Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts © iStockphoto.com/ktsimage

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 2 The Importance of Price Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 3 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 4 What is Price? Sacrifice Effect of Price –What is sacrificed to get a good or service Money, Time, Dignity Information Effect of Price –Infer quality information based on price Higher quality = higher price Convey status Value Based upon Perceived Satisfaction –Reasonable Price = Perceived Reasonable Value Exchange based on expectation of satisfaction LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 5 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. LO 1

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 6 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 LO 1 U.S. recession from late 2007 to 2009.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 7 Pricing Objectives Profit Oriented Sales Oriented Status Quo LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 8 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 9 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 10 Return on Investment ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets. Return on Investment (ROI) Return on Investment (ROI) LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 11 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 12 Market Share A company’s product sales as a percentage of total sales for that industry. LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 13 Sales Maximization  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 14 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives LO 2

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 15 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. 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. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 16 LO 3 Exhibit 19.2 Demand Curve and Demand Schedule for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 17 LO 3 Exhibit 19.3 Supply Curve and Supply Schedule for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 18 How Demand and Supply Establish Price Price Equilibrium Price Equilibrium The price at which demand and supply are equal. The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. Consumers’ responsiveness or sensitivity to changes in price. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 19 LO 3 Exhibit 19.4 Equilibrium Price for Gourmet Cookies

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 20 Elasticity of Demand Elastic Demand  Consumers buy more or less of a product when the price changes. Inelastic Demand  An increase or a decrease in price will not significantly affect demand. Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, so total revenue remains the same. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 21 Elasticity of Demand 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. LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 22 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 23 Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation LO 3

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 24 Yield Management Systems LO 4 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 25 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity LO 4

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 26 Yield Management Systems 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.. LO 4

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 27 SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at accessed November 7, Yield Management Systems Supply Side of Product or Service LO 4 High Office block House Airline seat Utilities Sport event Rental car Low Shirt Pencils Food Tropical fish LowHigh Capital Intensity Perishability Beyond the Book

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 28 SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at accessed November 7, Yield Management Systems Variability of Demand Demand Side of Product or Service LO 4 High Utilities Highway use Telephone Airline seat Sport event Rental car Mobile phone Low Food Music CD Shirt Office block Laptop House LowHigh Variability of Value Beyond the Book

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 29 The Cost Determinant of Price Varies with changes in level of output Varies with changes in level of output Types of Costs Variable Cost Variable Cost Fixed Cost Does not change as level of output changes Does not change as level of output changes LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 30 The Cost Determinant of Price Average Variable Cost (AVC) – total variable cost divided by quantity of output Average Total Cost (ATC) – total costs divided by quantity of output Marginal Cost (MC) – the change in total costs associated with a one-unit change in output

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 31 The Cost Determinant of Price Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 32 Markup 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. Keystoning The practice of marking up prices by 100 percent, or doubling the cost. The practice of marking up prices by 100 percent, or doubling the cost. LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 33 Profit 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. Marginal Revenue (MR) Marginal Revenue (MR) 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. LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 34 LO 5 Exhibit 19.7 Costs, Revenues, and Universal Sportswear

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 35 Break-Even Pricing Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost LO 5

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 36 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 Price LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 37 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 38 Stages in the Product Life Cycle LO 6 Introductory stage – prices high Growth stage – prices stabilize Maturity stage – price decreases Decline stage – price decreases

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 39 The Competition  High prices may induce firms to enter the market  Competition can lead to price wars LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 40 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 LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 41 Distribution Strategy Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Selling against the brand LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 42 The Impact of the Internet LO 6 Shopping Bots A program that searches the Web for the best price for a particular item. Internet Auctions Business-to-business auctions are likely to be the dominant form of online auctions in the future.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 43 Promotion Strategy Price is often used as a promotional tool to increase consumer interest. Examples: 1.Pittsburgh Zoo – $5 admission for wearing a tie-dye shirt 2.Crested Butte Ski Resort – free skiing between Thanksgiving and Christmas 3.Bugle Boy – uncut competition by offering pants to retailers at wholesale prices

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 44 Demands of Large Customers Require suppliers to pay cash rebates if stores’ profit margins aren’t met. Fines for violations of ticketing, packing, and shipping rules.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 45 The Relationship of Price to Quality Charging a high price to help promote a high- quality image. Prestige Pricing LO 6

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 46 Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige LO 6