PRICING
Key Concepts
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
What Is Price?
Price
Price is that which is given up
in an exchange to acquire a
good or service.
The Importance of Price to
Marketing Managers
Revenue
Profit
The price charged to
customers multiplied by the
number of units sold.
Revenue minus expenses.
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
The Importance of Pricing Decisions
Price X Sales Unit = Revenue
Revenue – Costs = Profit
Profit drives growth, salary increases, and corporate investment
Pricing Objectives
Profit-Oriented
Sales-Oriented
Status Quo
Pricing Objectives
Profit-Oriented
Profit
Maximization
Satisfactory
Profits
Sales-Oriented
Market
Share
Sales
Maximization
Target
ROI
Status Quo
Maintain
Existing Price
Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
Profit Maximization
Profit
Maximization
Setting prices so that total
revenue is as large as possible
relative to total costs.
Return on Investment
Return
on
Investment
Net profit after taxes divided
by total assets.
ROI =
Net Profit after taxes
Total assets
Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Share
Sales
Maximization
Market Share
Market Share
A company’s product sales
as a percentage of total
sales for that industry.
Sales Maximization
 Short-term objective to maximize
sales
 Ignores profits, competition, and
the marketing environment
 May be used to sell
off excess inventory
Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
prices
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.
The Demand Curve
The Supply Curve
Tyson’s Meat Glut
 Tyson Foods, the world’s largest processor, has an oversupply of
meat:
 Lower chicken consumption due to avian flu fears
 Export restrictions to Japan and South Korea
due to mad cow disease
 Mismatch between oversupply and reduced demand has created
tremendous financial losses for the company.
 Tyson produces 25% of meats that Americans eat, and small price
changes impact company profit significantly.
 To reverse trend, company is taking a commodity approach to the
primary business, while marketing more value-added products.
SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.
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.
Price Equilibrium
Elasticity of Demand
Elastic
Demand
 Consumers buy more or less
of a product when the
price changes.
Inelastic
Demand
 An increase or decrease in
price will not significantly
affect demand.
Unitary
Elasticity
 An increase in sales exactly
offsets a decrease in prices,
and revenue is unchanged.
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
Elasticity of Demand
Factors that Affect Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
A product’s other uses
Rate of inflation
Yield Management Systems
Yield
Management
Systems
A technique for adjusting
prices that uses complex
mathematical software to
profitably fill unused
capacity.
E.g. Airfare changes
closer to the flight date
How Yield Management Systems Work
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
Yield Management Systems
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
The Cost Determinant of Price
Markup pricing
Keystoning – 2X Cost
Methods
Used to
Set Prices
Profit Maximization
Pricing
Break-Even
Pricing
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.
Break-Even Pricing
Break-Even Pricing
Break-Even
Quantity
Fixed cost
Contribution
=
=
Total fixed costs
Fixed cost contribution
Price - Avg. Variable Cost
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.
SOURCE: Kemba J.Dunham, “Technology Proves a Boon for
Some Landlords,” Wall Street Journal, June 28, 2006, B10.
Cost-Oriented Pricing Strategies
Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
Perceived Quality
Factors Affecting Price
Stages in the Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
$
$
$
High
Stable
Decrease
Decline
Stage
$
Decrease
Stable
High
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
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
Distribution Strategy
Selling against
the brand
Stocking well-known branded items
at high prices in order to sell store
brands at discounted prices.
E.g. Wal-Mart sells Equate brand
drugs/lotions against
Tylenol/Johnson & Johnson
The Impact of the Internet
Product selection
Second opinions from expert sites
Shopping bots
Internet auctions
The Relationship of Price to Quality
Prestige Pricing
Charging a high price to help
promote a high-quality image.
Dimensions of Quality
1.
Ease of use
2.
Versatility
3.
Durability
4.
Serviceability
5.
Performance
6.
Prestige