1. PRICING Key Concepts

2. 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

3. What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price

4. The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

5. 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

6. The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

7. Pricing Objectives Profit-Oriented Sales-Oriented Status Quo

8. Pricing Objectives Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price

9. Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

10. Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization

11. Return on Investment ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets. Return on Investment

12. Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives

13. Market Share A company’s product sales as a percentage of total sales for that industry.

14. Sales Maximization  Short-term objective to maximize sales  Ignores profits, competition, and the marketing environment  May be used to sell off excess inventory

15. Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives

16. 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. 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.

17. The Demand Curve

18. The Supply Curve

19. Tyson’s Meat Glut  Tyson Foods, the world’s largest processor, has an oversupply of meat:  Lower chicken consumption due to avian flu fears  Export restrictions to Japan and South Korea due to mad cow disease  Mismatch between oversupply and reduced demand has created tremendous financial losses for the company.  Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly.  To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products. SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.

20. How Demand and Supply Establish Price 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.

21. Price Equilibrium

22. 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.

23. Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

24. Elasticity of Demand

25. Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation

26. Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. E.g. Airfare changes closer to the flight date

27. How Yield Management Systems Work Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

28. Yield Management Systems

29. The Cost Determinant of Price 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

30. The Cost Determinant of Price Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning – 2X Cost Markup pricing Methods Used to Set Prices Methods Used to Set Prices

31. Profit Maximization 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.

32. Break-Even Pricing

33. Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost

34. Yield Management Systems  Rental property landlords use yield management systems to raise rents at a faster pace.  The M/PF Yield-Star Price Optimizer is similar to pricing systems used by airlines and car-rental companies.  It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent.  Tenants can also take advantage of the technology. SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.

35. Cost-Oriented Pricing Strategies

36. Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle

37. Factors Affecting Price

38. Stages in the Product Life CycleIntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$DecreaseStableHigh

39. The Competition  High prices may induce firms to enter the market  Competition can lead to price wars  Global competition may force firms to lower prices

40. Distribution Strategy 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

41. Distribution Strategy Stocking well-known branded items at high prices in order to sell store brands at discounted prices. E.g. Wal-Mart sells Equate brand drugs/lotions against Tylenol/Johnson & Johnson Selling against the brand

42. The Impact of the Internet Internet auctions Shopping bots Second opinions from expert sites Product selection

43. The Relationship of Price to Quality Charging a high price to help promote a high-quality image. Prestige Pricing

44. Dimensions of Quality 1.Ease of use 2.Versatility 3.Durability 4.Serviceability 5.Performance 6.Prestige