Chapter 17 Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 1
MKTG
Designed byAmy McGuire, B-books, Ltd.
Prepared byDeborah Baker, Texas Christian University
Lamb, Hair, McDaniel 2007-2008
Pricing Concepts1
7
CHAPTER
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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
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LO1
What Is Price?
Price is that which is given up in an exchange to acquire a good or service.
PricePrice
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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.
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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
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REVIEW LEARNING OUTCOMELO1
The Importance of Pricing Decisions
Price X Sales Unit = Revenue
Revenue – Costs = Profit
Profit drives growth, salary increases, and corporate investment
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Pricing Objectives
LO2
Profit-Oriented
Sales-Oriented
Status Quo
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Profit-Oriented Pricing Objectives
LO2
Profit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
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Profit Maximization
LO2
Setting prices so that total
revenue is as large as possible
relative to total costs.
Profit Maximization
Profit Maximization
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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
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Sales-Oriented Pricing Objectives
LO2
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing Objectives
Online
http://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com
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Market Share
LO2
Market ShareMarket Share A company’s product sales as a percentage of total sales for that industry.
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Sales Maximization
LO2
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
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Status Quo Pricing Objectives
LO2
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing Objectives
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REVIEW LEARNING OUTCOMELO2
Pricing Objectives
ProfitMaximization
SatisfactoryProfits
TargetROI
Profit-Oriented
Sales-Oriented
MarketShare
SalesMaximization
Status Quo
MaintainExisting Price
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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
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The Demand CurveLO3
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The Supply CurveLO3
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LO3B
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Tyson’s Meat Glut Tyson Foods, the world’s largest processor, has an
oversupply of meat:Lower chicken consumption due to avian flu fearsExport restrictions to Japan and South Korea
due to mad cow disease
Mismatch between oversupply and reduced demand has created tremendous financial losses for the company.
Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly.
To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products.
SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.
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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.
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Price EquilibriumLO3
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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.
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Elasticity of DemandLO3
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.
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Elasticity of DemandLO3
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
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Biz Flix
LO3The Money Pit
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Elasticity of DemandLO3
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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
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LO4
Yield Management Systems
Yield Management
Systems
Yield Management
SystemsA technique for adjusting
prices that uses complex
mathematical software to
profitably fill unused
capacity.
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LO4
Yield Management Systems
Discounting early purchasesDiscounting early purchases
Limiting early sales at discounted pricesLimiting early sales at discounted prices
Overbooking capacityOverbooking capacity
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LO4B
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Yield Management Systems
Rental property landlords use
yield management systems to
raise rents at a faster pace.
The M/PF Yield-Star Price
Optimizer is similar to pricing
systems used by airlines and car-rental companies.
It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent.
Tenants can also take advantage of the technology.
SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.
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REVIEW LEARNING OUTCOMELO4
Yield Management Systems
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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
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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
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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.
Chapter 17 Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 35
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.
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Break-Even Pricing
LO5
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Break-Even Pricing
LO5
Break-EvenQuantity = Total fixed costs
Fixed cost contribution
Fixed costContribution = Price - Avg. Variable Cost
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REVIEW LEARNING OUTCOMELO5
Cost-Oriented Pricing Strategies
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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
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Stages in the Product Life Cycle
LO6
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
StableStable
HighHigh
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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
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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
Chapter 17 Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 43
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
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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
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The Relationship of Price to Quality
LO6
Charging a high price to help
promote a high-quality image.
Online
http://www.vivre.comhttp://www.ashford.com
Prestige PricingPrestige Pricing
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LO6B
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The $100,000 Family Car
The auto industry has a new sticker price on luxury: $100,000.
These cars are powerful mass market sedans, targeting households with incomes of $300,000 or more.
With sales of 9,000 cars sold last year, and 17,000
being built, it looks like
massive oversupply.
The expensive models
could lure buyers into
the showroom.SOURCE: “The $100,000 Family Car,” Wall Street Journal, March 12, 2006, W1.
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Dimensions of Quality
LO6
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
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REVIEW LEARNING OUTCOMELO6
Factors Affecting Price