Chapter 19
Pricing Concepts
Introduction
• Price:
the exchange value of a
good or service
some unit of value
given up for something
of value
Other Terms
• Terms Used
• Tuition
• Fare
• Fine
• Tip
• Bribe
Price Competition
Price
Competition
Customer
Needs
Slippery slope.
Nonprice Competition
Product
Competition
Customer
Needs
Promotion
Competition
Distribution
Competition
Emphasize value and therefore increase quality
The Importance of Price to
Marketers
• Manage demand
• Adapt to competitive environment
• Psychology of the consumer
• BOTTOMLINE issues
The Nature of Price
Profits = Total Revenues - Total Costs
or
Profits =(Price x Quantity Sold) - Total Costs
Steps in Setting the Right
Price
Establish pricing objectives
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
Pricing Objectives
Profit-oriented
•
Profit Maximization:
•
Target-Return Objectives:
achieving a specified return on
either sales or investment
ROI =
Net Profit after taxes
Total assets
Pricing Objectives
Profitability
•
Sales maximization:
Sales-oriented
•
Market-share objectives:for
controlling a portion of the
market
Price and Market Share
Pricing Objectives
Profitability
•
Passive (status quo pricing)
•
Value Pricing (starts with the
customer, consider the
competition and then sets the
right price)
Volume
Meeting
Competition
Pricing Objectives
Profitability
Volume
Meeting
Competition
Prestige
•
Prestige Objectives: set at a
relatively high level to help
promote a high quality image
PRICE DETERMINATION IN
ECONOMIC THEORY
•
Demand: schedule of the amounts of a
firm’s good or service that consumers
purchase at different prices during a specified
period
•
Supply: schedule of the amounts of a good
or service that firms will offer for sale at
different prices during a specified time
period.
Determination of Demand
Price
The Demand Curve
Price/Quantity Relationship
$2.50 P1
D1
Q1 200K
Quantity
Price
Determination of Demand
$2.50 P1
$2.00 P2
D1
200K
300K
Quantity
Price
Determination of Demand
$2.50 P1
$2.00 P2
$1.50 P3
D1
200K 300K 400K
Quantity
The Concept Of Elasticity In
Pricing Strategy
• Elasticity: measure of consumers
responsiveness to changes in price
Price Elasticity
of Demand
=
% Change in Quantity Demanded
% Change in Price
If Abs(elasticity) > 1 then DEMAND is ELASTIC
If Abs(elasticity) < 1 then DEMAND is INELASTIC
Determinants Of Elasticity
Availability
of Substitutes
Luxury or
Necessity
Portion of
Budget
Time
Determination of Demand - INELASTIC
Price
Demand is not very sensitive to price increases
P2
P1
Q2 Q1
Quantity
Determination of Demand - ELASTIC
Price
Demand is very sensitive to price increases
P2
P1
Q2
Quantity
Q1
Some Elasticity
Calculations
•
•
•
% Change in Price = 10% (increase)
% Change in Quantity = -20% (decrease)
Abs(Elasticity) =
•
Elastic?
Some Elasticity
Calculations
•
•
•
% Change in Price = +10% (increase)
% Change in Quantity = -5% (decrease)
Abs(Elasticity) =
•
Elastic?
Elasticity and Revenues
•
•
•
Baseline Case
100 units sold @ $ 10 each
Total Revenues = $ 10 * 100 units = $1000.
•
•
•
•
•
Case I
Let us drop price to $8.
Demand increases to 110 units.
Revenue =
Abs(Elasticity) =
Elasticity and Revenues
•
•
•
•
•
Case II
Let us drop price to $8.
Demand increases to 150 units.
Revenue =
Abs (Elasticity)=
Elasticity and Revenues
When Price DECREASES, Total Revenues
INCREASE for __________ products
When Price DECREASES, Total Revenues
DECREASE for _________ products
Elasticity and Revenues
Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Careful : Revenues DO not equal profitability!
Analysis of Demand, Cost,
and Profit Relationships
•Fixed Costs – do not vary with # units produced
•Variable Costs – varies with # units produced
•Total Costs = Fixed Costs + Variable costs
Analysis of Demand, Cost,
and Profit Relationships
Breakeven Analysis:
Fixed Costs
Breakeven Point = _______________________________
Per Unit Contribution to Fixed Costs
Fixed Costs
___________________
=
•(Price - Variable Costs) (per unit)!
Evaluation of Breakeven
Analysis
•
Effective tool in assessing the sales required
for covering costs and achieving specified
levels of profit. Sensitivity analysis.
•
Easily understood
Analysis of Demand, Cost,
and Profit Relationships
Determining the Breakeven Point
Dollars
Total Revenue
Breakeven
Point
Total
Costs
Fixed Costs
Quantity (Units of Production)
Analysis of Demand, Cost,
and Profit Relationships
Determining the Breakeven Point
Dollars
Total Revenue
Breakeven
Point
Losses
Total
Costs
Fixed Costs
Units of Production
Analysis of Demand, Cost,
and Profit Relationships
Determining the Breakeven Point
Dollars
Total Revenue
Breakeven
Point
Profits
Fixed Costs
Units of Production
Total
Costs
Breakeven Analysis
•
•
•
•
Selling Price = $ 100 per unit
Variable costs = $ 50 per unit
Total Fixed Costs = $150, 000
Contribution =
Breakeven Point =
Fixed Costs
_______________________________
Per Unit Contribution to Fixed Costs
Breakeven (continued)
•
Breakeven point (in terms of unit sales) = _____
units
•
Breakeven point (in terms of $ sales volume) =
____________ = $300,000
Factors that influence price:
Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
$
$
$
$
High
Stable
Decrease
Decrease
Other factors that influence price:
•
•
•
•
Competition
Distribution Strategy
Promotion Strategy
Customer Power