© iStockphoto.com/ktsimage Lamb, Hair, McDaniel Chapter 19 Pricing Concepts © Cengage Learning All Rights Reserved.

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 Understand the concept of yield management systems Describe cost-oriented pricing strategies Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price © Cengage Learning 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 © Cengage Learning All Rights Reserved. 3 1

What is Price? The Sacrifice Effect of Price – Price is that which is sacrificed to get a good or service. The Information Effect of Price – People infer quality information based on price. Value Is Based upon Perceived Satisfaction – “Reasonable price” means “perceived reasonable value.” © Cengage Learning All Rights Reserved. 4 1

The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. © Cengage Learning All Rights Reserved. 5 1

Trends Influencing Price Flood of new products Increased availability of bargain-priced private and generic brands 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 U.S. recession from late 2007 to © Cengage Learning All Rights Reserved. 6 1

Pricing Objectives Profit Oriented Sales Oriented Status Quo © Cengage Learning All Rights Reserved. 7 2

8 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2

© Cengage Learning All Rights Reserved.9 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2

© Cengage Learning All Rights Reserved.10 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives 2

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. © Cengage Learning All Rights Reserved. 11 3

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. © Cengage Learning All Rights Reserved. 12 3

Exhibit 19.4 © Cengage Learning All Rights Reserved.13 3

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. © Cengage Learning All Rights Reserved. 14 3

Elasticity of Demand Elasticity (E) = Percentage change in quantity demanded of good A Percentage change in price of good A If E > 1, demand is elastic. If E < 1, demand is inelastic. If E = 1, demand is unitary. © Cengage Learning All Rights Reserved. 15 3

Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Price relative to purchasing power Product durability A product’s other uses Rate of inflation © Cengage Learning All Rights Reserved. 16 3

Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity © Cengage Learning All Rights Reserved. 17 4

Yield Management Systems Yield Management Systems (YMS) make it possible for a company to: 1.Stimulate demand when demand is low 2.Maximize profits when demand is high. © Cengage Learning All Rights Reserved. 18 4

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 © Cengage Learning All Rights Reserved.19 5

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. © Cengage Learning All Rights Reserved. 20 5

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 © Cengage Learning All Rights Reserved. 21 5

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. © Cengage Learning All Rights Reserved. 22 5

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. © Cengage Learning All Rights Reserved. 23 5

Exhibit 19.7 Costs, Revenues, and Universal Sportswear © Cengage Learning All Rights Reserved. 24

Break-Even Pricing Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost © Cengage Learning All Rights Reserved. 25 5

Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle © Cengage Learning All Rights Reserved. 26 6

The Relationship of Price to Quality Charging a high price to help promote a high- quality image. Prestige Pricing © Cengage Learning All Rights Reserved When a purchase decision involves uncertainty, consumers tend to rely on a high price as a predictor of good quality.

28 Ch 19 Discussion Questions 1.Explain the three types of pricing objectives of the firm. 2.What is profit maximization? How does break- even analysis explain profit maximization? 3.What is yield management system? What role does it play in pricing? 4.Explain the (other) determinants of price. 5.What role of Internet plays in Pricing Decisions? Explain.