Ch 19 Pricing Concepts

8/15/2019 Ch 19 Pricing Concepts

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Learning Outcomes

2

LO 1

LO 2

LO 3

Discuss the importance of pricing decisionsto the economy and to the individual firm

List and explain a variety of pricing objectives

Explain the role of demand in pricedetermination

Copyright 2010 by Cengage Learning Inc. All Rights Reserved





The mportance of Price

4

Discuss the importance of

pricing decisions tothe economyand to the individual firm.

LO 1






What is Price?

6

Price is that which is givenup in an exchange to acquire

a good or service.




The Importance of Price toMarketing Managers

7

Revenue - The price charged tocustomers multiplied by the

number of units sold.

Profit - Revenue minus expenses.




Trends Influencing Price

8

Flood of new products

Increased availability of bargain-priced privateand generic brands

Price cutting as a strategy to maintain orregain market share

Internet used for comparison shopping




Review Learning OutcomeThe Importance of Pricing Decisions

9

LO 1

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment




Pricing Objectives

10

List and explain a variety ofpricing objectives.

LO 2




Pricing Objectives

11

Profit-Oriented

Sales-Oriented

Status Quo




Profit-Oriented Pricing Objectives

12

Profit-Oriented Pricing Objectives

ProfitMaximization

SatisfactoryProfits

TargetReturn on

Investment




Profit Maximization

13

Setting prices so that total

revenue is as large as possible

relative to total costs.




Return on Investment

14

Net profit after taxes divided by

total assets.

ROI = Net profit after taxesTotal assets




Sales-Oriented Pricing Objectives

15

MarketShare

SalesMaximization

Sales-Oriented Pricing Objectives

Online

http://www.target.com http://www.walmart.com http://www.jcpenney.com


http://www.target.com/

http://www.walmart.com/

http://www.jcpenney.com/

http://www.jcpenney.com/

http://www.walmart.com/

http://www.target.com/



Market Share

16

A company’s product sales

as a percentage of total sales

for that industry.




Sales Maximization•

Short-term objective to maximizesales

•

Ignores profits, competition, andthe marketing environment

•

May be used to selloff excess inventory

17Copyright 2010 by Cengage Learning Inc. All Rights Reserved



Status Quo Pricing Objectives

18

Maintainexistingprices

Meetcompetition’s

prices

Status Quo Pricing Objectives




Review Learning OutcomePricing Objectives

19

LO 2

ProfitMaximization

SatisfactoryProfits

TargetROI

Profit-Oriented

Sales-Oriented

MarketShare

SalesMaximization

Status Quo

MaintainExisting Price




The Demand Determinant of Price

20

Explain the role of demand inprice determination.

LO 3




The Demand Determinant of Price

21

Demand - The quantity of a productthat will be sold in the market at

various prices for aspecified period.

Supply- The quantity of aproduct that will be

offered to the market by a supplierat various prices for a

specified period.

Online

http://www.ubid.com


http://www.ubid.com/

http://www.ubid.com/



The Demand Curve




The Supply Curve




How Demand and Supply Establish Price

24

Price equilibrium - The price atwhich demand and supply

are equal.

Elasticity of Demand -Consumers’ responsiveness orsensitivity to changes in price.




Price Equilibrium




Elasticity of Demand

26

ElasticDemand

Consumers buy more or lessof a product when theprice changes.

InelasticDemand

An increase or decrease inprice will not significantlyaffect demand.

UnitaryElasticity

An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged.





27

Elasticity ( E ) =Percentage change in quantity

demanded of good A

Percentage change in price of good A

If E is greater than 1, demand is elastic.If E is less than 1, demand is inelastic.If E is equal to 1, demand is unitary.





28

Pr ic e Go es . .. Revenu e Go es . .. Demand i s . ..

Down Up Elastic

Down Down InelasticUp Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity








Factors that Affect Elasticity ofDemand

30

Availability of substitutes

Price relative topurchasing power

Product durability

A product’s other uses

Rate of inflation

Online

http://www.columbiahouse.com


http://www.columbiahouse.com/

http://www.columbiahouse.com/



Creating Pricing Power


LO 3



Review Learning OutcomeRole of Demand in Price Determination

32

LO




The Power of Yield Management Systems

33

Understand the concept ofyield management systems.

LO 4




Yield Management Systems

34

A technique for adjusting pricesthat uses complex mathematicalsoftware to profitably fill unused

capacity.




Yield Management Systems

35

Discounting early purchases

Limiting early sales at discounted prices

Overbooking capacity




Yield Management Systems•

Rental property landlords use yield managementsystems 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 theoptimal rent.

• Tenants can also take advantage of the technology.






The Cost Determinant of Price

38

Describe cost-oriented pricing

strategies.

LO 5





39

Varies with changesin level of output

Types of Costs

VariableCost Fixed Cost

Does not changeas level of output changes





40

Break-EvenPricing

Profit MaximizationPricing

Keystoning

Markup pricing

MethodsUsed toSet Prices




Markup Pricing

41

Markup Pricing – The cost of buying the

product from the producer plus

amounts for profit expenses n

ot otherwise accounted for.

Keystoning – The practice of markingup prices by 100%, or doubling the cost.




Profit Maximization

42

Profit Maximization – The method of

setting prices that occurs when

marginal revenue equals marginal cost.

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.




Break-Even Pricing




Break-Even Pricing

44

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost


LO 5



Review Learning OutcomeCost-Oriented Pricing Strategies




Other Determinants of Price

46

Demonstrate how the

product life cycle, competition,distribution and promotion

strategies, guaranteed pricematching, customer demands,

the Internet, and perceptions ofquality can affect price.

LO 6




Other Determinants of Price

47

Perceived Quality

Promotion Strategy

Distribution Strategy

Competition

Stages of theProduct Life Cycle




Stages in the Product Life Cycle

48

IntroductoryStage

GrowthStage

DeclineStage

$ High

$Stable

$Decrease

MaturityStage

$Decrease

Stable

High




The Competition

• High prices may induce firms to enter themarket

• Competition can lead to price wars

• Global competition may force firms tolower prices


Distrib tion Str teg




• Offer a larger profit margin ortrade allowance

• Use exclusive distribution

• Franchising

• Avoid business with price-cutting discounters

• Develop brand loyalty

50

Manufacturers Wholesalers/Retailers

Sell against the brand

Buy gray-market goods





51

Selling Against the Brand- Stockingwell-known branded items at

high prices in order to sell storebrands at discounted prices.




The Impact of the Internet

52

Internet auctions

Shopping bots

Second opinions from expert sites

Product selection




Promotion Strategy/Price Guarantee

Promotion Strategy• Price used as promotional tool• Pricing can also be a tool for trade promotions

Price Guarantee• Match any competitor’s price • Signals to target market it is positioned as a low-

price dealer




The Relationship of Price to Quality

54Online

http://www.vivre.com http://www.ashford.com

Prestige Pricing - Charging a highprice to help promote a high-quality image.


http://www.vivre.com/

http://www.ashford.com/

http://www.ashford.com/

http://www.vivre.com/



Dimensions of Quality

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige


Review Learning Outcome6



Review Learning OutcomeFactors Affecting Price

LO 6

Ch 19 Pricing Concepts

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