricing Concepts
Dimensions of Quality
Ease of use
Versatility
Durability
Serviceability
Performance
Prestige
Notes:
In a recent study to ascertain the dimensions of quality revealed the factors shown on this slide, in order of importance, beginning with ease of use.
When consumers focused on prestige and/or durability to assess quality, price was a strong indicator of perceived quality. Price was less important as an indicator of quality if the consumer was focused on any of the other four dimensions of quality.
LO6

61. Acid+All – Pricing Concepts
Chapter 19 Pricing Concepts
Chapter 19 Videos
Acid+All – Pricing Concepts
What role do the product life cycle, competition, and perceptions of quality play in Acid+All’s suggested retail price?
Beyond the Book