module 2 pricing strategy

8/6/2019 Module 2 Pricing Strategy

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Module II

Pricing ConceptsPricing Concepts


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Learning ObjectiveLearning Objective

Discuss the

importance of

pricing decisions to

the economy and to

the individual firm.

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On Line

http://www.mlb.com

On Line

http://www.mlb.com
http://www.mlb.com/http://www.mlb.com/http://www.mlb.com/


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In the broadest sense,In the broadest sense,price allocates resourcesprice allocates resources

in a free-market economyin a free-market economy

In the broadest sense,In the broadest sense,

price allocates resourcesprice allocates resources

in a free-market economyin a free-market economy

The Importance of PriceThe Importance of Price

To the consumer...To the consumer...

Price is the costPrice is the cost

of somethingof something

To the consumer...To the consumer...

Price is the costPrice is the cost

of somethingof something

To the seller...To the seller...

Price is revenuePrice is revenue

and profit sourceand profit source

To the seller...To the seller...

Price is revenuePrice is revenue

and profit sourceand profit source

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What Is Price?What Is Price?

Price is that which is givenup in an exchange to

acquire a good or service.

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to Marketing Managersto Marketing Managers

Revenue

Revenue

Profit

Profit

The price charged to customers

multiplied by the

number of units sold.

The price charged to customers

multiplied by the

number of units sold.

Revenue minus expenses

Revenue minus expenses

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To earn a profit,To earn a profit,

marketers must select a pricemarketers must select a price

that is not too highthat is not too highor not too low,or not too low,

a price that equalsa price that equals

the perceived value to target consumersthe perceived value to target consumers

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Revenue = Unit Price Number of units sold Revenue pays for every activity.

Whats left over is Profit.


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Trends Influencing Price SettingTrends Influencing Price Setting11

Flood of newproduct introductions

Flood of newproduct introductions

Increased availability ofbargain-priced private and

generic brands

Increased availability of

bargain-priced private andgeneric brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

A general decline in consumerconfidence after terrorist attacks

A general decline in consumerconfidence after terrorist attacks

TrendsTrendsin thein the

MarketMarket

TrendsTrendsin thein the

MarketMarket


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List and explain a

variety of pricing

objectives.

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Pricing ObjectivesPricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

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Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Profit

Maximization

Profit

Maximization

Satisfactory

Profits

Satisfactory

Profits

TargetReturn on

Investment

TargetReturn on

Investment

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Profit MaximizationProfit Maximization

Setting prices so thattotal revenue is as large

as possible relative

to total costs.

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Return on InvestmentReturn on Investment

Net profit after taxes

divided by total assets.

ROI =ROI = Net Profit after taxesNet Profit after taxesTotal assetsTotal assets

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Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Market

Share

Market

Share

Sales

Maximization

Sales

Maximization

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

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Market ShareMarket Share

A companys product sales

as a percentage of total

sales for that industry.

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Sales MaximizationSales Maximization

Short-term objective to maximize sales

Ignores profits, competition, and themarketing environment

May be used to sell

off excess inventory

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Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetitionsprices

Meetcompetitions

prices

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

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On Line

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

http://www.jcpenney.com

On Line

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

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


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Explain the role of

demand in pricedetermination.

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Demand and SupplyDemand and Supply

DemandDemand

SupplySupply

The 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.

The quantity of a product

that will be offered to the market

by a supplier at various pricesfor a specific period.

The quantity of a product

that will be offered to the market

by a supplier at various pricesfor a specific period.

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The Demand CurveThe Demand Curve

D

DPr

ice

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

Quantity demanded

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On Line

http://www.uBid.com

On Line

http://www.uBid.comThe Supply CurveThe Supply Curve

Quantity supplied

S

S

Pr

ice

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

33
http://www.ubid.com/http://www.ubid.com/http://www.ubid.com/


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Price EquilibriumPrice Equilibrium

The price at which demand

and supply are equal.

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Equilibrium PriceEquilibrium Price

Quantity demanded

S

S

Pr

ice

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

D

D

SurplusSurplus

ShortageShortage

PricePriceEquilibriumEquilibrium

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Elasticity of DemandElasticity of Demand

Consumers responsiveness

or sensitivity to changes

in price.

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ElasticElasticDemandDemand

ElasticElasticDemandDemand

Consumers buy more or lessof a product when theprice changes

InelasticInelasticDemandDemand

InelasticInelasticDemandDemand

An increase or decrease inprice will not significantlyaffect demand

UnitaryUnitaryElasticityElasticity

UnitaryUnitaryElasticityElasticity

An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged

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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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Elastic Demand CurveElastic Demand Curve

D

D

Quantity

Pr

ice

D

D

Quantity

Pr

ice

Inelastic Demand CurveInelastic Demand Curve

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Factors that AffectFactors that Affect


Availability of SubstitutesAvailability of Substitutes

Price relative to

purchasing power

Price relative to

purchasing power

Product durabilityProduct durability

A products other usesA products other uses

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On Line

http://www.columbiahouse.com

On Line

http://www.columbiahouse.com
http://www.columbiahouse.com/http://www.columbiahouse.com/http://www.columbiahouse.com/


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Understand the

concept of yieldmanagement

systems.

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Yield Management SystemsYield Management Systems

A technique for adjusting

prices that uses complexmathematical software

to profitably fill

unused capacity.

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Yield Management SystemsYield Management Systems

Price AdjustmentsPrice Adjustments

Discountingearly purchases

Discountingearly purchases

Limiting early sales atdiscounted prices

Limiting early sales atdiscounted prices

Overbooking capacityOverbooking capacity

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Describe cost-orientedpricing strategies.

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The Cost Determinant of PriceThe Cost Determinant of Price55

Deviate with changesin level of output

Deviate with changesin level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed Costs

Fixed CostsFixed Costs

Do not deviateas level of output changes

Do not deviateas level of output changes


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The Cost Determinant of PriceThe Cost Determinant of Price

Target-ReturnPricing

Target-ReturnPricing

Break-EvenPricing

Break-Even

Pricing

Profit MaximizationPricing

Profit MaximizationPricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices

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Markup PricingMarkup Pricing

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.

KeystoningKeystoningThe practice of marking up prices

by 100%, or doubling the cost.

The practice of marking up prices

by 100%, or doubling the cost.

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Profit MaximizationProfit Maximization

Profit

Maximization

Profit

Maximization

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

Marginal

Revenue

The extra revenue associated with

selling an extra unit of output, orthe change in total revenue with a

one-unit change in output.

The extra revenue associated with

selling an extra unit of output, orthe change in total revenue with a

one-unit change in output.

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Break-Even PricingBreak-Even Pricing

QuantityQuantity

Pr

ice

Pr

ice

2,0002,000

00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000

4,0004,000

Fixed costsFixed costs

Loss

Loss

Profit

ProfitTotal RevenueTotal Revenue

Total CostsTotal Costs

Break-even pointBreak-even point

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Break-Even PricingBreak-Even Pricing

Break-EvenQuantity

=Total Fixed Costs

Fixed cost Contribution

Fixed cost

Contribution = Price -- Avg. Variable Cost

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Demonstrate how the

product life cycle,

competition, distribution

and promotion strategies,customer demands, the

Internet and extranets,

and perceptions ofquality can affect price.

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Other Determinants of PriceOther Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

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On Line

http://www.fragrancenet.com

On Line

http://www.fragrancenet.comStages in theStages in the

Product Life CycleProduct Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

Rs.Rs.HighHigh

Rs.Rs.StableStable

Rs.Rs.DecreaseDecrease

MaturityMaturityStageStage

Rs.Rs.DecreaseDecrease

StableStable

HighHigh

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http://www.fragrancenet.com/http://www.fragrancenet.com/http://www.fragrancenet.com/


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Distribution StrategyDistribution Strategy

Offer a largerprofit margin

Offer a largerprofit margin

Convincing distributorsConvincing distributorsto carry productto carry product

Convincing distributorsConvincing distributorsto carry productto carry product

Give dealers a largetrade allowance

Give dealers a largetrade allowance

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Selling Against the BrandSelling Against the Brand

Stocking well-known

branded items at highprices in order to sell

store brands at

discounted prices.

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Regaining Price ControlRegaining Price Control66

DEVELOPBRAND LOYALTY

DEVELOPBRAND LOYALTY

Package marked withselling price

Package marked withselling price

Avoid business withprice-cutting discounters

Avoid business withprice-cutting discounters

FranchisingFranchising

Exclusivedistribution system

Exclusivedistribution system

Place goods on consignmentPlace goods on consignment


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On Line

http://www.botspot.com

On Line

http://www.botspot.com

The Impact of the InternetThe Impact of the Internet

Buyers can compare products and prices

Sellers can collect detailed customer data

Online merchants can compare othermerchants prices and adjust their own easily

Bargaining power is created between

buyers and sellers

66
http://www.botspot.com/http://www.botspot.com/http://www.botspot.com/


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ExtranetExtranet

A private electronic network

that links a companywith its suppliers

and customers.

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Prestige PricingPrestige Pricing

Charging a high price to

help promote a high-quality

image.

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On Line

http://www.debeers.comhttp://www.rolex.com

On Line

http://www.debeers.com

http://www.rolex.com
http://www.debeers.com/http://www.rolex.com/http://www.rolex.com/http://www.debeers.com/http://www.rolex.com/http://www.debeers.com/


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Dimensions of QualityDimensions of Quality66

VersatilityVersatility

DurabilityDurability

ServiceabilityServiceability

Ease of UseEase of Use

PerformancePerformance

PrestigePrestige

module 2 pricing strategy

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