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MKTG. Lamb, Hair, McDaniel 2008-2009. 17. CHAPTER. Pricing Concepts. Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University. Learning Outcomes. Discuss the importance of pricing decisions to the economy and to the individual firm

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MKTG

Lamb, Hair, McDaniel 2008-2009

17

CHAPTER

Pricing Concepts

Designed by

Amy McGuire, B-books, Ltd.

Prepared by

Deborah Baker, Texas Christian University


Learning outcomes
Learning Outcomes

Discuss the importance of pricing decisions to the economy and to the individual firm

List and explain a variety of pricing objectives

Explain the role of demand in price determination

LO1

LO2

LO3


Learning outcomes1
Learning Outcomes

Understand the concept of yield management systems

Describe cost-oriented pricing strategies

Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

LO4

LO5

LO6


The importance of price
The Importance of Price

LO1

Discuss the importance of pricing decisions to the economy and to the individual firm


The importance of price1

To the seller...Price is revenue

To the consumer...Price is the cost of something

The Importance of Price

Price allocates resources in a free-market economy

LO1


What is price
What Is Price?

Price

Price is that which is given up in an exchange to acquire a good or service.

LO1


The importance of price to marketing managers

Revenue

The price charged to customers multiplied by the number of units sold.

Profit

Revenue minus expenses.

The Importance of Price to Marketing Managers

LO1


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

Trends Influencing Price

LO1


Review learning outcome

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment

REVIEW LEARNING OUTCOME

LO1

The Importance of Pricing Decisions


Pricing objectives
Pricing Objectives

LO2

List and explain a variety of pricing objectives


Pricing objectives1

Profit-Oriented

Sales-Oriented

Status Quo

Pricing Objectives

LO2


Profit oriented pricing objectives

Profit-Oriented Pricing Objectives

Profit

Maximization

SatisfactoryProfits

Target Return on

Investment

Profit-Oriented Pricing Objectives

LO2


Profit maximization

Setting prices so that total revenue is as large as possible relative to total costs.

Profit Maximization

Profit Maximization

LO2


Return on investment

Net profit after taxes divided by total assets. relative to total costs.

ROI = Net Profit after taxes

Total assets

Return on Investment

Return on Investment

LO2


Sales oriented pricing objectives

Sales-Oriented Pricing Objectives relative to total costs.

Market

Share

Sales

Maximization

http://www.target.com

http://www.walmart.com

http://www.jcpenney.com

Online

Sales-Oriented Pricing Objectives

LO2


Market share
Market Share relative to total costs.

Market Share

A company’s product sales as a percentage of total sales for that industry.

LO2


Sales maximization
Sales Maximization relative to total costs.

  • Short-term objective to maximize sales

  • Ignores profits, competition, and the marketing environment

  • May be used to sell off excess inventory

LO2


Status quo pricing objectives

Status Quo Pricing Objectives relative to total costs.

Maintain

existing

prices

Meet

competition’s

prices

Status Quo Pricing Objectives

LO2


Review learning outcome1

Profit-Oriented relative to total costs.

Profit

Maximization

Satisfactory

Profits

Target

ROI

Status Quo

Sales-Oriented

Market

Share

SalesMaximization

Maintain

Existing Price

REVIEW LEARNING OUTCOME

LO2

Pricing Objectives


The demand determinant of price
The Demand Determinant of Price relative to total costs.

LO3

Explain the role of demand in price determination


The demand determinant of price1
The Demand Determinant relative to total costs.of Price

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.

http://www.ubid.com

Online

LO3


The demand curve
The Demand Curve relative to total costs.

LO3


The supply curve
The Supply Curve relative to total costs.

LO3


How demand and supply establish price
How Demand and Supply Establish Price relative to total costs.

Price

Equilibrium

The price at which demand and

supply are equal.

Elasticity of Demand

Consumers’ responsiveness or

sensitivity to changes in price.

LO3


Price equilibrium
Price Equilibrium relative to total costs.

LO3


Elasticity of demand
Elasticity of Demand relative to total costs.

LO3

Elastic Demand

  • Consumers buy more or lessof a product when the price changes.

InelasticDemand

  • An increase or decrease in price will not significantly affect demand.

UnitaryElasticity

  • An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.


Elasticity of demand1
Elasticity of Demand relative to total costs.

Percentage change in quantity demanded of good A

Elasticity (E) =

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.

LO3


Elasticity of demand2
Elasticity of Demand relative to total costs.

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

LO3


Biz Flix relative to total costs.

The

Money Pit

LO3


Elasticity of demand3
Elasticity of Demand relative to total costs.

LO3


Factors that affect elasticity of demand
Factors that Affect Elasticity of Demand relative to total costs.

http://www.columbiahouse.com

Online

LO3

Availability of substitutes

Price relative to purchasing power

Product durability

A product’s other uses

Rate of inflation


The power of yield management systems
The Power of Yield relative to total costs.Management Systems

LO4

Understand the concept of yield management

systems


Yield management systems

Yield relative to total costs.ManagementSystems

Yield Management Systems

A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

LO4


Yield management systems1

Discounting early purchases relative to total costs.

Limiting early sales at discounted prices

Overbooking capacity

Yield Management Systems

LO4


Yield Management Systems relative to total costs.

LO4

  • Yield Management Systems (YMS) make it possible for a company to:

    • stimulate demand when demand is low, and

    • maximize profits when demand is high.

  • .

Beyond the Book


High relative to total costs.

Capital Intensity

Low

High

Perishability

Low

Yield Management Systems

LO4

Supply Side of Product or Service

Beyond the Book

SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.


High relative to total costs.

Low

Variability of Value

High

Low

Yield Management Systems

LO4

Demand Side of Product or Service

Variability of Demand

Beyond the Book

SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.


Review learning outcome2
REVIEW LEARNING OUTCOME relative to total costs.

LO4

Yield Management Systems


The cost determinant of price
The Cost Determinant of Price relative to total costs.

LO5

Describe cost-oriented pricing strategies


The Cost Determinant of Price relative to total costs.

Types of Costs

Variable

Cost

Fixed Cost

Varies with changes

in level of output

Does not change

as level of output changes

LO5


The Cost Determinant of Price relative to total costs.

Markup pricing

Methods

Used to

Set Prices

Keystoning

Profit Maximization Pricing

Break-Even

Pricing

LO5


Markup Pricing relative to total costs.

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.

LO5


Profit Maximization relative to total costs.

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.

LO5


Break-Even Pricing relative to total costs.

LO5


Break-Even Pricing relative to total costs.

Break-Even

Quantity

Fixed cost

Contribution

Total fixed costs

Fixed cost contribution

Price - Avg. Variable Cost

=

=

LO5


Review learning outcome3
REVIEW LEARNING OUTCOME relative to total costs.

LO5

Cost-Oriented Pricing Strategies


Other determinants of price
Other Determinants of Price relative to total costs.

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


Other determinants of price1

Stages of the relative to total costs.

Product Life Cycle

Competition

Distribution Strategy

Promotion Strategy

Perceived Quality

Other Determinants of Price

LO6


Stages in the product life cycle

Introductory relative to total costs.

Stage

Growth

Stage

Maturity

Stage

Decline

Stage

$

Decrease

Stable

High

$

High

$

Stable

$

Decrease

Stages in the Product Life Cycle

LO6


The competition
The Competition relative to total costs.

  • High prices may induce firms to enter the market

  • Competition can lead to price wars

  • Global competition

    may force firms to

    lower prices

LO6


Distribution strategy
Distribution Strategy relative to total costs.

Manufacturers

Wholesalers/Retailers

  • Offer a larger profit margin or trade allowance

  • Use exclusive distribution

  • Franchising

  • Avoid business with price-cutting discounters

  • Develop brand loyalty

  • Sell against the brand

  • Buy gray-market goods

LO6


Distribution strategy1

Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

Distribution Strategy

Selling againstthe brand

LO6


The impact of the internet

Product selection sell store brands at discounted prices.

Second opinions from expert sites

Shopping bots

Internet auctions

The Impact of the Internet

LO6


Impact of the Internet on Book Distribution sell store brands at discounted prices.

Online 13%

Schools and Libraries 24%

Online 2%

Schools and Libraries 27%

Book Clubs 5%

Non-bookstore Retail 18%

Book Clubs 16%

Non-bookstore Retail 13%

Traditional Retail 38%

[+ 2% direct-to-consumer sales]

Traditional Retail 42%

1998 2006

$22.5 Billion $28.5 Billion

Net Publisher Revenue

LO6

Beyond the Book

SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal, March 22, 2007 B1


The relationship of price to quality

http://www.vivre.com sell store brands at discounted prices.

http://www.bluefly.com

Online

The Relationship of Price to Quality

Prestige Pricing

Charging a high price to help promote a high-quality image.

LO6


Prestige Pricing sell store brands at discounted prices.

LO6

When Tiffany & Co. created a line of more affordable silver jewelry to broaden its offerings to the upper-middle classes it took a gamble with its reputation as an upscale luxury brand. Tiffany’s managers began to worry about alienating its core clientele—the older, affluent, and conservative customer who prizes exclusivity.

Tiffany decided to protect its brand equity by significantly raising prices on its silver jewelry beyond the reach of “aspirational” customers while aggressively courting its affluent customers. Still, Tiffany lost some wealthy customers who complained that “everyone has Tiffany jewelry now.”

Beyond the Book

SOURCE: Ellen Byron “To Refurbish Its Image, Tiffany Risks Profits,” Wall Street Journal, 1/10/07 A1.


The pet-care market is a $47-billion industry sell store brands at discounted prices.

in the United States

17.4 million of the 52.8 million pet-owning households qualify as “premium” or “uber” owners, sparing no expense on high-end products for their pets

Uber owners tripled their pet-supply spending between 1995 and 2005 (from $5.2 billion to $18.6 billion)

Products for pets that are made to resemble products for humans—with familiar brand names—are growing the most in popularity

Premium Pets

LO6

Beyond the Book

SOURCE: Tom Ehart, “’Functional Pampering’ by ‘Uber Owners’ to drive Premium Pet Products Market Growth,” Packaged Facts, August 31, 2007.


Dimensions of quality
Dimensions of Quality sell store brands at discounted prices.

Ease of use

Versatility

Durability

Serviceability

Performance

Prestige

LO6


Review learning outcome4
REVIEW LEARNING OUTCOME sell store brands at discounted prices.

LO6

Factors Affecting Price


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