1. ©2002 South-Western Chapter 17 Version 6e1 chapter Pricing Concepts 17 Prepared by Deborah Baker Texas Christian University

2. ©2002 South-Western Chapter 17 Version 6e2 chapter Learning Objectives 17 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. ©2002 South-Western Chapter 17 Version 6e3 chapter Learning Objectives (continued) 17 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. ©2002 South-Western Chapter 17 Version 6e4 Learning Objective 1 1 Discuss the importance of pricing decisions to the economy and to the individual firm.

5. ©2002 South-Western Chapter 17 Version 6e5 The Importance of Price To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy What is Price? To the seller... Price is revenue and profit source To the seller... Price is revenue and profit source 1 1

6. ©2002 South-Western Chapter 17 Version 6e6 What is Price? 1 1 Price is that which is given up in an exchange to acquire a good or service.

7. ©2002 South-Western Chapter 17 Version 6e7 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses 1 1

8. ©2002 South-Western Chapter 17 Version 6e8 The Importance of Price Revenue = Unit Price  Number of units sold  Revenue pays for every activity.  What’s left over is Profit. Marketers must select a price that is not too high or not too low, or not too low, a price that equals the perceived value to target consumers 1 1

9. ©2002 South-Western Chapter 17 Version 6e9 Trends Influencing Price Setting Trends in the MarketTrends Market High rate of new product introduction High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers More efficient and better informed buyers 1 1

10. ©2002 South-Western Chapter 17 Version 6e10 Learning Objective 2 2 List and explain a variety of pricing objectives.

11. ©2002 South-Western Chapter 17 Version 6e11 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2 2

12. ©2002 South-Western Chapter 17 Version 6e12 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2 2

13. ©2002 South-Western Chapter 17 Version 6e13 Profit Maximization 2 2 Setting prices so that total revenue is as large as possible relative to total costs.

14. ©2002 South-Western Chapter 17 Version 6e14 Return on Investment Net profit after taxes divided by total assets. 2 2 ROI = Net Profit after taxes Total assets Total assets

15. ©2002 South-Western Chapter 17 Version 6e15 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2 2

16. ©2002 South-Western Chapter 17 Version 6e16 Market Share A company’s product sales as a percentage of total sales for that industry. 2 2

17. ©2002 South-Western Chapter 17 Version 6e17 Sales Maximization 2 2  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory

18. ©2002 South-Western Chapter 17 Version 6e18 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives 2 2

19. ©2002 South-Western Chapter 17 Version 6e19 Learning Objective Explain the role of demand in price determination. 3 3

20. ©2002 South-Western Chapter 17 Version 6e20 Demand and Supply 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. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. 3 3

21. ©2002 South-Western Chapter 17 Version 6e21 The Demand Curve D D Price.50 1.00 1.50 2.00 2.50 020406080100120 Quantity demanded 3 3

22. ©2002 South-Western Chapter 17 Version 6e22 The Supply Curve Quantity supplied S S Price.50 1.00 1.50 2.00 2.50 020406080100120 3 3

23. ©2002 South-Western Chapter 17 Version 6e23 Price Equilibrium 3 3 The price at which demand and supply are equal.

24. ©2002 South-Western Chapter 17 Version 6e24 Equilibrium Price 3 3 Quantity demanded S S Price.50 1.00 1.50 2.00 2.50 020406080100120 D D Surplus Shortage Price Equilibrium

25. ©2002 South-Western Chapter 17 Version 6e25 Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. 3 3

26. ©2002 South-Western Chapter 17 Version 6e26 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 Unitary Elasticity  An increase in sales exactly offsets a decrease in prices, and revenue is unchanged 3 3

27. ©2002 South-Western Chapter 17 Version 6e27 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity 3 3

28. ©2002 South-Western Chapter 17 Version 6e28 Elasticity of Demand Elastic Demand Curve D D Quantity Price D D Quantity Price Inelastic Demand Curve 3 3

29. ©2002 South-Western Chapter 17 Version 6e29 Factors that Affect Elasticity Factors That Affect ElasticityofDemand ElasticityofDemand Availability of Substitutes Price relative to Purchasing Power Price relative to Purchasing Power Product Durability Product’s Other Uses 3 3

30. ©2002 South-Western Chapter 17 Version 6e30 Learning Objective 4 4 Understand the concept of yield management systems.

31. ©2002 South-Western Chapter 17 Version 6e31 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. 4 4

32. ©2002 South-Western Chapter 17 Version 6e32 Yield Management Systems Discounting early purchases Discounting early purchases YMS Price Adjustments YMS Price Adjustments Limiting early sales at discounted prices Limiting early sales at discounted prices Overbooking capacity 4 4

33. ©2002 South-Western Chapter 17 Version 6e33 Learning Objective Describe cost-oriented pricing strategies. 5 5

34. ©2002 South-Western Chapter 17 Version 6e34 The Cost Determinant of Price Deviate with changes in level of output Deviate with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not deviate as level of output changes Do not deviate as level of output changes 5 5

35. ©2002 South-Western Chapter 17 Version 6e35 The Cost Determinant of Price 5 5 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

36. ©2002 South-Western Chapter 17 Version 6e36 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. 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. 5 5

37. ©2002 South-Western Chapter 17 Version 6e37 Profit Maximization 5 5 Profit Maximization Profit Maximization 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.

38. ©2002 South-Western Chapter 17 Version 6e38 Break-Even Pricing 5 5 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

39. ©2002 South-Western Chapter 17 Version 6e39 Break-Even Pricing 5 5 Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution =Price -- Avg. Variable Cost

40. ©2002 South-Western Chapter 17 Version 6e40 Learning Objective 6 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.

41. ©2002 South-Western Chapter 17 Version 6e41 Other Determinants of Price 6 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Other Factors ThatInfluencePrice ThatInfluencePrice

42. ©2002 South-Western Chapter 17 Version 6e42 Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High 6 6

43. ©2002 South-Western Chapter 17 Version 6e43 Distribution Strategy Offer a larger profit margin Offer a larger profit margin Convincing Distributors to Carry Product Convincing Distributors to Carry Product Give dealers a large trade allowance Give dealers a large trade allowance 6 6

44. ©2002 South-Western Chapter 17 Version 6e44 Selling Against the Brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. 6 6

45. ©2002 South-Western Chapter 17 Version 6e45 Regaining Price Control 6 6 DEVELOP BRAND LOYALTY Package marked with selling price Avoid business with price-cutting discounters Avoid business with price-cutting discounters Franchising Exclusive distribution system Methods Used to Regain Price Control Methods Used to Regain Price Control

46. ©2002 South-Western Chapter 17 Version 6e46 The Impact of the Internet 6 6  Allows price and product comparisons  Prices are coming down  Data collection allows sellers to tailor products and prices

47. ©2002 South-Western Chapter 17 Version 6e47 Extranet 6 6 A private electronic network that links a company with its suppliers and customers.

48. ©2002 South-Western Chapter 17 Version 6e48 Prestige Pricing 6 6 Charging a high price to help promote a high-quality image.

49. ©2002 South-Western Chapter 17 Version 6e49 Indicators of Quality 6 6 Brand Name Price Appearance Retailer Reputation