1. 1Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Prepared by Deborah Baker Texas Christian University Chapter 15 Pricing Concepts

2. 2Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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.

3. 3Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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.

4. 4Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objectives 7.Describe the procedure for setting the right price. 8. Identify the legal and ethical constraints on pricing decisions. 9. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price.

5. 5Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Discuss the importance of pricing decisions to the economy and to the individual firm. 1 1 On Line http://www.mlb.com On Line http://www.mlb.com

6. 6Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

7. 7Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

8. 8Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

9. 9Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning The Importance of Price 1 1 Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is Profit. Marketers must be sure not to set the price to high nor too low, but at the point the targeted customer thinks is ideal.

10. 10Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

11. 11Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective List and explain a variety of pricing objectives. 2 2

12. 12Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2 2

13. 13Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2 2

14. 14Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. 2 2

15. 15Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

16. 16Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2 2

17. 17Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Market Share A company’s product sales as a percentage of total sales for that industry. 2 2

18. 18Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

19. 19Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

20. 20Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Explain the role of demand in price determination. 3 3

21. 21Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

22. 22Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. 3 3

23. 23Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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 3 3

24. 24Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic 3 3

25. 25Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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 http://www.ubid.com On Line http://www.ubid.com

26. 26Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Understand the concept of yield management systems. 4 4

27. 27Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. 4 4

28. 28Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

29. 29Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Describe cost-oriented pricing strategies. 5 5

30. 30Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

31. 31Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning The Cost Determinant of Price Target-Return Pricing Target-Return Pricing Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Methods Used to Set Prices Methods Used to Set Prices 5 5 Markup pricing

32. 32Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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. 5 5

33. 33Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

34. 34Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

35. 35Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

36. 36Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning On Line http://www.fragrancenet.com On Line http://www.fragrancenet.com Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High 6 6

37. 37Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 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

38. 38Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning On Line http://www.botspot.com On Line http://www.botspot.com 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

39. 39Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Extranet A private electronic network that links a company with its suppliers and customers. 6 6

40. 40Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Prestige Pricing Charging a high price to help promote a high-quality image. 6 6 On Line http://www.debeers.com http://www.rolex.com On Line http://www.debeers.com http://www.rolex.com

41. 41Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Dimensions of Quality 6 6Versatility Durability Serviceability Ease of Use Performance Prestige

42. 42Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Describe the procedure for setting the right price. 7 7

43. 43Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Steps in Setting the Right Price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals 7 7 Results lead to the right price

44. 44Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Price Strategy A 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. 7 7

45. 45Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing 7 7

46. 46Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Price Skimming Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand 7 7

47. 47Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning 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. 7 7

48. 48Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Penetration Pricing AdvantagesAdvantages Discourages or blocks competition from market entry Boosts sales and provides large profit increases. 7 7 DisadvantagesDisadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail

49. 49Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Status Quo Pricing AdvantagesAdvantages Simplicity Safest route to long- term survival for small firmsDisadvantagesDisadvantages Strategy may ignore demand and/or cost 7 7

50. 50Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Identify the legal and ethical constraints on pricing decisions. 8 8

51. 51Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning The Legality and Ethics of Price Strategy Issues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 8 8

52. 52Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost. 8 8

53. 53Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Price Fixing An agreement between two or more firms on the price they will charge for a product. 8 8 On Line http://www.altavista.com http://www.yahoo.com On Line http://www.altavista.com http://www.yahoo.com

54. 54Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Price Discrimination The Robinson-Patman Act of 1936: Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition 8 8

55. 55Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Robinson-Patman Act Defenses Seller Defenses Cost Market Conditions Market Conditions Competition 8 8

56. 56Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market. 8 8

57. 57Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Learning Objective Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. 9 9

58. 58Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Tactics for Fine-Tuning the Base Price Special Pricing Tactics Discounts Geographic Pricing 9 9

59. 59Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Tactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts 9 9 Promotional Allowances Rebates Value-Based Pricing Zero Percent Financing

60. 60Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Value-Based Pricing The price is set at a level that seems to the customer to be a good price compared to the prices of other options. 9 9

61. 61Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Origin Pricing Common Methods of GeographicPricingCommon GeographicPricing 9 9

62. 62Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. 9 9

63. 63Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning On Line http://www.ups.com On Line http://www.ups.com Geographic Pricing Zone Pricing Freight Absorption Pricing Freight Absorption Pricing Basing-Point Pricing Basing-Point Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. The seller pays for all or part of the freight charges and does not pass them on to the buyer. The seller designates a location as a basing point and charges all buyers the freight costs from that point. 9 9

64. 64Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good 9 9

65. 65Chapter 15 Essentials of Marketing 4e Lamb Hair McDaniel ©2005 South-Western/Thomson Learning Consumer Penalties An irrevocable loss of revenue is suffered An irrevocable loss of revenue is suffered Additional transaction costs are incurred Additional transaction costs are incurred Businesses Impose Consumer Penalties If... 9 9 On Line http://www.princesscruises.com http://www.carnival.com On Line http://www.princesscruises.com http://www.carnival.com