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

Chapter 16 Version 3e 1©2003 South-Western

chapterPricing ConceptsPricing Concepts

1616

Prepared byPrepared byDeborah BakerDeborah Baker

Texas Christian UniversityTexas Christian University


chapter

Learning ObjectivesLearning Objectives

1616

1.1. Discuss the importance of pricing decisions Discuss the importance of pricing decisions to the economy and to the individual firm.to the economy and to the individual firm.

2. List and explain a variety of pricing 2. List and explain a variety of pricing objectives.objectives.

3. Explain the role of demand in price 3. Explain the role of demand in price determination.determination.


chapter

Learning Objectives (continued)Learning Objectives (continued)

1616

4. Understand the concept of yield 4. Understand the concept of yield management systems.management systems.

5. Describe cost-oriented pricing strategies.5. Describe cost-oriented pricing strategies.

6. Demonstrate how the product life cycle, 6. Demonstrate how the product life cycle, competition, distribution and promotion competition, distribution and promotion strategies, customer demands, the Internet strategies, customer demands, the Internet and extranets, and perceptions of quality and extranets, and perceptions of quality can affect price.can affect price.


chapter

Learning ObjectivesLearning Objectives

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7.7. Describe the procedure for settingDescribe the procedure for settingthe right price.the right price.

8. Identify the legal and ethical constraints 8. Identify the legal and ethical constraints on pricing decisions.on pricing decisions.

9. Explain how discounts, geographic pricing, 9. Explain how discounts, geographic pricing, and other special pricing tactics can be and other special pricing tactics can be used to fine-tune the base price.used to fine-tune the base price.


Learning Objective Learning Objective 11

Discuss the importance of Discuss the importance of pricing decisions to the economy pricing decisions to the economy

and to the individual firm.and to the individual firm.


The Importance of PriceThe Importance of Price

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

In the broadest sense, price allocates In the broadest sense, price allocates resources in a free-market economyresources in a free-market economy

What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...

Price is revenuePrice is revenueand profit sourceand profit source

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

11


What is Price?What is Price?11

Price is that which is given

up in an exchange to

acquire a good or service.


The Importance of PriceThe Importance of Priceto Marketing Managersto Marketing Managers

RevenueRevenue The price charged to customers

multiplied by the number of units sold.

The price charged to customers multiplied by the

number of units sold.

ProfitProfit Revenue minus expensesRevenue minus expenses

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The Importance of PriceThe 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 Marketers must select a price that is not too highthat is not too high

or not too low, or not too low, a price that equals a price that equals

the perceived value to target consumersthe perceived value to target consumers

11


Trends Influencing Price SettingTrends Influencing Price Setting

Trends Trends in thein the

MarketMarket

Trends Trends in thein the

MarketMarket

High rate of new product introduction

High rate of new product introduction

Increased availability ofbargain-priced dealer and

generic brands

Increased availability ofbargain-priced dealer and

generic brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

More efficient and betterinformed buyers

More efficient and betterinformed buyers

11



List and explain a variety List and explain a variety of pricing objectives.of pricing objectives.


Pricing ObjectivesPricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

22


Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives


ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

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Profit MaximizationProfit Maximization22

Setting prices so that

total revenue is as large

as possible relative

to total costs.


Return on InvestmentReturn on Investment

Net profit after taxes

divided by total assets.

22

ROI = ROI = Net Profit after taxesNet Profit after taxes Total assetsTotal assets


Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization


22


Market ShareMarket Share

A company’s product sales

as a percentage of total

sales for that industry.

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Sales MaximizationSales Maximization22

Short-term objective to maximize sales

Ignores profits, competition, and the marketing environment

May be used to sell off excess inventory


Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices


22


Learning Objective Learning Objective

Explain the role of demand Explain the role of demand in price determination.in price determination.

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Demand and SupplyDemand and Supply

DemandDemand 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.

SupplySupply

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

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Elasticity of DemandElasticity of Demand

Consumers’ responsiveness or

sensitivity to changes

in price.

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Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

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Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

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Factors that Affect ElasticityFactors that Affect Elasticity

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

Availability of SubstitutesAvailability of Substitutes

Price relative toPurchasing Power

Price relative toPurchasing Power

Product DurabilityProduct Durability

Product’s Other UsesProduct’s Other Uses

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Understand the concept of Understand the concept of yield management systems.yield management systems.


Yield Management SystemsYield Management Systems

A technique for adjusting

prices that uses complex

mathematical software

to profitably fill

unused capacity.

44


Yield Management SystemsYield Management Systems

Discounting early purchases

Discounting early purchases

YMSPrice

Adjustments

YMSPrice

AdjustmentsLimiting early sales at

discounted pricesLimiting early sales at

discounted prices

Overbooking capacityOverbooking capacity

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Describe cost-oriented pricing strategies.Describe cost-oriented pricing strategies.

55


The Cost Determinant of PriceThe Cost Determinant of Price

Deviate with changes in level of output

Deviate with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

Do not deviate as level of output changes

55


The Cost Determinant of PriceThe Cost Determinant of Price55

Markup pricingMarkup pricing

Methods used to set priceMethods used to set priceMethods used to set priceMethods used to set price

Break-even pricingBreak-even pricing


Markup PricingMarkup 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.

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

55


Break-Even PricingBreak-Even Pricing55

QuantityQuantity

Pri

ceP

rice

2,0002,000

00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000

4,0004,000

Fixed costsFixed costs

LossLoss

ProfitProfitTotal RevenueTotal Revenue

Total CostsTotal CostsBreak-even pointBreak-even point



Demonstrate how the product life Demonstrate how the product life cycle, competition, distribution cycle, competition, distribution

and promotion strategies, and promotion strategies, customer demands, the Internet customer demands, the Internet

and extranets, and perceptions of and extranets, and perceptions of quality can affect price.quality can affect price.


Other Determinants of PriceOther Determinants of Price66

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice


Stages in the Product Life CycleStages in the Product Life CycleIntroductoryIntroductory

StageStageGrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh

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Distribution StrategyDistribution Strategy

Offer a larger profit margin

Offer a larger profit margin

Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product

Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product

Give dealers a largetrade allowance

Give dealers a largetrade allowance

66


The Impact of the InternetThe Impact of the Internet66

Allows price and product comparisons

Prices are coming down

Data collection allows sellers to tailor products and prices


ExtranetExtranet66

A private electronic network

that links a company

with its suppliers

and customers.


Prestige PricingPrestige Pricing66

Charging a high price to

help promote a high-quality

image.


Indicators of QualityIndicators of Quality66

Brand NameBrand Name

PricePrice

AppearanceAppearance

Retailer Retailer ReputationReputation



Describe the procedure for Describe the procedure for setting the right price.setting the right price.


Steps in Setting the Right PriceSteps in Setting the Right Price

Results lead to the right price

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

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Pricing ObjectivesPricing Objectives




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Price StrategyPrice Strategy77

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.


Choosing a Price StrategyChoosing a Price Strategy

Basic StrategiesBasic Strategiesforfor

Setting PricesSetting Prices

Basic StrategiesBasic Strategiesforfor

Setting PricesSetting Prices

Status Quo Pricing Status Quo Pricing

Price SkimmingPrice Skimming

Penetration PricingPenetration Pricing

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Price SkimmingPrice Skimming

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingis is

SuccessfulSuccessful

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingis is

SuccessfulSuccessful

Superior Product

Legal Protection of Product

Limited Production

Technological Breakthrough

Inelastic Demand

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Penetration PricingPenetration Pricing77

A pricing policy whereby

a firm charges a relatively

low price for a product

initially as a way to

reach the mass market.


Penetration PricingPenetration Pricing

AdvantagesAdvantagesAdvantagesAdvantages

Discourages or blocks competition from market entry

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Requires gear up for mass production

Selling large volumes at low prices

Strategy to gain market share may fail

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Status Quo PricingStatus Quo Pricing

AdvantagesAdvantagesAdvantagesAdvantages

Simplicity

Safest route to long-term survival for small firms

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Strategy may ignore demand or cost

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Identify the legal and ethical constraints Identify the legal and ethical constraints on pricing decisions.on pricing decisions.


The Legality and Ethics ofThe Legality and Ethics ofPrice StrategyPrice Strategy

Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions

Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

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Unfair Trade Practice ActsUnfair Trade Practice Acts

Laws that prohibit

wholesalers and retailers

from selling below cost.

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Price FixingPrice Fixing

An agreement between two

or more firms on the

price they will charge

for a product.

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Price DiscriminationPrice Discrimination88

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


Robinson-Patman Act DefensesRobinson-Patman Act Defenses88

Seller Defenses Seller Defenses Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition


Predatory PricingPredatory 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.

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Explain how discounts, geographic Explain how discounts, geographic pricing, and other special pricing, and other special

pricing tactics can be used topricing tactics can be used to fine-tune the base price.fine-tune the base price.

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Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price

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Fine-TuningFine-TuningPricingPricingTacticsTactics

Fine-TuningFine-TuningPricingPricingTacticsTactics

Special Pricing Tactics

Special Pricing Tactics

DiscountsDiscounts

Geographic PricingGeographic Pricing


Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price

CommonCommonTacticsTactics

for for Fine-TuningFine-Tuning

the Base Pricethe Base Price

CommonCommonTacticsTactics

for for Fine-TuningFine-Tuning

the Base Pricethe Base Price

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Value-Based PricingValue-Based Pricing

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Value-Based PricingValue-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.

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Trade LoadingTrade 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.

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Basing-Point Pricing

Basing-Point Pricing

Freight AbsorptionPricing

Freight AbsorptionPricing

Zone PricingZone Pricing

Uniform Delivered Pricing

Uniform Delivered Pricing

FOB PricingFOB Pricing

Common Common Methods ofMethods ofGeographicGeographic

PricingPricing

Common Common Methods ofMethods ofGeographicGeographic

PricingPricing

99



FOB OriginPricing

FOB OriginPricing

The buyer absorbs the freight costs from the shipping point

(“free on board”).

The buyer absorbs the freight costs from the shipping point

(“free on board”).

UniformDelivered

Pricing

UniformDelivered

Pricing

The seller pays the freight charges and bills the purchaser an

identical flat freight charge.

The seller pays the freight charges and bills the purchaser an

identical flat freight charge.

99


Geographic PricingGeographic Pricing99

Zone PricingZone PricingThe U.S. is divided into zones and

a flat freight rate is charged to customers in a given zone.

The U.S. is divided into zones and a flat freight rate is charged to

customers in a given zone.

FreightAbsorption

Pricing

FreightAbsorption

Pricing

The seller pays for all or part of the freight charges and does not

pass them on to the buyer.

The seller pays for all or part of the freight charges and does not

pass them on to the buyer.

Basing-PointPricing

Basing-PointPricing

The seller designates a location as a basing point and charges all buyers

the freight costs from that point.

The seller designates a location as a basing point and charges all buyers

the freight costs from that point.


Special Pricing TacticsSpecial Pricing TacticsSingle-Price Tactic Single-Price Tactic

Flexible PricingFlexible Pricing

Professional Services PricingProfessional Services Pricing

Leader PricingLeader Pricing

Bait PricingBait Pricing

Odd-Even PricingOdd-Even Pricing

Price BundlingPrice Bundling

Two-Part Pricing Two-Part Pricing

All goods offered at the same price All goods offered at the same price

Different customers pay different priceDifferent customers pay different price

Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification

Sell product at near or below costSell product at near or below cost

Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single packageCombining two or more products in a single package

Two separate charges to consume a single goodTwo separate charges to consume a single good

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Consumer PenaltiesConsumer Penalties99

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 Businesses Impose Consumer Penalties if...Consumer Penalties if...

Businesses Impose Businesses Impose Consumer Penalties if...Consumer Penalties if...

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

Documents

southwestern chapter

price determination

right price

base price

importance of price

market share price

variety of pricing objectives

generic brands price