Pricing Concepts: Importance, Objectives, Role of Demand, and Cost-Oriented Strategies

1. Pricing Concepts Chapter 17 Prepared by Deborah Baker Texas Christian University

2. 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.

3. 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.

4. Learning Objective 1 On Line http://www.mlb.com Discuss the importance of pricing decisions to the economy and to the individual firm.

5. The Importance of Price 1 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

6. What Is Price? 1 Price is that which is given up in an exchange to acquire a good or service.

7. Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses The Importance of Priceto Marketing Managers 1

8. Revenue = Unit Price  Number of units sold • Revenue pays for every activity. • What’s left over is Profit. The Importance of Price 1 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

9. Flood of new product introductions Trends in the Market Increased availability of bargain-priced private and generic brands Price cutting as a strategy tomaintain or regain market share A general decline in consumer confidence after terrorist attacks Trends Influencing Price Setting 1

10. Learning Objective 2 List and explain a variety of pricing objectives.

11. Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives Pricing Objectives 2

12. Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives 2 Profit Maximization SatisfactoryProfits Target Return on Investment

13. Profit Maximization 2 Setting prices so that total revenue is as large as possible relative to total costs.

14. Return on Investment 2 Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets

15. Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives 2

16. Market Share 2 A company’s product sales as a percentage of total sales for that industry.

17. Sales Maximization 2 • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory

18. Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives 2 On Line http://www.target.com http://www.walmart.com http://www.jcpenney.com

19. Learning Objective 3 Explain the role of demand in price determination.

20. 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. Demand and Supply 3

21. 2.50 D 2.00 Price 1.50 D 1.00 .50 0 20 40 60 80 100 120 Quantity demanded The Demand Curve 3

22. S 2.50 2.00 Price 1.50 1.00 S .50 0 20 40 60 80 100 120 The Supply Curve 3 On Line http://www.uBid.com Quantity supplied

23. Price Equilibrium 3 The price at which demand and supply are equal.

24. S 2.50 Surplus D 2.00 PriceEquilibrium Price 1.50 1.00 Shortage S D .50 0 20 40 60 80 100 120 Quantity demanded Equilibrium Price 3

25. Elasticity of Demand 3 Consumers’ responsiveness or sensitivity to changes in price.

26. 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 Demand 3

27. 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 3

28. Elastic Demand Curve Inelastic Demand Curve D D Price Price D D Quantity Quantity Elasticity of Demand 3

29. Availability of Substitutes Price relative to purchasing power Product durability A product’s other uses Factors that Affect Elasticity of Demand 3 On Line http://www.columbiahouse.com

30. Learning Objective 4 Understand the concept of yield management systems.

31. Yield Management Systems 4 A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

32. Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Yield Management SystemsPrice Adjustments 4

33. Learning Objective 5 Describe cost-oriented pricing strategies.

34. Types of Costs Variable Costs Fixed Costs Deviate with changes in level of output Do not deviate as level of output changes The Cost Determinant of Price 5

35. Markup pricing Methods Used to Set Prices Keystoning Profit Maximization Pricing Break-Even Pricing Target-Return Pricing The Cost Determinant of Price 5

36. 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. Markup Pricing 5

37. 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. Profit Maximization 5

38. Total Revenue Profit Total Costs 4,000 Break-even point Price Loss 2,000 Fixed costs 3,000 4,000 5,000 6,000 0 1,000 2,000 Quantity Break-Even Pricing 5

39. Break-Even Quantity Fixed cost Contribution Total Fixed Costs Fixed cost Contribution = = Price -- Avg. Variable Cost Break-Even Pricing 5

40. Learning Objective 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.

41. Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Other Determinants of Price 6

42. Introductory Stage Growth Stage Maturity Stage Decline Stage $ High $ Stable $ Decrease $ DecreaseStableHigh Stages in the Product Life Cycle On Line http://www.fragrancenet.com 6

43. Convincing distributors to carry product Offer a larger profit margin Give dealers a large trade allowance Distribution Strategy 6

44. Selling Against the Brand 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

45. Exclusive distribution system Franchising Avoid business with price-cutting discounters Package marked with selling price Place goods on consignment DEVELOP BRAND LOYALTY Regaining Price Control 6

46. The Impact of the Internet 6 On Line http://www.botspot.com • 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

47. Extranet 6 A private electronic network that links a company with its suppliers and customers.

48. Prestige Pricing 6 On Line http://www.debeers.com http://www.rolex.com Charging a high price to help promote a high-quality image.

49. 6 Prestige Performance Serviceability Durability Versatility Ease of Use Dimensions of Quality