Chapter 17 Pricing Concepts

IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value

Other Terms Terms Used Tuition Fare Fine Tip Bribe

Price Competition CustomerNeeds PriceCompetition Slippery slope.

CustomerNeeds ProductCompetition PromotionCompetition DistributionCompetition Nonprice Competition Emphasize value and therefore increase quality AUCTION

The Importance of Price to Marketers Manage demand Manage demand Adapt to competitive environment Adapt to competitive environment Psychology of the consumer Psychology of the consumer BOTTOMLINE issues BOTTOMLINE issues

The Nature of Price Profits = Total Revenues - Total Costs or Profits =(Price x Quantity Sold) - Total Costs

Steps in Setting the Right Price Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing objectives

Pricing Objectives Profit-oriented Profit Maximization: Target-Return Objectives: achieving a specified return on either sales or investment ROI = Net Profit after taxes Total assets

Pricing Objectives Profitability Sales-oriented Sales maximization: Market-share objectives:for controlling a portion of the market

Price and Market Share

Pricing Objectives Meeting Competition Value Pricing Profitability Volume

Pricing Objectives Meeting Competition Prestige Prestige Objectives: set at a relatively high level Profitability Volume

Competitive Environment Number of sellers Product differences Importance of market mix Large number of sellers Similar products Distribution is important Large number of sellers Unique but substitutable Pricing is important- Differentiated products A few large competitors Similar products Promotion is key to achieve perceived product differences Single producer Unique and unsubstitutable Unimportant BASIS OF COMPARISON PURE COMPETITION MONOPOLISTIC COMPETITION OLIGOPOLYMONOPOLY Number of sellers ManyOne

PRICE DETERMINATION IN ECONOMIC THEORY Demand: schedule of the amounts of a firm’s good or service that consumers purchase at different prices during a specified period Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period.

Determination of Demand The Demand Curve Price/Quantity Relationship Q1 200K Quantity $2.50 P1 D1D1D1D1 Price

Determination of Demand 200K 300K Quantity $2.50 P1 D1D1D1D1 Price $2.00 P2

Determination of Demand 200K 300K 400K 200K 300K 400K Quantity $2.50 P1 D1D1D1D1 Price $2.00 P2 $1.50 P3

Determination of Demand Price/Quantity Relationship and Demand Increasing 200K 400K Quantity P 1 P 1 $2.50 D1D1D1D1 D2D2D2D2 Price Shifting Demand Curves

The Concept Of Elasticity In Pricing Strategy Elasticity: measure of consumers responsiveness to changes in price Price Elasticity of Demand % Change in Quantity Demanded % Change in Price = If Abs(elasticity) > 1 then DEMAND is ELASTIC If Abs(elasticity) < 1 then DEMAND is INELASTIC

Determinants Of Elasticity Availability of Substitutes Luxury or Necessity Portion of Budget Time

Determination of Demand - INELASTIC Q2 Q1Q2 Q1Q2 Q1Q2 Q1 Quantity P1P1P1P1 P2P2P2P2 Price Demand is not very sensitive to price increases

Determination of Demand - ELASTIC Q2Q2Q2Q2 Quantity P1P1P1P1 P2P2P2P2 Q1Q1Q1Q1 Price Demand is very sensitive to price increases

Some Elasticity Calculations % Change in Price = 10% (increase) % Change in Quantity = -20% (decrease) Abs(Elasticity) = Elastic?

Some Elasticity Calculations % Change in Price = +10% (increase) % Change in Quantity = -5% (decrease) Abs(Elasticity) = Elastic?

Elasticity and Revenues Baseline Case 100 units $ 10 each Total Revenues = $ 10 * 100 units = $1000. Case I Let us drop price to $8. Demand increases to 110 units. Elasticity = Revenue =

Elasticity and Revenues Case II Let us drop price to $8. Demand increases to 150 units. Demand = Revenue =

Elasticity and Revenues When Price DECREASES, Total Revenues INCREASE for __________ products When Price DECREASES, Total Revenues DECREASE for _________ products

Elasticity and Revenues Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Careful : Revenues DO not equal profitability!

Analysis of Demand, Cost, and Profit Relationships Fixed Costs – do not vary with # units produced Variable Costs – varies with # units produced Total Costs = Fixed Costs + Variable costs

Analysis of Demand, Cost, and Profit Relationships Fixed Costs Breakeven Point = _______________________________ Per Unit Contribution to Fixed Costs = Fixed Costs ___________________ Price - Variable Costs Breakeven Analysis:

Evaluation of Breakeven Analysis Effective tool in assessing the sales required for covering costs and achieving specified levels of profit. Sensitivity analysis. Easily understood

Analysis of Demand, Cost, and Profit Relationships Determining the Breakeven Point Quantity (Units of Production) Fixed Costs Total Revenue Total Costs Breakeven Point Dollars

Analysis of Demand, Cost, and Profit Relationships Determining the Breakeven Point Units of Production Fixed Costs Total Revenue Total Costs Breakeven Point Dollars Losses

Analysis of Demand, Cost, and Profit Relationships Determining the Breakeven Point Units of Production Fixed Costs Total Revenue Total Costs Breakeven Point Profits Dollars

Breakeven Analysis Selling Price = $ 100 per unit Variable costs = $ 50 per unit Total Fixed Costs = $150, 000 Contribution = Breakeven Point = _______________________________ Per Unit Contribution to Fixed Costs Fixed Costs

Breakeven (continued) Breakeven point (in terms of unit sales) = _____ units Breakeven point (in terms of $ sales volume) = ____________ = $300,000

Other factors: Pricing and the Life Cycle IntroductoryStageGrowthStageDeclineStage $High$Stable$Decrease MaturityStage $Decrease

Pricing Strategies Skimming pricing strategy: the use of a high price relative to competitive offerings. Skimming

Pricing Strategies Penetration pricing policy: the use of relatively low price as compared with competitive offerings Skimming Penetration Psychological