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Pricing Concepts Chapter 17 Prepared by Deborah Baker Texas Christian University Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 1 Learning Objectives 1. Discuss the importance of pricing decisions to the economy and to the individual firm. 2. List and explain a variety of pricing objectives. 3. Explain the role of demand in price determination. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 2 Learning Objectives (continued) 4. Understand the concept of yield management systems. 5. Describe cost-oriented pricing strategies. 6. Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 3 1 Learning Objective On Line http://www.mlb.com Discuss the importance of pricing decisions to the economy and to the individual firm. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 4 1 The Importance of Price To the seller... Price is revenue and profit source To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 5 1 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 6 The Importance of Price to Marketing Managers 1 Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 7 1 The Importance of Price Revenue = Unit Price Number of units sold Revenue pays for every activity. What’s left over is Profit. To earn a profit, marketers must select a price that is not too high or not too low, a price that equals the perceived value to target consumers Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 8 1 Trends Influencing Price Setting Flood of new product introductions Trends in the Market Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share A general decline in consumer confidence after terrorist attacks Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 9 2 Learning Objective List and explain a variety of pricing objectives. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 10 2 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 11 2 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Target Return on Investment 12 2 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 13 2 Return on Investment Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 14 2 Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Market Share Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Sales Maximization 15 2 Market Share A company’s product sales as a percentage of total sales for that industry. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 16 2 Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 17 2 Status Quo Pricing Objectives On Line http://www.target.com http://www.walmart.com http://www.jcpenney.com Status Quo Pricing Objectives Maintain existing prices Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Meet competition’s prices 18 3 Learning Objective Explain the role of demand in price determination. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 19 3 Demand and Supply Demand The quantity of a product that will be sold in the market at various prices for a specified period. Supply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 20 3 The Demand Curve 2.50 D Price 2.00 1.50 D 1.00 .50 0 20 40 60 80 Quantity demanded Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 100 120 21 The Supply Curve On Line http://www.uBid.com S 2.50 2.00 Price 3 1.50 1.00 S .50 0 20 40 60 80 Quantity supplied Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 100 120 22 3 Price Equilibrium The price at which demand and supply are equal. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 23 3 Equilibrium Price 2.50 S Surplus D Price 2.00 Price Equilibrium 1.50 1.00 Shortage S .50 0 20 40 60 80 100 D 120 Quantity demanded Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 24 3 Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 25 3 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 Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 26 3 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 Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 27 3 Elasticity of Demand Elastic Demand Curve D Inelastic Demand Curve Price Price D D D Quantity Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Quantity 28 Factors that Affect Elasticity of Demand 3 On Line http://www.columbiahouse.com Availability of Substitutes Price relative to purchasing power Product durability A product’s other uses Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 29 4 Learning Objective Understand the concept of yield management systems. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 30 4 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 31 Yield Management Systems Price Adjustments 4 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 32 5 Learning Objective Describe cost-oriented pricing strategies. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 33 5 The Cost Determinant of Price Types of Costs Variable Costs Fixed Costs Deviate with changes in level of output Do not deviate as level of output changes Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 34 5 The Cost Determinant of Price Markup pricing Keystoning Methods Used to Set Prices Profit Maximization Pricing Break-Even Pricing Target-Return Pricing Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 35 5 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. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 36 5 Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 37 5 Break-Even Pricing Total Revenue Total Costs Break-even point Price 4,000 2,000 Fixed costs 0 1,000 2,000 3,000 4,000 5,000 6,000 Quantity Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 38 5 Break-Even Pricing Break-Even Quantity = Fixed cost Contribution = Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Total Fixed Costs Fixed cost Contribution Price -- Avg. Variable Cost 39 6 Learning Objective Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 40 6 Other Determinants of Price Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 41 6 Stages in the Product Life Cycle On Line http://www.fragrancenet.com Introductory Stage Growth Stage Maturity Stage Decline Stage $ $ $ $ High Stable Decrease Decrease Stable High Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 42 6 Distribution Strategy Convincing distributors to carry product Offer a larger profit margin Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Give dealers a large trade allowance 43 6 Selling Against the Brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 44 6 Regaining Price Control Exclusive distribution system Franchising Avoid business with price-cutting discounters Package marked with selling price Place goods on consignment Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning DEVELOP BRAND LOYALTY 45 6 On Line http://www.botspot.com The Impact of the Internet Buyers can compare products and prices Sellers can collect detailed customer data Online merchants can compare other merchant’s prices and adjust their own easily Bargaining power is created between buyers and sellers Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 46 6 Extranet A private electronic network that links a company with its suppliers and customers. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 47 6 Prestige Pricing On Line http://www.debeers.com http://www.rolex.com Charging a high price to help promote a high-quality image. Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 48 6 Prestige Dimensions of Quality Performance Serviceability Durability Versatility Ease of Use Chap. 17 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 49
