1 Copyright ©2009 by Cengage Learning Inc. All rights reserved Designed by Eric Brengle B-books, Ltd. CHAPTER 19 Pricing Concepts Prepared by Amit Shah Frostburg State University Marketing Lamb, Hair, McDaniel 10

Copyright ©2009 by Cengage Learning Inc. All rights reserved Learning Outcomes 2 LO I LO 2 LO 3 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

Copyright ©2009 by Cengage Learning Inc. All rights reserved 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, customer demands, the Internet and extranets, and perceptions of quality can affect price LO 5 LO 6 LO 4

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Importance of Price 4 Discuss the importance of pricing decisions to the economy and to the individual firm LO I

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Importance of Price 5 LO I Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue

Copyright ©2009 by Cengage Learning Inc. All rights reserved Price What Is Price? 6 LO I Price is that which is given up in an exchange to acquire a good or service.

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Importance of Price to Marketing Managers 7 LO I Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Trends Influencing Price 8 LO I Flood of new products Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Internet used for comparison shopping

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME The Importance of Pricing Decisions 9 LO I Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

Copyright ©2009 by Cengage Learning Inc. All rights reserved Pricing Objectives 10 List and explain a variety of pricing objectives LO 2

Copyright ©2009 by Cengage Learning Inc. All rights reserved Pricing Objectives 11 LO 2 Profit-Oriented Sales-Oriented Status Quo

Copyright ©2009 by Cengage Learning Inc. All rights reserved Profit-Oriented Pricing Objectives 12 LO 2 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

Copyright ©2009 by Cengage Learning Inc. All rights reserved Profit Maximization 13 LO 2 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Return on Investment 14 Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Sales-Oriented Pricing Objectives 15 LO 2 Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved Market Share 16 Market Share LO 2 A company’s product sales as a percentage of total sales for that industry.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory 17 LO 2

Copyright ©2009 by Cengage Learning Inc. All rights reserved Status Quo Pricing Objectives 18 LO 2 Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME Pricing Objectives 19 LO 2 Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Demand Determinant of Price 20 Explain the role of demand in price determination LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Demand Determinant of Price 21 LO 3 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. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved 22 The Demand Curve LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved 23 The Supply Curve LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved How Demand and Supply Establish Price 24 LO 3 Price Equilibrium Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price.

Copyright ©2009 by Cengage Learning Inc. All rights reserved 25 Price Equilibrium LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved Elasticity of Demand 26 LO 3 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Elasticity of Demand 27 LO 3 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Elasticity of Demand 28 LO 3 Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

Copyright ©2009 by Cengage Learning Inc. All rights reserved 29 Elasticity of Demand LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved Factors that Affect Elasticity of Demand 30 LO 3 Availability of substitutes Price relative to purchasing power Price relative to purchasing power Product durability A product’s other uses Rate of inflation Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved 31 Creating Pricing Power LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME Role of Demand in Price Determination 32 LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Power of Yield Management Systems 33 Understand the concept of yield management systems LO 4

Copyright ©2009 by Cengage Learning Inc. All rights reserved Yield Management Systems 34 LO 4 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Yield Management Systems 35 LO 4 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

Copyright ©2009 by Cengage Learning Inc. All rights reserved 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. 36 LO 4

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME Yield Management Systems 37 LO 4

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Cost Determinant of Price 38 Describe cost-oriented pricing strategies LO 5

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Cost Determinant of Price 39 LO 5 Varies with changes in level of output Varies with changes in level of output Types of Costs Variable Cost Variable Cost Fixed Cost Does not change as level of output changes Does not change as level of output changes

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Cost Determinant of Price 40 LO 5 Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

Copyright ©2009 by Cengage Learning Inc. All rights reserved Markup Pricing 41 LO 5 Markup Pricing 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%, or doubling the cost.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Profit Maximization 42 LO 5 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved 43 LO 5 Break-Even Pricing

Copyright ©2009 by Cengage Learning Inc. All rights reserved Break-Even Pricing 44 LO 5 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies 45 LO 5

Copyright ©2009 by Cengage Learning Inc. All rights reserved Other Determinants of Price 46 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved Other Determinants of Price 47 LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle

Copyright ©2009 by Cengage Learning Inc. All rights reserved Stages in the Product Life Cycle 48 LO 6IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High

Copyright ©2009 by Cengage Learning Inc. All rights reserved 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 49 LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved Distribution Strategy Offer a larger profit margin or trade allowance Use exclusive distribution Franchising Avoid business with price- cutting discounters Develop brand loyalty 50 LO 6 Manufacturers Wholesalers/Retailers  Sell against the brand  Buy gray-market goods

Copyright ©2009 by Cengage Learning Inc. All rights reserved Distribution Strategy 51 LO 6 Selling against the brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Impact of the Internet 52 LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection

Copyright ©2009 by Cengage Learning Inc. All rights reserved 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 53 LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Relationship of Price to Quality 54 LO 6 Prestige Pricing Charging a high price to help promote a high-quality image. Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige 55 LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved REVIEW LEARNING OUTCOME Factors Affecting Price 56 LO 6