Chapter 15 Ver 2e1 Chapter 15 ©2000 South-Western College Publishing Pricing Concepts Prepared by Deborah Baker Texas Christian University

Chapter 15 Ver 2e2 Chapter 15 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. (continued) ©2000 South-Western College Publishing

Chapter 15 Ver 2e3 Chapter 15 Objectives 4.Describe cost-oriented pricing strategies. 5.Demonstrate how the product life cycle, competition, distribution and promotion strategies, the impact of the Internet, demands of large customers, and perceptions of quality can affect price. 6.Describe the procedure for setting the right price. (continued) ©2000 South-Western College Publishing

Chapter 15 Ver 2e4 Chapter 15 Objectives 7.Identify the legal and ethical constraints on pricing decisions. 8.Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. ©2000 South-Western College Publishing

Chapter 15 Ver 2e5 The Importance of Price ©2000 South-Western College Publishing To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy What is Price? To the seller... Price is revenue and profit source To the seller... Price is revenue and profit source

Chapter 15 Ver 2e6 The Importance of Price ©2000 South-Western College Publishing Revenue = Unit Price X number of units sold  Revenue pays for every activity.  What’s left over is Profit. Marketers must select a price that is not too high or not too low, or not too low, a price that equals the perceived value to target consumers

Chapter 15 Ver 2e7 ©2000 South-Western College Publishing The Importance of Price Trends in the MarketTrends Market High rate of new product introduction High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers More efficient and better informed buyers

Chapter 15 Ver 2e8 ©2000 South-Western College Publishing Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

Chapter 15 Ver 2e9 ©2000 South-Western College Publishing Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

Chapter 15 Ver 2e10 ©2000 South-Western College Publishing Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives

Chapter 15 Ver 2e11 ©2000 South-Western College Publishing Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

Chapter 15 Ver 2e12 ©2000 South-Western College Publishing The Demand Curve Quantity demanded D D Price

Chapter 15 Ver 2e13 ©2000 South-Western College Publishing The Supply Curve Quantity supplied S S Price

Chapter 15 Ver 2e14 ©2000 South-Western College Publishing Equilibrium Price Quantity demanded S S Price D D Surplus Shortage Price Equilibrium

Chapter 15 Ver 2e15 ©2000 South-Western College Publishing Elasticity of Demand Elastic Demand  Consumers buy more or less of a product when the price changes Inelastic Demand  An increase or decrease in price will not significantly affect demand Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Chapter 15 Ver 2e16 ©2000 South-Western College Publishing Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

Chapter 15 Ver 2e17 ©2000 South-Western College Publishing Elasticity of Demand Elastic Demand Curve D D Quantity Price D D Quantity Price Inelastic Demand Curve

Chapter 15 Ver 2e18 Factors That Affect ElasticityofDemand ElasticityofDemand Availability of Substitutes Price relative to Purchasing Power Price relative to Purchasing Power Product Durability Product’s Other Uses Factors That Affect Elasticity ©2000 South-Western College Publishing

Chapter 15 Ver 2e19 ©2000 South-Western College Publishing The Cost Determinant of Price Deviate with changes in level of output Deviate with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not deviate as level of output changes Do not deviate as level of output changes

Chapter 15 Ver 2e20 ©2000 South-Western College Publishing The Cost Determinant of Price Target-Return Pricing Target-Return Pricing Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

Chapter 15 Ver 2e21 ©2000 South-Western College Publishing Break-Even Analysis Quantity Price 2,000 01,0002,000 3,0004,0005,0006,000 4,000 Fixed costs Loss Profit Total Revenue Total Costs Break-even point

Chapter 15 Ver 2e22 ©2000 South-Western College Publishing Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Other Factors ThatInfluencePrice ThatInfluencePrice

Chapter 15 Ver 2e23 ©2000 South-Western College Publishing Price and Stages in the PLC Introductor y StageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High

Chapter 15 Ver 2e24 ©2000 South-Western College Publishing Distribution Strategy Offer a larger profit margin Offer a larger profit margin Convincing Distributors to Carry Product Convincing Distributors to Carry Product Give dealers a large trade allowance Give dealers a large trade allowance

Chapter 15 Ver 2e25 ©2000 South-Western College Publishing Steps in Setting the Right Price Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine tune with pricing tactics Results lead to the right price

Chapter 15 Ver 2e26 ©2000 South-Western College Publishing Choose a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing

Chapter 15 Ver 2e27 ©2000 South-Western College Publishing Price Skimming Situationswhen is Successful Situationswhen Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand

Chapter 15 Ver 2e28 ©2000 South-Western College PublishingIssues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Legality and Ethics of Price Strategy

Chapter 15 Ver 2e29 ©2000 South-Western College Publishing CommonTacticsforFine-Tuning the Base Price CommonTacticsforFine-Tuning Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing Fine Tuning the Base Price

Chapter 15 Ver 2e30 ©2000 South-Western College Publishing Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Pricing Common Methods of GeographicPricingCommon GeographicPricing

Chapter 15 Ver 2e31 ©2000 South-Western College Publishing Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good