Copyright Cengage Learning 2013 All Rights Reserved 1 Chapter 19: Pricing Concepts Introduction to Designed & Prepared by Laura Rush B-books, Ltd.

Copyright Cengage Learning 2013 All Rights Reserved 2 Learning Outcomes LO 1 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 Cengage Learning 2013 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, guaranteed price matching, customer demands, the Internet, and perceptions of quality can affect price LO 5 LO 6 LO 4

4 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 Copyright Cengage Learning 2013 All Rights Reserved

5 What is Price? Price is that which is given up in an exchange to acquire a good or service. Copyright Cengage Learning 2013 All Rights Reserved

6 The Importance of Price to Marketing Managers Revenue - The price charged to customers multiplied by the number of units sold. Profit - Revenue minus expenses. Copyright Cengage Learning 2013 All Rights Reserved

7 Pricing Objectives Profit-Oriented Sales-Oriented Status Quo Copyright Cengage Learning 2013 All Rights Reserved

8 Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory Copyright Cengage Learning 2013 All Rights Reserved

9 The Demand Determinant of Price 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 specified period. Copyright Cengage Learning 2013 All Rights Reserved

10 How Demand and Supply Establish Price Price equilibrium - The price at which demand and supply are equal. Elasticity of Demand - Consumers’ responsiveness or sensitivity to changes in price. Copyright Cengage Learning 2013 All Rights Reserved

11 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. Copyright Cengage Learning 2013 All Rights Reserved

12 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 Rate of inflation Copyright Cengage Learning 2013 All Rights Reserved

13 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Copyright Cengage Learning 2013 All Rights Reserved

14 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 Copyright Cengage Learning 2013 All Rights Reserved

15 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 Copyright Cengage Learning 2013 All Rights Reserved

16 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Copyright Cengage Learning 2013 All Rights Reserved

17 The Impact of the Internet Internet auctions Shopping bots Second opinions from expert sites Product selection Copyright Cengage Learning 2013 All Rights Reserved

18 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 Copyright Cengage Learning 2013 All Rights Reserved

19 The Relationship of Price to Quality Prestige Pricing - Charging a high price to help promote a high- quality image. Copyright Cengage Learning 2013 All Rights Reserved

20 Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige Copyright Cengage Learning 2013 All Rights Reserved