Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 1 MKTG Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University Lamb, Hair, McDaniel Pricing Concepts 17 CHAPTER

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 2 Learning Outcomes 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 LO 1 LO 2 LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 3 Learning Outcomes 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 6 LO 5 LO 4

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 4 Discuss the importance of pricing decisions to the economy and to the individual firm The Importance of Price LO 1

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 5 LO 1 The Importance of Price Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 6 LO 1 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 7 LO 1 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 8 LO 1 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 Internet used for comparison shopping

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 9 REVIEW LEARNING OUTCOME LO 1 The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 10 List and explain a variety of pricing objectives Pricing Objectives LO 2

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 11 Pricing Objectives LO 2 Profit-Oriented Sales-Oriented Status Quo

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 12 Profit-Oriented Pricing Objectives LO 2 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 13 Profit Maximization LO 2 Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 14 Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets. Return on Investment

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 15 Sales-Oriented Pricing Objectives LO 2 Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives Online

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 16 Market Share LO 2 Market Share A company’s product sales as a percentage of total sales for that industry.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 17 Sales Maximization LO 2  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 18 Status Quo Pricing Objectives LO 2 Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 19 REVIEW LEARNING OUTCOME LO 2 Pricing Objectives Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 20 Explain the role of demand in price determination The Demand Determinant of Price LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 21 The Demand Determinant of Price LO 3 Demand 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 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

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 22 The Demand Curve LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 23 The Supply Curve LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 24 LO 3 Beyond the Book Tyson’s Meat Glut  Tyson Foods, the world’s largest processor, has an oversupply of meat:  Lower chicken consumption due to avian flu fears  Export restrictions to Japan and South Korea due to mad cow disease  Mismatch between oversupply and reduced demand has created tremendous financial losses for the company.  Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly.  To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products. SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 25 How Demand and Supply Establish Price LO 3 Price Equilibrium Price Equilibrium The price at which demand and supply are equal. The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. Consumers’ responsiveness or sensitivity to changes in price.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 26 Price Equilibrium LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 27 Elasticity of Demand 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.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 28 Elasticity of Demand 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.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 29 Elasticity of Demand LO 3 Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 30 Biz Flix LO 3 The Money Pit

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 31 Elasticity of Demand LO 3

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 32 Factors that Affect Elasticity of Demand LO 3 Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation Online

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 33 Understand the concept of yield management systems The Power of Yield Management Systems LO 4

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 34 LO 4 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 35 LO 4 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 36 LO 4 Beyond the Book 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. SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 37 REVIEW LEARNING OUTCOME LO 4 Yield Management Systems

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 38 Describe cost-oriented pricing strategies The Cost Determinant of Price LO 5

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 39 The Cost Determinant of Price 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

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 40 The Cost Determinant of Price LO 5 Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 41 Markup Pricing 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. 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. The practice of marking up prices by 100%, or doubling the cost.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 42 Profit Maximization LO 5 Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. 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. The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 43 Break-Even Pricing LO 5

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 44 Break-Even Pricing LO 5 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 45 REVIEW LEARNING OUTCOME LO 5 Cost-Oriented Pricing Strategies

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 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 Other Determinants of Price LO 6

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 47 Other Determinants of Price LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 48 Stages in the Product Life Cycle LO 6IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$DecreaseStableHigh

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 49 The Competition LO 6  High prices may induce firms to enter the market  Competition can lead to price wars  Global competition may force firms to lower prices

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 50 Distribution Strategy LO 6 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

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 51 Distribution Strategy LO 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Selling against the brand

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 52 The Impact of the Internet LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 53 The Relationship of Price to Quality LO 6 Charging a high price to help promote a high-quality image. Online Prestige Pricing

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 54 LO 6 Beyond the Book The $100,000 Family Car  The auto industry has a new sticker price on luxury: $100,000.  These cars are powerful mass market sedans, targeting households with incomes of $300,000 or more.  With sales of 9,000 cars sold last year, and 17,000 being built, it looks like massive oversupply.  The expensive models could lure buyers into the showroom. SOURCE: “The $100,000 Family Car,” Wall Street Journal, March 12, 2006, W1.

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 55 Dimensions of Quality LO 6 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige

Chapter 17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 56 REVIEW LEARNING OUTCOME LO 6 Factors Affecting Price