Chapter 17
Lamb, Hair, McDaniel
MKTG
2008-2009
17
Pricing Concepts
Designed by
Amy McGuire, B-books, Ltd.
Prepared by
Deborah Baker, Texas Christian University
Copyright ©2009 Cengage Learning Inc. All rights reserved 1

Learning Outcomes
LO 1 Discuss the importance of pricing decisions to the economy and to the individual firm
LO 2
List and explain a variety of pricing objectives
LO 3
Explain the role of demand in price determination
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 2

Learning Outcomes
LO 4 Understand the concept of yield management systems
LO 5
Describe cost-oriented pricing strategies
LO 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
Copyright ©2009 Cengage Learning Inc. All rights reserved Chapter 17 3

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
Chapter 17
LO 1
Copyright ©2009 Cengage Learning Inc. All rights reserved 4

What Is Price?
Price
Price is that which is given up in an exchange to acquire a good or service.
Chapter 17
LO 1
Copyright ©2009 Cengage Learning Inc. All rights reserved 5

The Importance of Price to
Marketing Managers
Revenue
The price charged to customers multiplied by the number of units sold.
Profit Revenue minus expenses.
Chapter 17
LO 1
Copyright ©2009 Cengage Learning Inc. All rights reserved 6

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
Chapter 17
LO 1
Internet used for comparison shopping
Copyright ©2009 Cengage Learning Inc. All rights reserved 7

LO 1 REVIEW LEARNING OUTCOME
The Importance of Pricing Decisions
Price X Sales Unit = Revenue
Revenue – Costs = Profit
Profit drives growth, salary increases, and corporate investment
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 8

LO 2
Chapter 17
Pricing Objectives
Profit-Oriented
Sales-Oriented
Status Quo
Copyright ©2009 Cengage Learning Inc. All rights reserved 9

Profit-Oriented Pricing
Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
LO 2
Chapter 17
Satisfactory
Profits
Copyright ©2009 Cengage Learning Inc. All rights reserved
Target
Return on
Investment
10

LO 2
Chapter 17
Profit Maximization
Profit
Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
Copyright ©2009 Cengage Learning Inc. All rights reserved 11

LO 2
Chapter 17
Return on Investment
Return on
Investment
Net profit after taxes divided by total assets.
ROI = Net Profit after taxes
Total assets
Copyright ©2009 Cengage Learning Inc. All rights reserved 12

Sales-Oriented Pricing
Objectives
Sales-Oriented Pricing Objectives
LO 2
Chapter 17
Market
Share
Sales
Maximization http://www.target.com
http://www.walmart.com
http://www.jcpenney.com
Copyright ©2009 Cengage Learning Inc. All rights reserved
Online
13

Market Share
Market Share
A company’s product sales as a percentage of total sales for that industry.
LO 2
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 14

LO 2
Chapter 17
Sales Maximization
 Short-term objective to maximize sales
 Ignores profits, competition, and the marketing environment
 May be used to sell off excess inventory
Copyright ©2009 Cengage Learning Inc. All rights reserved 15

Status Quo Pricing Objectives
Status Quo Pricing Objectives
LO 2
Chapter 17
Maintain existing prices
Meet competition’s prices
Copyright ©2009 Cengage Learning Inc. All rights reserved 16

LO 2 REVIEW LEARNING OUTCOME
Pricing Objectives
Profit
Maximization
Profit-Oriented
Satisfactory
Profits
Target
ROI
Chapter 17
Market
Share
Sales-Oriented
Sales
Maximization
Copyright ©2009 Cengage Learning Inc. All rights reserved
Status Quo
Maintain
Existing Price
17

LO 3
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 specific period.
Copyright ©2009 Cengage Learning Inc. All rights reserved http://www.ubid.com
Online
18 Chapter 17

LO 3
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 19

LO 3
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 20

LO 3
How Demand and Supply
Establish Price
Chapter 17
Price
Equilibrium
The price at which demand and supply are equal.
Elasticity of Demand
Consumers’ responsiveness or sensitivity to changes in price.
Copyright ©2009 Cengage Learning Inc. All rights reserved 21

LO 3
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 22

LO 3
Elastic
Demand
 Consumers buy more or less of a product when the price changes.
Chapter 17
Inelastic
Demand
Unitary
Elasticity
 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.
Copyright ©2009 Cengage Learning Inc. All rights reserved 23

LO 3
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.
Copyright ©2009 Cengage Learning Inc. All rights reserved 24 Chapter 17

LO 3
Chapter 17
Price Goes...
Revenue Goes...
Demand is...
Down Up Elastic
Down
Up
Up
Down
Up
Down
Inelastic
Inelastic
Elastic
Up or Down Stays the Same Unitary Elasticity
Copyright ©2009 Cengage Learning Inc. All rights reserved 25

LO 3
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 26

LO 3
Factors that Affect
Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
A product’s other uses
Rate of inflation
Chapter 17 http://www.columbiahouse.com
Online
Copyright ©2009 Cengage Learning Inc. All rights reserved 27

Yield Management Systems
Yield
Management
Systems
A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
Chapter 17
LO 4
Copyright ©2009 Cengage Learning Inc. All rights reserved 28

Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
Chapter 17
LO 4
Copyright ©2009 Cengage Learning Inc. All rights reserved 29

LO 4 REVIEW LEARNING OUTCOME
Yield Management Systems
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 30

The Cost Determinant of Price
Types of Costs
Variable
Cost
Fixed Cost
Chapter 17
Varies with changes in level of output
LO 5
Does not change as level of output changes
Copyright ©2009 Cengage Learning Inc. All rights reserved 31

The Cost Determinant of Price
Markup pricing
Chapter 17
LO 5
Keystoning
Methods
Used to
Set Prices Profit Maximization
Pricing
Break-Even
Pricing
Copyright ©2009 Cengage Learning Inc. All rights reserved 32

Markup Pricing
Markup
Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.
The practice of marking up prices by 100%, or doubling the cost.
Keystoning
Chapter 17
LO 5
Copyright ©2009 Cengage Learning Inc. All rights reserved 33

Profit Maximization
Profit
Maximization
A method of setting prices that occurs when marginal revenue equals marginal cost.
Chapter 17
LO 5
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.
Copyright ©2009 Cengage Learning Inc. All rights reserved 34

Break-Even Pricing
Chapter 17
LO 5
Copyright ©2009 Cengage Learning Inc. All rights reserved 35

Break-Even Pricing
Break-Even
Quantity
=
Total fixed costs
Fixed cost contribution
Fixed cost
Contribution
= Price
-
Avg. Variable Cost
Chapter 17
LO 5
Copyright ©2009 Cengage Learning Inc. All rights reserved 36

LO 5 REVIEW LEARNING OUTCOME
Cost-Oriented
Pricing Strategies
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 37

LO 6
Chapter 17
Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
Perceived Quality
Copyright ©2009 Cengage Learning Inc. All rights reserved 38

LO 6
Chapter 17
Stages in the Product Life Cycle
Introductory
Stage
$
High
Growth
Stage
$
Stable
Maturity
Stage
$
Decrease
Decline
Stage
$
Decrease
Stable
High
Copyright ©2009 Cengage Learning Inc. All rights reserved 39

LO 6
Chapter 17
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
Copyright ©2009 Cengage Learning Inc. All rights reserved 40

Distribution Strategy
Manufacturers Wholesalers/Retailers
LO 6
Chapter 17
 Offer a larger profit margin or trade allowance
 Sell against the brand
 Buy gray-market goods
 Use exclusive distribution
 Franchising
 Avoid business with pricecutting discounters
 Develop brand loyalty
Copyright ©2009 Cengage Learning Inc. All rights reserved 41

Distribution Strategy
Selling against the brand
Stocking well-known branded items at high prices in order to sell store brands at discounted prices.
LO 6
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 42

The Impact of the Internet
Product selection
Second opinions from expert sites
Shopping bots
LO 6
Chapter 17
Internet auctions
Copyright ©2009 Cengage Learning Inc. All rights reserved 43

LO 6
Chapter 17
The Relationship of
Price to Quality
Prestige Pricing
Charging a high price to help promote a highquality image.
http://www.vivre.com
http://www.bluefly.com
Online
Copyright ©2009 Cengage Learning Inc. All rights reserved 44

LO 6
Chapter 17
Dimensions of Quality
1.
Ease of use
2.
Versatility
3.
Durability
4.
Serviceability
5.
Performance
6.
Prestige
Copyright ©2009 Cengage Learning Inc. All rights reserved 45

LO 6 REVIEW LEARNING OUTCOME
Factors Affecting Price
Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 46