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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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slide1
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.

ROI = Net Profit after taxes

Total assets

Return on Investment

Return on Investment

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

Sales-Oriented Pricing Objectives

LO2

market share
Market Share

Market Share

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

LO2

sales maximization
Sales Maximization
  • 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

Maintain

existing

prices

Meet

competition’s

prices

Status Quo Pricing Objectives

LO2

review learning outcome1
Profit-Oriented

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

LO3

Explain the role of demand in price determination

the demand determinant of price1
The Demand Determinant 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

how demand and supply establish price
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.

LO3

elasticity of demand
Elasticity of Demand

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

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

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

slide29
Biz Flix

The

Money Pit

LO3

factors that affect elasticity of demand
Factors that Affect Elasticity of Demand

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 Management Systems

LO4

Understand the concept of yield management

systems

yield management systems
Yield ManagementSystemsYield Management Systems

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

LO4

yield management systems1
Discounting early purchases

Limiting early sales at discounted prices

Overbooking capacity

Yield Management Systems

LO4

slide35
Yield Management Systems

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

slide36
High

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.

slide37
High

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

LO4

Yield Management Systems

the cost determinant of price
The Cost Determinant of Price

LO5

Describe cost-oriented pricing strategies

slide40
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

LO5

slide41
The Cost Determinant of Price

Markup pricing

Methods

Used to

Set Prices

Keystoning

Profit Maximization Pricing

Break-Even

Pricing

LO5

slide42
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.

LO5

slide43
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.

LO5

slide45
Break-Even Pricing

Break-Even

Quantity

Fixed cost

Contribution

Total fixed costs

Fixed cost contribution

Price - Avg. Variable Cost

=

=

LO5

review learning outcome3
REVIEW LEARNING OUTCOME

LO5

Cost-Oriented Pricing Strategies

other determinants of price
Other Determinants of Price

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

Product Life Cycle

Competition

Distribution Strategy

Promotion Strategy

Perceived Quality

Other Determinants of Price

LO6

stages in the product life cycle
Introductory

Stage

Growth

Stage

Maturity

Stage

Decline

Stage

$

Decrease

Stable

High

$

High

$

Stable

$

Decrease

Stages in the Product Life Cycle

LO6

the competition
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

LO6

distribution strategy
Distribution Strategy

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

Second opinions from expert sites

Shopping bots

Internet auctions

The Impact of the Internet

LO6

slide54
Impact of the Internet on Book Distribution

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

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

slide56
Prestige Pricing

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.

slide57
The pet-care market is a $47-billion industry

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

Ease of use

Versatility

Durability

Serviceability

Performance

Prestige

LO6

review learning outcome4
REVIEW LEARNING OUTCOME

LO6

Factors Affecting Price

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