1Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Prepared by Deborah Baker Texas Christian University Chapter 17 Pricing Concepts

2Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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.

3Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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.

4Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Discuss the importance of pricing decisions to the economy and to the individual firm. 1 1 On Line On Line

5Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning In the broadest sense, price allocates resources in a free-market economy 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 1

6Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning What Is Price? Price is that which is given up in an exchange to acquire a good or service. 1 1

7Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 1

8Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning The Importance of Price To earn a profit, marketers must select a price that is not too high or not too low, or not too low, a price that equals the perceived value to target consumers 1 1 Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is Profit.

9Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Trends Influencing Price Setting 1 1 Flood of new product introductions Increased availability of bargain-priced private and generic brands Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Price cutting as a strategy to maintain or regain market share A general decline in consumer confidence after terrorist attacks Trends in the MarketTrends Market

10Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective List and explain a variety of pricing objectives. 2 2

11Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2 2

12Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2 2

13Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. 2 2

14Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Return on Investment Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets Total assets 2 2

15Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2 2

16Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Market Share A company’s product sales as a percentage of total sales for that industry. 2 2

17Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Sales Maximization  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory 2 2

18Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives 2 2 On Line On Line

19Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Explain the role of demand in price determination. 3 3

20Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 3

21Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning The Demand Curve D D Price Quantity demanded 3 3

22Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line The Supply Curve Quantity supplied S S Price

23Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Price Equilibrium The price at which demand and supply are equal. 3 3

24Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Equilibrium Price Quantity demanded S S Price D D Surplus Shortage Price Equilibrium 3 3

25Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. 3 3

26Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 3

27Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity 3 3

28Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Elasticity of Demand Elastic Demand Curve D D Quantity Price D D Quantity Price Inelastic Demand Curve 3 3

29Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 3 On Line On Line

30Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Understand the concept of yield management systems. 4 4

31Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. 4 4

32Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Yield Management Systems Price Adjustments Discounting early purchases Discounting early purchases Limiting early sales at discounted prices Limiting early sales at discounted prices Overbooking capacity 4 4

33Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Describe cost-oriented pricing strategies. 5 5

34Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning The Cost Determinant of Price 5 5 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

35Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning The Cost Determinant of Price Target-Return Pricing Target-Return Pricing Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices 5 5

36Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Markup Pricing 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. The practice of marking up prices by 100%, or doubling the cost. 5 5

37Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 5

38Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Break-Even Pricing Quantity Price 2,000 01,0002,000 3,0004,0005,0006,000 4,000 Fixed costs Loss Profit Total Revenue Total Costs Break-even point 5 5

39Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Break-Even Pricing Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution =Price -- Avg. Variable Cost 5 5

40Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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

41Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle 6 6

42Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High 6 6

43Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 6

44Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Selling Against the Brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. 6 6

45Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Regaining Price Control 6 6 DEVELOP BRAND LOYALTY Package marked with selling price Avoid business with price-cutting discounters Avoid business with price-cutting discounters Franchising Exclusive distribution system Place goods on consignment

46Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line The Impact of the Internet  Buyers can compare products and prices  Sellers can collect detailed customer data  Online merchants can compare other merchant’s prices and adjust their own easily  Bargaining power is created between buyers and sellers 6 6

47Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Extranet A private electronic network that links a company with its suppliers and customers. 6 6

48Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Prestige Pricing Charging a high price to help promote a high-quality image. 6 6 On Line On Line

49Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Dimensions of Quality 6 6Versatility Durability Serviceability Ease of Use Performance Prestige