Ch 19 Pricing Concepts

Chapter 19: Pricing Concepts Prepared by Amit Shah, Frostburg State University Designed by Eric Brengle, B-books, Ltd.

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Learning Outcomes LO1

Discuss the importance of pricing decisions to the economy and to the individual firm

LO2

List and explain a variety of pricing objectives

LO3

Explain the role of demand in price determination

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Learning Outcomes LO4

Understand the concept of yield management systems

LO5

Describe cost-oriented pricing strategies

LO6

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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

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The Importance of Price LO1 Discuss the importance of pricing decisions to the economy and to the individual firm.

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The Importance of Price

To the seller... Price is revenue

To the consumer... Price is the cost of something

Price allocates resources in a free-market economy

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What is Price?

Price is that which is given up in an exchange to acquire a good or service.

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The Importance of Price to Marketing Managers

Revenue - The price charged to customers multiplied by the number of units sold. Profit - Revenue minus expenses.

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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

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LO1

Review Learning Outcome The Importance of Pricing Decisions

Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

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Pricing Objectives LO2

List and explain a variety of

pricing objectives.

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Pricing Objectives Profit-Oriented

Sales-Oriented

Status Quo

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Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives

Profit Maximization

Satisfactory Profits

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Target Return on Investment

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Profit Maximization

Setting prices so that total revenue is as large as possible relative to total costs.

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Return on Investment

Net profit after taxes divided by total assets. ROI = Net profit after taxes Total assets

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Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives

Market Share

Sales Maximization

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Market Share

A company’s product sales as a percentage of total sales for that industry.

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Sales Maximization • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory

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Status Quo Pricing Objectives Status Quo Pricing Objectives

Maintain existing prices

Meet competition’s prices

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Review Learning Outcome

LO2

Pricing Objectives Profit-Oriented Profit Maximization

Satisfactory Profits

Target ROI

Sales-Oriented Market Share

Sales Maximization

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Status Quo

Maintain Existing Price

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The Demand Determinant of Price LO3 Explain the role of demand in

price determination.

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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. http://www.ubid.com

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The Demand Curve

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The Supply Curve

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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.

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Price Equilibrium

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Elasticity of Demand Elastic Demand

Inelastic Demand

Unitary Elasticity



Consumers buy more or less of a product when the price changes.



An increase or decrease in price will not significantly affect demand.



An increase in sales exactly offsets a decrease in prices, and revenue is unchanged. 26

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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.

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Elasticity of Demand Price Goes...

Revenue Goes...

Demand is...

Down

Up

Elastic

Down

Down

Inelastic

Up

Up

Inelastic

Up

Down

Elastic

Up or Down

Stays the Same Unitary Elasticity

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Elasticity of Demand

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Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power

Product durability A product’s other uses Rate of inflation

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Creating Pricing Power

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LO3

Review Learning Outcome Role of Demand in Price Determination

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The Power of Yield Management Systems LO4

Understand the concept of yield management systems.

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Yield Management Systems

A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

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Yield Management Systems Discounting early purchases Limiting early sales at discounted prices

Overbooking capacity

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Yield Management Systems • Rental property landlords use yield management systems to raise rents at a faster pace. • The “M/PF Yield-Star Price Optimizer” is similar to pricing systems used by airlines and car-rental companies.

• It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent. • Tenants can also take advantage of the technology.

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LO4

Review Learning Outcome Yield Management Systems

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The Cost Determinant of Price LO5 Describe cost-oriented pricing strategies.

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The Cost Determinant of Price Types of Costs

Variable Cost

Fixed Cost

Varies with changes in level of output

Does not change as level of output changes 39

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The Cost Determinant of Price Markup pricing

Methods Used to Set Prices

Keystoning Profit Maximization Pricing Break-Even Pricing

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Markup Pricing

Markup Pricing – The cost of buying the product from the producer plus amounts for profit expenses n

ot otherwise accounted for. Keystoning – The practice of marking

up prices by 100%, or doubling the cost.

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Profit Maximization Profit Maximization – The 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.

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Break-Even Pricing

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Break-Even Pricing Break-Even Quantity

Fixed cost Contribution

=

=

Total fixed costs Fixed cost contribution

Price - Avg. Variable Cost

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LO5

Review Learning Outcome Cost-Oriented Pricing Strategies

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Other Determinants of Price LO6 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.

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Other Determinants of Price Stages of the Product Life Cycle

Competition Distribution Strategy Promotion Strategy Perceived Quality 47 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Stages in the Product Life Cycle Introductory Stage

Growth Stage

Maturity Stage

Decline Stage

$

$

$

$

High

Stable

Decrease

Decrease Stable High

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The Competition • High prices may induce firms to enter the market • Competition can lead to price wars

• Global competition may force firms to lower prices

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Distribution Strategy Manufacturers • Offer a larger profit margin or trade allowance

Wholesalers/Retailers  Sell against the brand  Buy gray-market goods

• Use exclusive distribution

• Franchising • Avoid business with pricecutting discounters • Develop brand loyalty

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Distribution Strategy

Selling Against the Brand- Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

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The Impact of the Internet Product selection Second opinions from expert sites

Shopping bots Internet auctions

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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 lowprice dealer

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The Relationship of Price to Quality

Prestige Pricing - Charging a high price to help promote a highquality image.

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Dimensions of Quality 1. Ease of use

2. Versatility 3. Durability 4. Serviceability 5. Performance 6. Prestige

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LO6

Review Learning Outcome Factors Affecting Price

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