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
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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
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3
LOI
The Importance of Price
Discuss the importance of
pricing decisions to
the economy
and to the individual firm
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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
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LOI
What Is Price?
Price
Price is that which is given up
in an exchange to acquire a
good or service.
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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.
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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
LOI
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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
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9
LO2
Pricing Objectives
List and explain a variety
of pricing objectives
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LO2
Pricing Objectives
Profit-Oriented
Sales-Oriented
Status Quo
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LO2
Profit-Oriented Pricing
Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
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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.
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LO2
Return on Investment
Return
on
Investment
Net profit after taxes divided
by total assets.
ROI =
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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
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LO2
Market Share
Market Share
A company’s product sales
as a percentage of total
sales for that industry.
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LO2
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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LO2
Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
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Meet
competition’s
prices
18
LO2
REVIEW LEARNING OUTCOME
Pricing Objectives
Profit-Oriented
Profit
Maximization
Satisfactory
Profits
Sales-Oriented
Market
Share
Sales
Maximization
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Target
ROI
Status Quo
Maintain
Existing Price
19
LO3 The Demand Determinant of Price
Explain the role of demand
in price determination
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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
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21
The Demand Curve
LO3
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The Supply Curve
LO3
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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.
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Price Equilibrium
LO3
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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.
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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.
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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
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Elasticity of Demand
LO3
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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
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Creating Pricing Power
LO3
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LO3
REVIEW LEARNING OUTCOME
Role of Demand in Price Determination
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LO4
The Power of
Yield Management Systems
Understand the concept of
yield management systems
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LO4
Yield Management Systems
Yield
Management
Systems
A technique for adjusting
prices that uses complex
mathematical software to
profitably fill unused
capacity.
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LO4
Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
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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.
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LO4
REVIEW LEARNING OUTCOME
Yield Management Systems
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LO5
The Cost Determinant of Price
Describe cost-oriented
pricing strategies
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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
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LO5
The Cost Determinant of Price
Markup pricing
Methods
Used to
Set Prices
Keystoning
Profit Maximization
Pricing
Break-Even
Pricing
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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.
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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.
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Break-Even Pricing
LO5
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Break-Even Pricing
Break-Even
Quantity
Fixed cost
Contribution
LO5
=
=
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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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
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LO6
Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
Perceived Quality
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LO6
Stages in the Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
$
$
$
High
Stable
Decrease
Decline
Stage
$
Decrease
Stable
High
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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
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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
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LO6
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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LO6
The Impact of the Internet
Product selection
Second opinions from expert sites
Shopping bots
Internet auctions
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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
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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
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LO6
Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
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55
LO6
REVIEW LEARNING OUTCOME
Factors Affecting Price
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