1. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 1 MKTG Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University Lamb, Hair, McDaniel 2008-2009 Pricing Concepts 17 CHAPTER

2. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 2 Learning Outcomes 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 LO 1 LO 2 LO 3

3. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 3 Learning Outcomes 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 LO 6 LO 5 LO 4

4. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 4 LO 1 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

5. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 5 LO 1 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price

6. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 6 LO 1 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

7. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 7 LO 1 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

8. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 8 REVIEW LEARNING OUTCOME LO 1 The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

9. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 9 Pricing Objectives LO 2 Profit-Oriented Sales-Oriented Status Quo

10. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 10 Profit-Oriented Pricing Objectives LO 2 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

11. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 11 Profit Maximization LO 2 Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization

12. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 12 Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets. Return on Investment

13. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 13 Sales-Oriented Pricing Objectives LO 2 Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives Online http://www.target.com http://www.walmart.com http://www.jcpenney.com

14. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 14 Market Share LO 2 Market Share A company’s product sales as a percentage of total sales for that industry.

15. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 15 Sales Maximization LO 2  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory

16. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 16 Status Quo Pricing Objectives LO 2 Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

17. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 17 REVIEW LEARNING OUTCOME LO 2 Pricing Objectives Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price

18. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 18 The Demand Determinant of Price LO 3 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. Online http://www.ubid.com

19. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 19 The Demand Curve LO 3

20. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 20 The Supply Curve LO 3

21. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 21 How Demand and Supply Establish Price LO 3 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.

22. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 22 Price Equilibrium LO 3

23. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 23 Elasticity of Demand LO 3 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.

24. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 24 Elasticity of Demand LO 3 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.

25. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 25 Elasticity of Demand LO 3 Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

26. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 26 Elasticity of Demand LO 3

27. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 27 Factors that Affect Elasticity of Demand LO 3 Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation Online http://www.columbiahouse.com

28. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 28 LO 4 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

29. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 29 LO 4 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

30. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 30 REVIEW LEARNING OUTCOME LO 4 Yield Management Systems

31. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 31 The Cost Determinant of Price LO 5 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

32. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 32 The Cost Determinant of Price LO 5 Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

33. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 33 Markup Pricing LO 5 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%, or doubling the cost. The practice of marking up prices by 100%, or doubling the cost.

34. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 34 Profit Maximization LO 5 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 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. The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

35. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 35 Break-Even Pricing LO 5

36. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 36 Break-Even Pricing LO 5 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost

37. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 37 REVIEW LEARNING OUTCOME LO 5 Cost-Oriented Pricing Strategies

38. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 38 Other Determinants of Price LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle

39. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 39 Stages in the Product Life Cycle LO 6IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$DecreaseStableHigh

40. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 40 The Competition LO 6  High prices may induce firms to enter the market  Competition can lead to price wars  Global competition may force firms to lower prices

41. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 41 Distribution Strategy LO 6 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

42. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 42 Distribution Strategy LO 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Selling against the brand

43. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 43 The Impact of the Internet LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection

44. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 44 The Relationship of Price to Quality LO 6 Charging a high price to help promote a high- quality image. Online http://www.vivre.com http://www.bluefly.com Prestige Pricing

45. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 45 Dimensions of Quality LO 6 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige

46. Chapter 17Copyright ©2009 Cengage Learning Inc. All rights reserved 46 REVIEW LEARNING OUTCOME LO 6 Factors Affecting Price