Pricing Concepts CHAPTER 19 Marketing 10 Lamb, Hair, McDaniel Designed by Eric Brengle B-books, Ltd. Copyright ©2009 by Cengage Learning Inc. All rights reserved Prepared by Amit Shah Frostburg State University 1 Learning Outcomes LOI 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 Copyright ©2009 by Cengage Learning Inc. All rights reserved 2 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, customer demands, the Internet and extranets, and perceptions of quality can affect price Copyright ©2009 by Cengage Learning Inc. All rights reserved 3 LOI The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm Copyright ©2009 by Cengage Learning Inc. All rights reserved 4 LOI 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 Copyright ©2009 by Cengage Learning Inc. All rights reserved 5 LOI What Is Price? Price Price is that which is given up in an exchange to acquire a good or service. Copyright ©2009 by Cengage Learning Inc. All rights reserved 6 LOI The Importance of Price to Marketing Managers Revenue Profit The price charged to customers multiplied by the number of units sold. Revenue minus expenses. Copyright ©2009 by Cengage Learning Inc. All rights reserved 7 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 LOI Copyright ©2009 by Cengage Learning Inc. All rights reserved 8 LOI REVIEW LEARNING OUTCOME The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment Copyright ©2009 by Cengage Learning Inc. All rights reserved 9 LO2 Pricing Objectives List and explain a variety of pricing objectives Copyright ©2009 by Cengage Learning Inc. All rights reserved 10 LO2 Pricing Objectives Profit-Oriented Sales-Oriented Status Quo Copyright ©2009 by Cengage Learning Inc. All rights reserved 11 LO2 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Copyright ©2009 by Cengage Learning Inc. All rights reserved Target Return on Investment 12 LO2 Profit Maximization Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. Copyright ©2009 by Cengage Learning Inc. All rights reserved 13 LO2 Return on Investment Return on Investment Net profit after taxes divided by total assets. ROI = Copyright ©2009 by Cengage Learning Inc. All rights reserved Net Profit after taxes Total assets 14 LO2 Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Market Share Sales Maximization http://www.target.com http://www.walmart.com http://www.jcpenney.com Online Copyright ©2009 by Cengage Learning Inc. All rights reserved 15 LO2 Market Share Market Share A company’s product sales as a percentage of total sales for that industry. Copyright ©2009 by Cengage Learning Inc. All rights reserved 16 LO2 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 by Cengage Learning Inc. All rights reserved 17 LO2 Status Quo Pricing Objectives Status Quo Pricing Objectives Maintain existing prices Copyright ©2009 by Cengage Learning Inc. All rights reserved Meet competition’s prices 18 LO2 REVIEW LEARNING OUTCOME Pricing Objectives Profit-Oriented Profit Maximization Satisfactory Profits Sales-Oriented Market Share Sales Maximization Copyright ©2009 by Cengage Learning Inc. All rights reserved Target ROI Status Quo Maintain Existing Price 19 LO3 The Demand Determinant of Price Explain the role of demand in price determination Copyright ©2009 by Cengage Learning Inc. All rights reserved 20 LO3 The Demand Determinant of Price 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. http://www.ubid.com Online Copyright ©2009 by Cengage Learning Inc. All rights reserved 21 The Demand Curve LO3 Copyright ©2009 by Cengage Learning Inc. All rights reserved 22 The Supply Curve LO3 Copyright ©2009 by Cengage Learning Inc. All rights reserved 23 LO3 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. Copyright ©2009 by Cengage Learning Inc. All rights reserved 24 Price Equilibrium LO3 Copyright ©2009 by Cengage Learning Inc. All rights reserved 25 LO3 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. Copyright ©2009 by Cengage Learning Inc. All rights reserved 26 LO3 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. Copyright ©2009 by Cengage Learning Inc. All rights reserved 27 LO3 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 Copyright ©2009 by Cengage Learning Inc. All rights reserved 28 Elasticity of Demand LO3 Copyright ©2009 by Cengage Learning Inc. All rights reserved 29 LO3 Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation http://www.columbiahouse.com Online Copyright ©2009 by Cengage Learning Inc. All rights reserved 30 Creating Pricing Power LO3 Copyright ©2009 by Cengage Learning Inc. All rights reserved 31 LO3 REVIEW LEARNING OUTCOME Role of Demand in Price Determination Copyright ©2009 by Cengage Learning Inc. All rights reserved 32 LO4 The Power of Yield Management Systems Understand the concept of yield management systems Copyright ©2009 by Cengage Learning Inc. All rights reserved 33 LO4 Yield Management Systems Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Copyright ©2009 by Cengage Learning Inc. All rights reserved 34 LO4 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Copyright ©2009 by Cengage Learning Inc. All rights reserved 35 LO4 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. Copyright ©2009 by Cengage Learning Inc. All rights reserved 36 LO4 REVIEW LEARNING OUTCOME Yield Management Systems Copyright ©2009 by Cengage Learning Inc. All rights reserved 37 LO5 The Cost Determinant of Price Describe cost-oriented pricing strategies Copyright ©2009 by Cengage Learning Inc. All rights reserved 38 LO5 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 Copyright ©2009 by Cengage Learning Inc. All rights reserved 39 LO5 The Cost Determinant of Price Markup pricing Methods Used to Set Prices Keystoning Profit Maximization Pricing Break-Even Pricing Copyright ©2009 by Cengage Learning Inc. All rights reserved 40 LO5 Markup Pricing Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. Copyright ©2009 by Cengage Learning Inc. All rights reserved 41 LO5 Profit Maximization Profit Maximization Marginal Revenue A method of setting prices that occurs when marginal revenue equals marginal cost. 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 by Cengage Learning Inc. All rights reserved 42 Break-Even Pricing LO5 Copyright ©2009 by Cengage Learning Inc. All rights reserved 43 Break-Even Pricing Break-Even Quantity Fixed cost Contribution LO5 = = Total fixed costs Fixed cost contribution Price - Avg. Variable Cost Copyright ©2009 by Cengage Learning Inc. All rights reserved 44 LO5 REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies Copyright ©2009 by Cengage Learning Inc. All rights reserved 45 LO6 Other Determinants of Price 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 by Cengage Learning Inc. All rights reserved 46 LO6 Other Determinants of Price Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Copyright ©2009 by Cengage Learning Inc. All rights reserved 47 LO6 Stages in the Product Life Cycle Introductory Stage Growth Stage Maturity Stage $ $ $ High Stable Decrease Decline Stage $ Decrease Stable High Copyright ©2009 by Cengage Learning Inc. All rights reserved 48 LO6 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 by Cengage Learning Inc. All rights reserved 49 LO6 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 Copyright ©2009 by Cengage Learning Inc. All rights reserved 50 LO6 Distribution Strategy Selling against the brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Copyright ©2009 by Cengage Learning Inc. All rights reserved 51 LO6 The Impact of the Internet Product selection Second opinions from expert sites Shopping bots Internet auctions Copyright ©2009 by Cengage Learning Inc. All rights reserved 52 LO6 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 low-price dealer Copyright ©2009 by Cengage Learning Inc. All rights reserved 53 LO6 The Relationship of Price to Quality Prestige Pricing Charging a high price to help promote a high-quality image. http://www.vivre.com http://www.ashford.com Online Copyright ©2009 by Cengage Learning Inc. All rights reserved 54 LO6 Dimensions of Quality 1. Ease of use 2. Versatility 3. Durability 4. Serviceability 5. Performance 6. Prestige Copyright ©2009 by Cengage Learning Inc. All rights reserved 55 LO6 REVIEW LEARNING OUTCOME Factors Affecting Price Copyright ©2009 by Cengage Learning Inc. All rights reserved 56