1. Chapter 19 Pricing Concepts MKTG10 Lamb, Hair, and McDaniel
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2. © 2016 Cengage Learning. All Rights Reserved.
Chapter 19 Pricing Concepts
LEARNING OUTCOMES
19-1 Discuss the importance of pricing decisions to the economy and to the individual firm
19-2 List and explain a variety of pricing objectives
19-3 Explain the role of demand in price determination
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3. © 2016 Cengage Learning. All Rights Reserved.
Chapter 19 Pricing Concepts
LEARNING OUTCOMES
19-4 Understand the concepts of dynamic pricing and yield management systems
19-5 Describe cost-oriented pricing strategies
19-6 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price
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Chapter 19 Pricing Concepts
LEARNING OUTCOMES
19-7 Describe the procedure for setting the right price
19-8 Identify the legal constraints on pricing decisions
19-9 Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune a base price
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5. The Importance of Price
Chapter 19 Pricing Concepts
The Importance of Price
19-1
Discuss the importance of pricing decisions to the economy and to the individual firm
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6. © 2016 Cengage Learning. All Rights Reserved.
Chapter 19 Pricing Concepts
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.”
Notes:
Price is that which is given up in an exchange to acquire a good or service.
Price is typically money exchanged for a good or service; however, it may include other costs such as time lost while waiting to acquire the good or service.
Consumers are interested in obtaining a “reasonable price,” which means a “perceived reasonable value” at the time of the transaction. The price paid is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction they actually receive.
Price can relate to anything with perceived value, not just money. When goods or services are exchanged, the trade is called barter.
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7. The Importance of Price to Marketing Managers
Chapter 19 Pricing Concepts
The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by
the number of units sold.
Profit
Revenue minus expenses.
Notes:
Prices are the key to revenues, which are the key to profits for an organization.
Revenue is what pays for every activity of the company. What’s left over is profit. The price is set to earn a profit for the company.
Managers strive to charge a price that will earn a fair profit.
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8. List and explain a variety of pricing objectives
Chapter 19 Pricing Concepts
Pricing Objectives
19-2
List and explain a variety of pricing objectives
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Chapter 19 Pricing Concepts
Pricing Objectives
Profit-Oriented
Sales-Oriented
Status Quo
Notes:
Pricing objectives must be specific, attainable, and measurable to survive in today’s competitive market.
Pricing objectives can be divided into the three categories shown above and described in the following slides.
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10. Profit-Oriented Pricing Objectives
Chapter 19 Pricing Concepts
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory Profits
Target Return on
Investment
Notes:
Profit-oriented pricing objectives include profit maximization, satisfactory profits, and target return on investment. A discussion of each of these follows.
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11. Sales-Oriented Pricing Objectives
Chapter 19 Pricing Concepts
Market
Share
Sales
Maximization
Sales-Oriented Pricing Objectives
Online
Target vs. Walmart vs. JC Penney
Shop for some kind of electronic device (such as a Blu-ray player, digital camera, or MP3 player) on the Target, Walmart, and JCPenney Web sites. How do the prices for the same product compare at the three retailers? Do they all even carry the same product? Compare the price on the Web with the price offered at the physical store and explain any discrepancies.
Notes:
Sales-oriented pricing objectives are based either on market share or on dollar or unit sales.
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Chapter 19 Pricing Concepts
Market Share
A company’s product sales as a percentage of total sales for that industry.
Notes:
Market share can be reported in dollars or units of product, and the results may be different.
Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Larger market shares often mean higher profits, thanks to economies of scale, market power, and ability to compensate top-quality management.
However, this conventional wisdom is not always reliable.
Many companies with low market share survive if they are in a slow growth industry and experience few product changes.
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Chapter 19 Pricing Concepts
Sales Maximization
Rather than strive for market share, sometimes companies try to maximize sales.
Uses a short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
Notes:
Maximization of cash should never be a long-run objective because cash maximization may mean little or no profitability. Without profits, a company cannot survive.
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14. Status Quo Pricing Objectives
Chapter 19 Pricing Concepts
Maintain
existing
prices
Meet
competition’s
Status Quo Pricing Objectives
Notes:
Status quo pricing seeks to maintain existing prices or to meet the competition’s prices.
This category requires little planning, and is essentially a passive policy.
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15. The Demand Determinant of Price
Chapter 19 Pricing Concepts
The Demand Determinant of Price
19-3
Explain the role of demand in price determination
Notes:
After pricing goals are established, specific prices are set.
The price set for products depend on two factors: The demand for the good and the cost to the seller for that good.
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16. The Demand Determinant of Price
Chapter 19 Pricing Concepts
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.
Supply
The quantity of a product that will
be offered to the market by a supplier
at various prices for a specific period.
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17. How Demand and Supply Establish Price
Chapter 19 Pricing Concepts
How Demand and Supply Establish Price
Price
Equilibrium
The price at which demand
and supply are equal.
Elasticity of Demand
Consumers’ responsiveness
or sensitivity to changes
in price.
Notes:
The concepts of supply and demand are combined to see how competitive market prices are determined.
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Elasticity of Demand
Chapter 19 Pricing Concepts
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.
Notes:
To appreciate demand analysis, the concept of elasticity should be understood.
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19. The Power of Dynamic Pricing and Yield Management Systems
Chapter 19 Pricing Concepts
The Power of Dynamic Pricing and Yield Management Systems
19-4
Understand the concepts of dynamic pricing and yield management
systems
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Chapter 19 Pricing Concepts
Dynamic Pricing
A strategy whereby prices are adjusted over time to maximize a company’s revenues
Notes:
More and more companies are turning to dynamic pricing to help adjust prices.
Dynamic pricing is most useful when two product or service characteristics co-exist.
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21. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
Notes:
In yield management systems (YMS), prices are adjusted using complex mathematical software to profitably fill unused capacity.
When competitive pressures are high, a company must know when it can raise prices to maximize its revenues.
Yield management systems have spread beyond the service industries and are used by companies to set prices based on a number of variables.
The software employs techniques such as discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity.
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22. Yield Management Systems
Chapter 19 Pricing Concepts
Yield Management Systems
Yield Management Systems (YMS) make it possible for a company to:
Stimulate demand when demand is low
Maximize profits when demand is high .
Notes:
An example of the effect of YMS on the customer is that when people on tight budgets buy air fare, they usually accept the inconvenience of planning ahead and staying over on a Saturday night to get cheaper fares. The last-minute planner pays more for their fare and (essentially) subsidizes the cost-sensitive customer.
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23. The Cost Determinant of Price
Chapter 19 Pricing Concepts
The Cost Determinant of Price
19-5
Describe cost-oriented pricing strategies
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24. The Cost Determinant of Price
Chapter 19 Pricing Concepts
Varies with changes
in level of output
Types of Costs
Variable
Cost
Fixed Cost
Does not change
as level of output changes
Notes:
Sometimes the importance of demand is ignored when prices are decided, based largely or solely on the basis of costs.
Prices set on the basis of cost may be too high for the target market. On the other hand, if prices are set too low, the firm will earn a lower return than it should.
Costs should be determined as part of any price determination, in part to determine the floor below which a good or service must not be priced in the long run.
4. Variable and fixed costs are important aspects of price determination.
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Setting Prices
Chapter 19 Pricing Concepts
Break-Even
Pricing
Keystoning
Markup pricing
Methods
Used to
Set Prices
Notes:
Costs can be used to set prices in a variety of ways. Markup pricing is fairly simple. The others—profit maximization pricing and break-even pricing—use more complicated concepts of costs. A description of these methods is shown on the following slides.
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Markup Pricing
Chapter 19 Pricing Concepts
Markup
Pricing
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.
Notes:
Markup pricing is the most popular method to establish a selling price. Instead of using the costs of production to set price, markup pricing uses the costs of buying the product from the producer, plus amounts for profit and expenses. The total determines the selling price.
Keystoning is a method based on experience, with many small retailers doubling the cost. Other factors that influence markups are the merchandise’s appeal to customers, past response to the markup, the item’s promotional value, the seasonality of the goods, their fashion appeal, the product’s traditional selling price, and competition.
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27. Other Determinants of Price
Chapter 19 Pricing Concepts
Other Determinants of Price
19-6
Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price
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28. Other Determinants of Price
Chapter 19 Pricing Concepts
Promotion Strategy
The Internet and Extranets
Distribution Strategy
Competition
Stages of the PLC
Notes:
Other factors besides demand and costs can influence price.
Demands of Large Customers
Price versus Quality
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29. How to Set a Price on a Product Describe the procedure for setting the
Chapter 19 Setting the Right Price
How to Set a
Price on a Product
19-7
Describe the procedure for setting the
right price
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30. Setting the Right Price
Chapter 19 Setting the Right Price
Fine-tune with pricing tactics
Choose a price strategy
Estimate demand, costs, and profits
Establish pricing goals
Results lead to the right price
Notes:
Setting the right price is a four-step process.
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31. Choose a Price Strategy
Chapter 19 Setting the Right Price
Status Quo Pricing
Price Skimming
Penetration Pricing
Charging a price identical to or very
close to the competition’s price.
A firm charges a high introductory
price, often coupled with heavy
promotion.
A firm charges a relatively low price
for a product initially as a way to
reach the mass market.
Notes:
Companies that plan for creating a price strategy can select from three basic approaches:
Price skimming
Penetration pricing
Status quo pricing
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32. Price Skimming Situations When Price Skimming Is Successful
Chapter 19 Setting the Right Price
Situations
When
Price Skimming
Is Successful
Unique/Superior Advantages
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Strong Demand
Notes:
Price skimming is a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The term is derived from the phrase “skimming the cream off the top.”
Companies often use price skimming for new products when the product is perceived as having unique advantages. Over time the price will be lowered.
Additional situations when price skimming is successful are listed on this slide. Luxury retailers often employ a strategy called anchoring, in which one highly priced item makes other items seem less expensive by comparison, though they are still priced as high as the market will bear.
Firms often feel it is better to test the market at high prices and then lower the price if sales are too slow.
A price skimming strategy will encourage competitors to enter the market.
Discussion/Team Activity:
List companies and/or products that utilize a price skimming strategy.
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33. © 2016 Cengage Learning. All Rights Reserved.
Penetration Pricing
Chapter 19 Setting the Right Price
Advantages
Disadvantages
Can lead to lower cost per unit as production expands
Discourages or blocks competition from market entry
Boosts sales and provides large profit increases
Requires gear up for mass production
Selling large volumes at low prices
Strategy to gain market share may fail
Notes:
Penetration pricing is at the opposite end of the spectrum from price skimming.
By charging a low price for a product, a larger share of the market is captured, resulting in lower production costs.
It does, however, mean lower profit per unit, and a higher volume of sales is required to reach the break-even point. Penetration pricing does tend to discourage competition and is effective in a price-sensitive market.
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Status Quo Pricing
Chapter 19 Setting the Right Price
Advantages
Disadvantages
Simplicity
Safest route to long-term survival for small firms
Strategy may ignore demand and/or cost
Notes:
Status quo pricing means meeting the competition’s prices by charging an identical price or very close to the competition’s price.
It is a simple method of pricing, but the strategy may ignore demand and/or cost. However, if the firm is small, meeting the competition’s prices may be the safest route to long-term survival.
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