CHAPTER SEVENTEEN
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PRICING CONCEPTS
Prepared by Jack Gifford
Miami University (Ohio)
© 2000 South-Western College
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IMPORTANCE OF PRICING
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$ To the consumer…
$ The cost of something
$ To the marketer…
$ Price is revenue, source of
profit
$ In the broadest sense, price
allocates resources in a freemarket economy
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WHAT IS A PRICE?
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$ Is that which is given up in
$
$
$
$
an exchange to acquire a
good or service
Can relate to anything with
perceived value
Facilitates the exchange
process
Is the medium of exchange
An agreed upon
abstraction based upon
supply and demand and
value assessment
$ Has many names:
$
$
$
$
$
$
$
Revenue
Rent
Fee
Donation
Toll
Honorarium
Tuition
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IMPORTANCE OF PRICE TO MARKETING
MANAGERS
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$ Revenue is the price charged to
customers multiplied by the number of
units sold
$ Revenue is what pays for every activity
of a company
$ Profit is what’s left over after paying for
all these activities
$ Marketers must select a price that is
not too high or not too low, a price that
equals the perceived value to target
consumers
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PRICING OBJECTIVES
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1. PROFIT MAXIMIZATION
$ Profit-oriented pricing
objectives
$ Sales-oriented pricing
objectives
$ Status quo pricing
objectives
•Setting prices so that total
revenue is as large as
possible relative to total
costs
•Competitive
environment?
•Highest price possible
given consumers perceived
value of the product
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PRICING OBJECTIVES
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$ Profit-oriented pricing
objectives
$ Sales-oriented pricing
objectives
$ Status quo pricing
objectives
2. SATISFACTORY
PROFITS
•Setting prices so that
profits to stakeholders are
satisfactory
•What is satisfactory
depends upon levels of risk
and management
objectives
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PRICING OBJECTIVES
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$ Profit-oriented pricing
objectives
$ Sales-oriented pricing
objectives
$ Status quo pricing
objectives
3. TARGET RETURN ON
INVESTMENT (ROI)
•ROI = NPat / TA
•If you think of your
savings account, it is the
interest you earn on your
money; the more the better
•A “good” ROI depends
upon the level of risk,
industry benchmarks, and
available alternatives
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PRICING OBJECTIVES
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$ Profit-oriented pricing
1. Market share: A percentage
of sales for that industry
A Sales can be reported in
either dollars or units
objectives
$ Sales-oriented pricing
objectives
$ Status quo pricing
B Profitability and high
market share are often
highly correlated..but not
always
2. Sales Maximization
objectives
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PRICING OBJECTIVES
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$ Profit-oriented pricing
objectives
$ Sales-oriented pricing
objectives
$ Status quo pricing
objectives
1. Seeks to maintain existing
prices or meet the
competition’s prices
A Price leadership
B Minimizes price wars
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PRICE COMPETITION
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$ If price is the sole basis of
competition, then competitors
can easily take away the
competitive advantage... unless
it is based upon a significant
cost advantage.
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$ If prices and costs
are all similar, the
marketer must
compete on
nonprice variables
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PRICE IN THE ECONOMY
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$ From a micromarketing
perspective, price
allocates available
goods and services
within our economy
by determining who
will get them.
I’ll buy it!
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I cannot afford it.
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PRICE IN THE ECONOMY
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$ The Demand Curve:
$ Demand is the quantity of a
Price
product consumers are willing
and able to buy at a given
price. Normally, the higher the
price, the lower the demand.
$ As prices drop, consumers will 2$
be willing to purchase more of
an item
1$
$ The slope of the demand line
depends upon the sensitivity
of demand to prices
Demand
Quantity
One
unit
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Two
units
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PRICE IN THE ECONOMY
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$ The Supply Curve:
$ Supply is the quantity of a
product that marketers are
willing and able to sell at a
given price in a given time
period.
$ As prices increase, suppliers
are willing to sell more units
$ As prices decrease,
marketers are less willing to
sell units
Price
Supply
2$
1$
Quantity
One
unit
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Two
units
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HOW SUPPLY AND DEMAND
ESTABLISH PRICES
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$ Industry Price:
$ The price for a product or service
in an industry is determined by
the intersection of the supply
and demand curves. At this
point, the price the buyer is
willing to pay is equal to the
number of units marketer is
willing to sell
Price
Demand
Supply
1$
Quantity
Two
units
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ELASTICITY OF DEMAND
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$ Price elasticity
measures the
percentage change in
quantity demanded by
a percentage change
in price.
$ Elastic
$ Inelastic
$ Unitary elasticity
E=
% CHANGE IN QUANTITY
DEMANDED OF GOOD “A”
% CHANGE IN PRICE OF
GOOD “A”
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ELASTICITY OF DEMAND: INELASTIC
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$ Relatively
Price
Inelastic
Demand
A relatively large increase in
price results in only a small
decrease in quantity
demanded.
Quantity
E is less than 1.0
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ELASTICITY OF DEMAND: ELASTIC
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$ Relatively
Price
Elastic
Demand
A relatively small decrease
in price results in a
substantial increase in
quantity demanded.
Quantity
E is greater than 1.0
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ELASTICITY OF DEMAND: UNITARY
ELASTICITY
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$ Unitary
Price
elasticity
Demand
A change in price
results in an equal
and opposite change
in quantity
demanded.
=
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Quantity
E = 1.0
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FACTORS THAT AFFECT ELASTICITY
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$ Availability of substitutes
$ Price relative to purchasing power
$ Product durability
$ A product’s other uses
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THE COST DETERMINANT OF PRICE
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$ All costs are Fixed, Variable,
or a combination of fixed and
variable
$ The costs and revenues
associated with the
production of “one more
unit” of a product are called
marginal costs and marginal
revenues
$ An analysis of these and
other costs help marketers
determine alternative pricing
strategies
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THE COST DETERMINANT OF PRICE
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$ In an ideal situation,
marketers will operate at
the point where marginal
costs (MC) equal marginal
revenue (MR).
MC
MR
UNITS PRODUCED & SOLD
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ALTERNATIVE METHODS OF COST
BASED PRICING
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$ Markup pricing
$ Formula pricing (keystoning)
$ Profit maximization pricing
$ Break-even pricing
$ Target-return pricing
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OTHER DETERMINANTS OF PRICE
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1 Stage in the product life cycle
$ Introductory
$ Growth
$ Maturity
$ Decline
$ High or low pricing
$ Prices begin to stabilize
and drop
$ Prices drop dramatically
$ Lowest prices; little if
any profits; prices may
be below costs
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OTHER DETERMINANTS OF PRICE
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1 The competition
2 Distribution strategy
3 Promotion strategy
4 The relationship of price to quality
5 Demands of larger customers
6 Global environmental influences
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