1. ©2003 South-Western Chapter 16 Version 3e1 chapter Pricing Concepts 16 Prepared by Deborah Baker Texas Christian University

2. ©2003 South-Western Chapter 16 Version 3e2 chapter Learning Objectives 16 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. ©2003 South-Western Chapter 16 Version 3e3 chapter Learning Objectives (continued) 16 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. ©2003 South-Western Chapter 16 Version 3e4 chapter Learning Objectives 16 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. ©2003 South-Western Chapter 16 Version 3e5 Learning Objective 1 1 Discuss the importance of pricing decisions to the economy and to the individual firm.

6. ©2003 South-Western Chapter 16 Version 3e6 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

7. ©2003 South-Western Chapter 16 Version 3e7 What is Price? 1 1 Price is that which is given up in an exchange to acquire a good or service.

8. ©2003 South-Western Chapter 16 Version 3e8 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

9. ©2003 South-Western Chapter 16 Version 3e9 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

10. ©2003 South-Western Chapter 16 Version 3e10 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

11. ©2003 South-Western Chapter 16 Version 3e11 Learning Objective 2 2 List and explain a variety of pricing objectives.

12. ©2003 South-Western Chapter 16 Version 3e12 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 2 2

13. ©2003 South-Western Chapter 16 Version 3e13 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment 2 2

14. ©2003 South-Western Chapter 16 Version 3e14 Profit Maximization 2 2 Setting prices so that total revenue is as large as possible relative to total costs.

15. ©2003 South-Western Chapter 16 Version 3e15 Return on Investment Net profit after taxes divided by total assets. 2 2 ROI = Net Profit after taxes Total assets Total assets

16. ©2003 South-Western Chapter 16 Version 3e16 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives 2 2

17. ©2003 South-Western Chapter 16 Version 3e17 Market Share A company’s product sales as a percentage of total sales for that industry. 2 2

18. ©2003 South-Western Chapter 16 Version 3e18 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

19. ©2003 South-Western Chapter 16 Version 3e19 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives 2 2

20. ©2003 South-Western Chapter 16 Version 3e20 Learning Objective Explain the role of demand in price determination. 3 3

21. ©2003 South-Western Chapter 16 Version 3e21 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

22. ©2003 South-Western Chapter 16 Version 3e22 Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. 3 3

23. ©2003 South-Western Chapter 16 Version 3e23 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 3

24. ©2003 South-Western Chapter 16 Version 3e24 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic 3 3

25. ©2003 South-Western Chapter 16 Version 3e25 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

26. ©2003 South-Western Chapter 16 Version 3e26 Learning Objective 4 4 Understand the concept of yield management systems.

27. ©2003 South-Western Chapter 16 Version 3e27 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. 4 4

28. ©2003 South-Western Chapter 16 Version 3e28 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

29. ©2003 South-Western Chapter 16 Version 3e29 Learning Objective Describe cost-oriented pricing strategies. 5 5

30. ©2003 South-Western Chapter 16 Version 3e30 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

31. ©2003 South-Western Chapter 16 Version 3e31 The Cost Determinant of Price 5 5 Markup pricing Methods used to set price Break-even pricing

32. ©2003 South-Western Chapter 16 Version 3e32 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. Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of cost Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of cost 5 5

33. ©2003 South-Western Chapter 16 Version 3e33 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

34. ©2003 South-Western Chapter 16 Version 3e34 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.

35. ©2003 South-Western Chapter 16 Version 3e35 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

36. ©2003 South-Western Chapter 16 Version 3e36 Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High 6 6

37. ©2003 South-Western Chapter 16 Version 3e37 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

38. ©2003 South-Western Chapter 16 Version 3e38 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

39. ©2003 South-Western Chapter 16 Version 3e39 Extranet 6 6 A private electronic network that links a company with its suppliers and customers.

40. ©2003 South-Western Chapter 16 Version 3e40 Prestige Pricing 6 6 Charging a high price to help promote a high-quality image.

41. ©2003 South-Western Chapter 16 Version 3e41 Indicators of Quality 6 6 Brand Name Price Appearance Retailer Reputation

42. ©2003 South-Western Chapter 16 Version 3e42 Learning Objective 7 7 Describe the procedure for setting the right price.

43. ©2003 South-Western Chapter 16 Version 3e43 Steps in Setting the Right Price Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals 7 7

44. ©2003 South-Western Chapter 16 Version 3e44 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 7 7

45. ©2003 South-Western Chapter 16 Version 3e45 Price Strategy 7 7 A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle.

46. ©2003 South-Western Chapter 16 Version 3e46 Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing 7 7

47. ©2003 South-Western Chapter 16 Version 3e47 Price Skimming Situationswhen is Successful Situationswhen Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand 7 7

48. ©2003 South-Western Chapter 16 Version 3e48 Penetration Pricing 7 7 A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market.

49. ©2003 South-Western Chapter 16 Version 3e49 Penetration Pricing AdvantagesAdvantages  Discourages or blocks competition from market entryDisadvantagesDisadvantages  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may fail 7 7

50. ©2003 South-Western Chapter 16 Version 3e50 Status Quo Pricing AdvantagesAdvantages  Simplicity  Safest route to long- term survival for small firmsDisadvantagesDisadvantages  Strategy may ignore demand or cost 7 7

51. ©2003 South-Western Chapter 16 Version 3e51 Learning Objective 8 8 Identify the legal and ethical constraints on pricing decisions.

52. ©2003 South-Western Chapter 16 Version 3e52 The Legality and Ethics of Price Strategy Issues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 8 8

53. ©2003 South-Western Chapter 16 Version 3e53 Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost. 8 8

54. ©2003 South-Western Chapter 16 Version 3e54 Price Fixing An agreement between two or more firms on the price they will charge for a product. 8 8

55. ©2003 South-Western Chapter 16 Version 3e55 Price Discrimination 8 8 The Robinson-Patman Act of 1936:  Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition

56. ©2003 South-Western Chapter 16 Version 3e56 Robinson-Patman Act Defenses 8 8 Seller Defenses Cost Market Conditions Market Conditions Competition

57. ©2003 South-Western Chapter 16 Version 3e57 Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market. 8 8

58. ©2003 South-Western Chapter 16 Version 3e58 Learning Objective Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. fine-tune the base price. 9 9

59. ©2003 South-Western Chapter 16 Version 3e59 Tactics for Fine-Tuning the Base Price 9 9 Fine-TuningPricingTacticsFine-TuningPricingTactics Special Pricing Tactics Discounts Geographic Pricing

60. ©2003 South-Western Chapter 16 Version 3e60 Tactics for Fine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing 9 9

61. ©2003 South-Western Chapter 16 Version 3e61 Value-Based Pricing The price is set at a level that seems to the customer to be a good price compared to the prices of other options. 9 9

62. ©2003 South-Western Chapter 16 Version 3e62 Trade Loading The practice of temporarily lowering the price to induce wholesalers and retailers to buy more goods than can be sold in a reasonable time. 9 9

63. ©2003 South-Western Chapter 16 Version 3e63 Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Pricing Common Methods of GeographicPricingCommon GeographicPricing 9 9

64. ©2003 South-Western Chapter 16 Version 3e64 Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical flat freight charge. 9 9

65. ©2003 South-Western Chapter 16 Version 3e65 Geographic Pricing 9 9 Zone Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point.

66. ©2003 South-Western Chapter 16 Version 3e66 Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good 9 9

67. ©2003 South-Western Chapter 16 Version 3e67 Consumer Penalties 9 9 An irrevocable loss of revenue is suffered An irrevocable loss of revenue is suffered Additional transaction costs are incurred Additional transaction costs are incurred Businesses Impose Consumer Penalties if...