1 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Pricing Concepts Prepared by Deborah Baker Texas Christian University 14

2 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Learning 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

3 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Learning Objectives (continued) 4. Understand the concept of yield management systems 5. Describe cost-oriented pricing strategies 6. Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

4 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Learning Objectives (continued) 7.Describe the procedure for setting the right price 8. Identify the legal and ethical constraints on pricing decisions 9. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price

5 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 The Importance of Price 1 Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is Profit. High Price Low Price Price = Perceived Value

6 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2

7 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2

8 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Status Quo Pricing Objectives Online Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

9 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Demand and Supply Demand Supply 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 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. 3 Online

10 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 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 3

11 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 The Cost Determinant of Price Types of Costs VariableCostsVariableCosts Fixed Costs 5

12 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 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 5

13 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Markup Pricing Markup Pricing Markup Pricing Keystoning 5

14 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Profit Maximization Profit Maximization Profit Maximization Marginal Revenue Marginal Revenue 5

15 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Break-Even Pricing 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 5

16 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Steps in Setting the Right Price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals 7 Results lead to the right price

17 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Pricing Objectives vs. Pricing Strategy Status Quo Oriented Profit Oriented Sales Oriented 7 Status Quo Pricing Price Skimming Penetration Pricing OBJECTIVES STRATEGIES

18 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 8

19 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Robinson-Patman Act Defenses Seller Defenses Cost Market Conditions Market Conditions Competition 8

20 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing 9

21 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Geographic Pricing Basing-point pricing Basing-point pricing Freight absorption pricing Freight absorption pricing Zone pricing Uniform delivered pricing Uniform delivered pricing FOB origin pricing 9

22 Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved Chapter 14 Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Price Lining Leader Pricing Base Pricing 9 Odd-Even Pricing Bundling (Unbundling) Two-Part Pricing