2. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 1 chapter 15 Prepared by Angela Zigras, Seneca College Deborah Baker, Texas Christian University PRICING AND SETTING THE RIGHT PRICE

3. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 2 You Will Learn To... 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. 4. Describe cost-oriented pricing strategies.

4. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 3 You Will Learn To... 5. 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. Describe the procedure for setting the right price. 7. Identify the legal and ethical constraints on pricing decisions. 8. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine tune the base price.

5. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 4 The Importance of Price To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy What is Price? To the seller... Price is revenue and profit source To the seller... Price is revenue and profit source

6. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 5 What is Price? Price is that which is given up in an exchange to acquire a good or service.

7. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 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

8. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 7 The Importance of Price Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is 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

9. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 8 Trends Influencing Price Setting Trends in the MarketTrends Market High rate of new product introduction High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Increased availability of bargain-priced dealer 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 More efficient and better informed buyers More efficient and better informed buyers

10. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 9 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

11. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 10 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

12. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 11 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs.

13. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 12 Return on Investment Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets Total assets

14. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 13 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives

15. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 14 Market Share A company’s product sales as a percentage of total sales for that industry.

16. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 15 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

17. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 16 Demand and Supply 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.

18. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 17 The Demand Curve D D Price.50 1.00 1.50 2.00 2.50 020406080100120 Quantity demanded

19. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 18 The Supply Curve Quantity supplied S S Price.50 1.00 1.50 2.00 2.50 020406080100120

20. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 19 Price Equilibrium The price at which demand and supply are equal.

21. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 20 Equilibrium Price Quantity demanded S S Price.50 1.00 1.50 2.00 2.50 020406080100120 D D Surplus Shortage Price Equilibrium

22. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 21 Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price.

23. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 22 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

24. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 23 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

25. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 24 Elasticity of Demand Elastic Demand Curve D D Quantity Price D D Quantity Price Inelastic Demand Curve

26. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 25 Factors that Affect Elasticity Factors That Affect ElasticityofDemand ElasticityofDemand Availability of Substitutes Price relative to Purchasing Power Price relative to Purchasing Power Product Durability Product’s Other Uses

27. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 26 The Cost Determinant of Price 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

28. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 27 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

29. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 28 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.

30. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 29 Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. 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.

31. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 30 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

32. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 31 Break-Even Pricing Break-Even Quantity Break-Even Quantity = = Total Fixed Costs Fixed cost Contribution Total Fixed Costs Fixed cost Contribution Fixed cost Contribution Fixed cost Contribution = = Price -- Avg. Variable Cost

33. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 32 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Other Factors ThatInfluencePrice ThatInfluencePrice

34. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 33 Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High

35. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 34 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

36. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 35 Selling Against the Brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

37. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 36 Regaining Price Control DEVELOP BRAND LOYALTY Package marked with selling price Avoid business with price-cutting discounters Avoid business with price-cutting discounters Franchising Exclusive distribution system Methods Used to Regain Price Control Methods Used to Regain Price Control

38. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 37 The Impact of the Internet  Allows price and product comparisons  Prices are coming down  Data collection allows sellers to tailor products and prices  Internet shopping is on the rise

39. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 38Extranet A private electronic network that links a company with its suppliers and customers.

40. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 39 Prestige Pricing Charging a high price to help promote a high-quality image.

41. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 40 How to Set A Price on a Product. Four Steps to Setting Price  Establish pricing goals  Estimate demand, costs, and profits  Choose a price strategy to help determine a base price  Fine-tune the base price with pricing tactics

42. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 41 Price Strategy The basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle.

43. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 42 Pricing Strategies Price Skimming A pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. Status Quo Pricing A pricing policy whereby a firm charges a price identical to or very close to the competition’s price.

44. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 43 Penetration Pricing A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market.

45. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 44 Legal and Ethical Constraints Marketing Managers should be aware of pricing regulations.  Resale Price Maintenance  Price Fixing  Price Discrimination  Predatory Pricing

46. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 45 Fine-Tune the Base Price Price can be lowered through the use of Pricing Tactics  Discounts –Quantity Discounts –Cumulative Quantity Discount –Non Cumulative Quantity Discount –Cash Discounts –Functional Discounts (trade discount) –Seasonal Discounts –Promotional Allowance (trade allowance)

47. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 46 Fine-Tune the Base Price Price can be lowered through the use of Pricing Tactics  Geographic Pricing –FOB Origin Pricing –Uniform Delivery Pricing –Zone Pricing –Freight Absorption Pricing –Basing Point Pricing

48. Copyright © 2002 by Nelson, a division of Thomson Canada Limited. Chapter 1515 - 47 Fine-Tune the Base Price  Single-Price Tactic  Flexible Pricing  Professional Services Pricing  Price Lining  Leader Pricing  Loss Leader Pricing  Bait Pricing  Odd-Even Pricing  Price Bundling  Unbundling  Two Part Pricing Price can be lowered through the use of Pricing Tactics