Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts © iStockphoto.com/ktsimage

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 2 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 LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 3 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 4 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 5 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 LO 1 U.S. recession from late 2007 to 2009.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 6 Pricing Objectives Profit Oriented Sales Oriented Status Quo LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 7 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 8 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 9 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 10 LO 3 Exhibit 19.2 Demand Curve and Demand Schedule for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 11 LO 3 Exhibit 19.3 Supply Curve and Supply Schedule for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 12 LO 3 Exhibit 19.4 Equilibrium Price for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 13 Elasticity of Demand 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. Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, so total revenue remains the same. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 14 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. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 15 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 16 Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 17 The Cost Determinant of Price 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 LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 18 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 LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 19 LO 5 Exhibit 19.7 Costs, Revenues, and Universal Sportswear

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 20 Break-Even Pricing Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 21 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 22 Stages in the Product Life Cycle LO 6 Introductory stage – prices high Growth stage – prices stabilize Maturity stage – price decreases Decline stage – price decreases

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 23 The Competition  High prices may induce firms to enter the market  Competition can lead to price wars LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 24 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 LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 25 The Impact of the Internet LO 6 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.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 26 Promotion Strategy Price is often used as a promotional tool to increase consumer interest. Examples: 1.Pittsburgh Zoo – $5 admission for wearing a tie-dye shirt 2.Crested Butte Ski Resort – free skiing between Thanksgiving and Christmas 3.Bugle Boy – uncut competition by offering pants to retailers at wholesale prices

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 27 The Relationship of Price to Quality Charging a high price to help promote a high- quality image. Prestige Pricing LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 28 Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige LO 6