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 The Importance of Price 2 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? 3 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 4 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 Pricing Objectives 5 LO 2 Profit-Oriented Sales-Oriented Status Quo

Copyright ©2009 by Cengage Learning Inc. All rights reserved Profit-Oriented Pricing Objectives 6 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 Sales-Oriented Pricing Objectives 7 LO 2 Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved Status Quo Pricing Objectives 8 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 The Demand Determinant of Price 9 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 10 The Demand Curve LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved 11 The Supply Curve LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved How Demand and Supply Establish Price 12 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 13 Price Equilibrium LO 3

Copyright ©2009 by Cengage Learning Inc. All rights reserved Elasticity of Demand 14 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 15 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 Factors that Affect Elasticity of Demand 16 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 The Cost Determinant of Price 17 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 Break-Even Pricing 18 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 Other Determinants of Price 19 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 20 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 21 LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Impact of the Internet 22 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 23 LO 6

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Relationship of Price to Quality 24 LO 6 Prestige Pricing Charging a high price to help promote a high-quality image. Online