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Transcript of 1 Chapter 19: Pricing Concepts Prepared by Amit Shah, Frostburg State University Designed by Eric...
1
Chapter 19: Pricing Concepts
Prepared by Amit Shah, Frostburg State University
Designed by Eric Brengle, B-books, Ltd.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Learning Outcomes
2
LO1
LO2
LO3
Discuss the importance of pricing decisions to the economy and to the individual firm
List and explain a variety of pricing objectives
Explain the role of demand in price determination
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Learning Outcomes
3
Understand the concept of yield management systems
Describe cost-oriented pricing strategies
Demonstrate how the product life cycle, competition, distribution and promotion strategies, guaranteed price matching, customer demands, the Internet, and perceptions of quality can affect price
LO5
LO6
LO4
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Importance of Price
4
Discuss the importance of pricing decisions to
the economy and to the individual firm.
LO1
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Importance of Price
5
Price allocates resources in a free-market economyPrice allocates resources in a free-market economy
To the consumer...Price is the cost
of something
To the consumer...Price is the cost
of something
To the seller...Price is revenueTo the seller...
Price is revenue
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
What is Price?
6
Price is that which is givenup in an exchange to acquire
a good or service.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Importance of Price to Marketing Managers
7
Revenue - The price charged tocustomers multiplied by the
number of units sold.
Profit - Revenue minus expenses.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Trends Influencing Price
8
Flood of new productsFlood of new products
Increased availability of bargain-priced private and generic brandsIncreased availability of bargain-priced private and generic brands
Price cutting as a strategy to maintain or regain market sharePrice cutting as a strategy to maintain or regain market share
Internet used for comparison shoppingInternet used for comparison shopping
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Review Learning OutcomeThe Importance of Pricing Decisions
9
LO1
Price X Sales Unit = Revenue
Revenue – Costs = Profit
Profit drives growth, salary increases, and corporate investment
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Pricing Objectives
10
List and explain a variety of
pricing objectives.
LO2
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Pricing Objectives
11
Profit-Oriented
Sales-Oriented
Status Quo
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Profit-Oriented Pricing Objectives
12
Profit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Profit Maximization
13
Setting prices so that total
revenue is as large as possible
relative to total costs.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Return on Investment
14
Net profit after taxes divided by total assets.
ROI = Net profit after taxes Total assets
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Sales-Oriented Pricing Objectives
15
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing Objectives
Online
http://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Market Share
16
A company’s product sales
as a percentage of total sales
for that industry.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Sales Maximization
• Short-term objective to maximize sales
• Ignores profits, competition, and the marketing environment
• May be used to sell off excess inventory
17Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Status Quo Pricing Objectives
18
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing Objectives
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Review Learning OutcomePricing Objectives
19
LO2
ProfitMaximization
SatisfactoryProfits
TargetROI
Profit-Oriented
Sales-Oriented
MarketShare
SalesMaximization
Status Quo
MaintainExisting Price
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Demand Determinant of Price
20
Explain the role of demand in
price determination.
LO3
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Demand Determinant of Price
21
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
specified period.
Online
http://www.ubid.com
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
How Demand and Supply Establish Price
24
Price equilibrium - The price at which demand and supply
are equal.
Elasticity of Demand - Consumers’ responsiveness or sensitivity to changes in price.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Elasticity of Demand
26
Elastic Demand Elastic
Demand
Consumers buy more or lessof a product when the price changes.
InelasticDemand
InelasticDemand
An increase or decrease in price will not significantly affect demand.
UnitaryElasticityUnitary
Elasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Elasticity of Demand
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.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Elasticity of Demand
28
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
Up or Down Stays the Same Unitary Elasticity
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Factors that Affect Elasticity of Demand
30
Availability of substitutesAvailability of substitutes
Price relative topurchasing power
Price relative topurchasing power
Product durabilityProduct durability
A product’s other usesA product’s other uses
Rate of inflationRate of inflation
Online
http://www.columbiahouse.com
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Review Learning OutcomeRole of Demand in Price Determination
32
LO3
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The Power of Yield Management Systems
33
Understand the concept of yield management systems.
LO4
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Yield Management Systems
34
A technique for adjusting pricesthat uses complex mathematicalsoftware to profitably fill unused
capacity.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Yield Management Systems
35
Discounting early purchasesDiscounting early purchases
Limiting early sales at discounted pricesLimiting early sales at discounted prices
Overbooking capacityOverbooking capacity
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
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.
36Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Review Learning OutcomeYield Management Systems
37
LO4
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Cost Determinant of Price
38
Describe cost-oriented pricing
strategies.
LO5
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Cost Determinant of Price
39
Varies with changes in level of output
Varies with changes in level of output
Types of CostsTypes of Costs
VariableCost
VariableCost Fixed CostFixed Cost
Does not change as level of output changes
Does not change as level of output changes
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Cost Determinant of Price
40
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsUsed to
Set Prices
MethodsUsed to
Set Prices
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
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 marking
up prices by 100%, or doubling the cost.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
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.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Break-Even Pricing
44
Break-EvenQuantity = Total fixed costs
Fixed cost contribution
Fixed costContribution = Price - Avg. Variable Cost
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Review Learning OutcomeCost-Oriented Pricing Strategies
45
LO5
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Other Determinants of Price
46
Demonstrate how the product life cycle, competition,
distribution and promotion strategies, guaranteed price
matching, customer demands, the Internet, and perceptions of
quality can affect price.
LO6
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Other Determinants of Price
47
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Stages in the Product Life Cycle
48
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
StableStable
HighHigh
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
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
49Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Distribution Strategy
• Offer a larger profit margin or trade allowance
• Use exclusive distribution
• Franchising
• Avoid business with price-cutting discounters
• Develop brand loyalty
50
ManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers
Sell against the brand
Buy gray-market goods
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Distribution Strategy
51
Selling Against the Brand- Stockingwell-known branded items at
high prices in order to sell storebrands at discounted prices.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Impact of the Internet
52
Internet auctionsInternet auctions
Shopping botsShopping bots
Second opinions from expert sitesSecond opinions from expert sites
Product selectionProduct selection
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
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
53Copyright 2010 by Cengage Learning Inc. All Rights Reserved
The Relationship of Price to Quality
54Online
http://www.vivre.comhttp://www.ashford.com
Prestige Pricing - Charging a highprice to help promote a high-
quality image.
Copyright 2010 by Cengage Learning Inc. All Rights Reserved
Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
55Copyright 2010 by Cengage Learning Inc. All Rights Reserved