1 Chapter 19: Pricing Concepts Prepared by Amit Shah, Frostburg State University Designed by Eric Brengle, B-books, Ltd. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Learning Outcomes 2 LO 1 LO 2 LO 3 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Learning Outcomes 3 Understand the concept of yield management systems Describe cost-oriented pricing strategies Demonstrate how the product life cycle, competition, distribution and promotion strategies, guaranteed price matching, customer demands, the Internet, and perceptions of quality can affect price LO 5 LO 6 LO 4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Importance of Price 4 Discuss the importance of pricing decisions to the economy and to the individual firm. LO 1 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Importance of Price 5 Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue Copyright 2010 by Cengage Learning Inc. All Rights Reserved

What is Price? 6 Price is that which is given up in an exchange to acquire a good or service. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Importance of Price to Marketing Managers 7 Revenue - The price charged to customers multiplied by the number of units sold. Profit - Revenue minus expenses. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Trends Influencing Price 8 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome The Importance of Pricing Decisions 9 LO 1 Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Pricing Objectives 10 List and explain a variety of pricing objectives. LO 2 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Pricing Objectives 11 Profit-Oriented Sales-Oriented Status Quo Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Profit-Oriented Pricing Objectives 12 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Profit Maximization 13 Setting prices so that total revenue is as large as possible relative to total costs. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Return on Investment 14 Net profit after taxes divided by total assets. ROI = Net profit after taxes Total assets Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Sales-Oriented Pricing Objectives 15 Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives Online Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Market Share 16 A company’s product sales as a percentage of total sales for that industry. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory 17 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Status Quo Pricing Objectives 18 Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Pricing Objectives 19 LO 2 Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Demand Determinant of Price 20 Explain the role of demand in price determination. LO 3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Demand Determinant of Price 21 Demand - 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 specified period. Online Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Demand Curve Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Supply Curve Copyright 2010 by Cengage Learning Inc. All Rights Reserved

How Demand and Supply Establish Price 24 Price equilibrium - The price at which demand and supply are equal. Elasticity of Demand - Consumers’ responsiveness or sensitivity to changes in price. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Price Equilibrium Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Elasticity of Demand 26 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Elasticity of Demand 27 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Elasticity of Demand 28 Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Elasticity of Demand Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Factors that Affect Elasticity of Demand 30 Availability of substitutes Price relative to purchasing power Price relative to purchasing power Product durability A product’s other uses Rate of inflation Online Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Creating Pricing Power Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Role of Demand in Price Determination 32 LO 3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Power of Yield Management Systems 33 Understand the concept of yield management systems. LO 4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Yield Management Systems 34 A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Yield Management Systems 35 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Copyright 2010 by Cengage Learning Inc. All Rights Reserved

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. 36 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Yield Management Systems 37 LO 4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Cost Determinant of Price 38 Describe cost-oriented pricing strategies. LO 5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Cost Determinant of Price 39 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Cost Determinant of Price 40 Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Markup Pricing 41 Markup Pricing – The cost of buying the product from the producer plus amounts for profit expenses n ot otherwise accounted for. Keystoning – The practice of marking up prices by 100%, or doubling the cost. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Profit Maximization 42 Profit Maximization – The method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue – The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Break-Even Pricing Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Break-Even Pricing 44 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Cost-Oriented Pricing Strategies 45 LO 5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Other Determinants of Price 46 Demonstrate how the product life cycle, competition, distribution and promotion strategies, guaranteed price matching, customer demands, the Internet, and perceptions of quality can affect price. LO 6 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Other Determinants of Price 47 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Stages in the Product Life Cycle 48IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Competition High prices may induce firms to enter the market Competition can lead to price wars Global competition may force firms to lower prices 49 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Distribution Strategy Offer a larger profit margin or trade allowance Use exclusive distribution Franchising Avoid business with price- cutting discounters Develop brand loyalty 50 Manufacturers Wholesalers/Retailers  Sell against the brand  Buy gray-market goods Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Distribution Strategy 51 Selling Against the Brand- Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Impact of the Internet 52 Internet auctions Shopping bots Second opinions from expert sites Product selection Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Promotion Strategy/Price Guarantee Promotion Strategy Price used as promotional tool Pricing can also be a tool for trade promotions Price Guarantee Match any competitor’s price Signals to target market it is positioned as a low- price dealer 53 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Relationship of Price to Quality 54 Online Prestige Pricing - Charging a high price to help promote a high- quality image. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige 55 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Factors Affecting Price 56 LO 6 Copyright 2010 by Cengage Learning Inc. All Rights Reserved