1. 1 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Pricing Concepts 16 Canadian Adaptation prepared by Don Hill, Langara College

2. 2 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning 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

3. 3 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objectives (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

4. 4 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objective Discuss the importance of pricing decisions to the economy and to the individual firm Online www.dollarstores.com www.buckortwo.com www.dollarstore.ca www.dollarblitz.net 1 1 1

5. 5 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 What Is Price? 1 Price Price is that which is given up in an exchange to acquire a good or service.

6. 6 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Importance of Price To the consumer... Price is the cost of something To the seller... Price is revenue and profit source To the seller... Price is revenue and profit source 1

7. 7 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Importance of Price to Marketing Managers Revenue Profit The price charged to customers multiplied by the number of units sold. Revenue minus expenses 1

8. 8 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Importance of Price 1 Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is Profit. High Price Low Price Price = Perceived Value

9. 9 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Trends Influencing Price Setting Flood of new product introductions Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share 1

10. 10 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objective List and explain a variety of pricing objectives 2 2 2

11. 11 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2

12. 12 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Pricing Objectives 2

13. 13 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2

14. 14 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Profit Maximization 2 Setting prices so that total revenue is as large as possible relative to total costs.

15. 15 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Return on Investment ROI = Net Profit after taxes Total assets Total assets 2 Return on Investment Return on Investment Net profit after taxes divided by total assets.

16. 16 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2

17. 17 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Market Share 2 A company’s product sales as a percentage of total sales for that industry.

18. 18 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory 2

19. 19 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Status Quo Pricing Objectives Online www.canadiantire.ca www.walmart.ca www.hbc.com/zellers 2 Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

20. 20 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objective Explain the role of demand in price determination 3 3 3

21. 21 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Demand and Supply Demand Supply 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 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. 3 Online http://www.uBid.com www.columbiahousecanada.com

22. 22 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Demand Curve D D Price.50 1.00 1.50 2.00 2.50 020406080100120 Quantity demanded 3

23. 23 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Supply Curve Quantity supplied S S Price.50 1.00 1.50 2.00 2.50 020406080100120 3

24. 24 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Price Equilibrium 3 The price at which demand and supply are equal.

25. 25 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Equilibrium Price Quantity demanded S S Price.50 1.00 1.50 2.00 2.50 020406080100120 D D Surplus Shortage Price Equilibrium 3

26. 26 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Elasticity of Demand 3 Consumers’ responsiveness or sensitivity to changes in price.

27. 27 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Elasticity of Demand 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 Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, and revenue is unchanged 3

28. 28 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity 3

29. 29 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Elasticity of Demand 3

30. 30 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Price relative to purchasing power Product durability A product’s other uses 3

31. 31 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Role of Demand in Pricing 3

32. 32 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objective Understand the concept of yield management systems 4 4 4

33. 33 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Yield Management Systems 4 A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

34. 34 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Yield Management Systems Price Adjustments Discounting early purchases Limiting early sales at discounted prices Overbooking capacity 4

35. 35 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Concept of Yield Management 4

36. 36 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Learning Objective Describe cost-oriented pricing strategies 5 5 5

37. 37 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Cost Determinant of Price Deviate with changes in level of output Deviate with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not deviate as level of output changes Do not deviate as level of output changes 5

38. 38 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 The Cost Determinant of Price Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices 5

39. 39 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Markup Pricing Markup Pricing Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses. Keystoning The practice of marking up prices by 100%, or doubling the cost. The practice of marking up prices by 100%, or doubling the cost. 5

40. 40 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Profit Maximization Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue 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. 5

41. 41 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Break-Even Point 5

42. 42 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16Break-Even Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution =Price - Avg. Variable Cost 5

43. 43 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 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 6 6 6

44. 44 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle 6

45. 45 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Various Affects on Price 6

46. 46 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High 6 Online www.fragrancenet.com

47. 47 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16Competition High Profit Margins Induce More Competition High Profit Margins Induce More Competition As Competition Grows It Effects Pricing Decisions As Competition Grows It Effects Pricing Decisions Intense Competition can lead To Price Wars Intense Competition can lead To Price Wars 6

48. 48 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Distribution Strategy Offer a larger profit margin Offer a larger profit margin Convincing distributors to carry product Convincing distributors to carry product Give dealers a large trade allowance Give dealers a large trade allowance 6

49. 49 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Selling Against the Brand 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

50. 50 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Regaining Price Control Deliver quality and value Package marked with selling price Avoid business with price-cutting discounters Franchising Exclusive distribution system Place goods on consignment 6

51. 51 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Online http://www.botspot.com The Impact of the Internet Compare products and prices Collect customer data Compare other merchant’s prices and adjust their prices Bargaining power Internet auctions 6

52. 52 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16Extranet 6 Extranet A private electronic network that links a company with its suppliers and customers.

53. 53 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Prestige Pricing Online http://www.vivre.com http://www.ashford.com 6 Prestige Pricing Prestige Pricing Charging a high price to help promote a high-quality image.

54. 54 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 16 Dimensions of Quality 6 To the consumer... Price Quality