chapter 17copyright ©2009 cengage learning inc. all rights reserved 1 mktg designed by amy mcguire,...

Chapter 17 Copyright ©2009 Cengage Learning Inc. All rights reserved 1

MKTG

Designed byAmy McGuire, B-books, Ltd.

Prepared byDeborah Baker, Texas Christian University

Lamb, Hair, McDaniel 2008-2009

Pricing Concepts1

7

CHAPTER


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 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

LO6

LO5

LO4


Discuss the importance of pricing

decisions to the economy and to the

individual firm

The Importance of PriceThe Importance of PriceLO1


LO1

The Importance of Price

Price allocates resources in a free-market economyPrice allocates resources in a free-market economy

To the consumer...Price is the cost

of something

To the consumer...Price is the cost

of something

To the seller...Price is revenueTo the seller...

Price is revenue


LO1

What Is Price?

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

PricePrice


LO1

The Importance of Price to Marketing Managers

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

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

ProfitProfit Revenue minus expenses.Revenue minus expenses.


LO1

Trends Influencing Price

Flood of new productsFlood of new products

Increased availability of bargain-priced private and generic brandsIncreased availability of bargain-priced private and generic brands

Price cutting as a strategy to maintain or regain market sharePrice cutting as a strategy to maintain or regain market share

Internet used for comparison shoppingInternet used for comparison shopping


REVIEW LEARNING OUTCOMELO1

The Importance of Pricing Decisions

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment


List and explain a variety of pricing

objectives

Pricing ObjectivesPricing ObjectivesLO2


Pricing Objectives

LO2

Profit-Oriented

Sales-Oriented

Status Quo


Profit-Oriented Pricing Objectives

LO2

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment


Profit Maximization

LO2

Setting prices so that total

revenue is as large as possible

relative to total costs.

Profit Maximization

Profit Maximization


Return on Investment

LO2

ROI = Net Profit after taxes Total assets

Net profit after taxes divided

by total assets.

Return on

Investment

Return on

Investment


Sales-Oriented Pricing Objectives

LO2

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

Online

http://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com


Market Share

LO2

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


Sales Maximization

LO2

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

LO2

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives



Pricing Objectives

ProfitMaximization

SatisfactoryProfits

TargetROI

Profit-Oriented

Sales-Oriented

MarketShare

SalesMaximization

Status Quo

MaintainExisting Price


Explain the role of demand in price determination

The Demand Determinant of PriceThe Demand Determinant of PriceLO3


The Demand Determinant of Price

LO3

DemandDemandThe 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 sold in the market at various prices for a specified period.

SupplySupplyThe quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

Online

http://www.ubid.com


The Demand CurveLO3


The Supply CurveLO3


How Demand and Supply Establish Price

LO3

PriceEquilibrium

PriceEquilibrium

The price at which demand and supply are equal.

The price at which demand and supply are equal.

Elasticity of Demand

Elasticity of Demand

Consumers’ responsiveness or sensitivity to changes in price.

Consumers’ responsiveness or sensitivity to changes in price.


Price EquilibriumLO3


Elasticity of DemandLO3

Elastic Demand Elastic

Demand

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

InelasticDemand

InelasticDemand

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

UnitaryElasticityUnitary

Elasticity

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



Elasticity (E) =Percentage change in quantity

demanded of good A

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.



Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity


Biz Flix

LO3The Money Pit


Factors that Affect Elasticity of Demand

LO3

Availability of substitutesAvailability of substitutes

Price relative to purchasing powerPrice relative to purchasing power

Product durabilityProduct durability

A product’s other usesA product’s other uses

Rate of inflationRate of inflation

Online

http://www.columbiahouse.com


Understand the concept of yield

management systems

The Power of Yield The Power of Yield Management SystemsManagement SystemsLO4


LO4

Yield Management Systems

Yield Management

Systems

Yield Management

SystemsA technique for adjusting

prices that uses complex

mathematical software to

profitably fill unused

capacity.


LO4


Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity


LO4B

eyond

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

1.stimulate demand when

demand is low, and

2.maximize profits when

demand is high.

.


LO4B

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Book

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


Office block

House

Airline seat

Utilities

Sport event

Rental car

Shirt

Pencils

Food

Tropical fish

Perishability

Capital Intensity

High

High

Low

Low

Supply Side of Product or Service


LO4B

eyond

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Book

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


Utilities

Highway use

Telephone

Airline seat

Sport event

Rental car

Mobile phone

Food

Music CD

Shirt

Office block

Laptop

House

Variability of Demand

Variability of Value

High

High

Low

Low

Demand Side of Product or Service


Describe cost-oriented pricing strategies

The Cost Determinant of PriceThe Cost Determinant of PriceLO5


The Cost Determinant of Price

LO5

Varies with changes in level of output

Varies with changes in level of output

Types of CostsTypes of Costs

VariableCost

VariableCost Fixed CostFixed Cost

Does not change as level of output changes

Does not change as level of output changes


The Cost Determinant of Price

LO5Break-Even

PricingBreak-Even

Pricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsUsed to

Set Prices

MethodsUsed to

Set Prices


Markup Pricing

LO5

Markup Pricing

Markup Pricing

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

KeystoningKeystoning The practice of marking up prices by 100%, or doubling the cost.

The practice of marking up prices by 100%, or doubling the cost.


Profit Maximization

LO5

ProfitMaximization

ProfitMaximization

A method of setting prices that occurs when marginal revenue equals marginal cost.

A method of setting prices that occurs when marginal revenue equals marginal cost.

MarginalRevenue

MarginalRevenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

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

LO5


Break-Even Pricing

LO5

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost



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

Other Determinants of PriceOther Determinants of PriceLO6


Other Determinants of Price

LO6 Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle


Stages in the Product Life Cycle

LO6

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh


The Competition

LO6

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

LO6

ManufacturersManufacturers Wholesalers/RetailersWholesalers/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


Distribution Strategy

LO6

Stocking well-known branded items

at high prices in order to sell store

brands at discounted prices.

Selling againstthe brand

Selling againstthe brand


The Impact of the Internet

LO6

Internet auctions Internet auctions

Shopping bots Shopping bots

Second opinions from expert sites Second opinions from expert sites

Product selection Product selection


LO6B

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

Net Publisher Revenue

1998 2006$22.5 Billion $28.5 Billion

Online 13%

Schools and Libraries 24%

Book Clubs 5%

Non-bookstore Retail 18%

Traditional Retail 38%

[+ 2% direct-to-consumer sales]

Online 2%

Schools and Libraries 27%

Book Clubs 16%

Non-bookstore Retail 13%

Traditional Retail 42%

Impact of the Internet on Book Distribution


The Relationship of Price to Quality

LO6

Charging a high price to

help promote a high-

quality image.

Online

http://www.vivre.comhttp://www.bluefly.com

Prestige PricingPrestige Pricing


LO6B

eyond

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Prestige Pricing

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

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.”


LO6B

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Premium Pets

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

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


Dimensions of Quality

LO6

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige



Factors Affecting Price

chapter 17copyright ©2009 cengage learning inc. all rights reserved 1 mktg designed by amy mcguire,...

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