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©2002 South-Western Chapter 17 Version 6e1 chapter Pricing Concepts 17 Prepared by Deborah Baker...
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Chapter 17 Version 6e 1 ©2002 South- Western chapter Pricing Concepts Pricing Concepts 17 Prepared by Prepared by Deborah Baker Deborah Baker Texas Christian University Texas Christian University
Transcript of ©2002 South-Western Chapter 17 Version 6e1 chapter Pricing Concepts 17 Prepared by Deborah Baker...
Chapter 17 Version 6e 1©2002 South-Western
chapterPricing ConceptsPricing Concepts
1717
Prepared byPrepared byDeborah BakerDeborah Baker
Texas Christian UniversityTexas Christian University
Chapter 17 Version 6e 2©2002 South-Western
chapter
Learning ObjectivesLearning Objectives
1717
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 17 Version 6e 3©2002 South-Western
chapter
Learning Objectives (continued)Learning Objectives (continued)
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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 17 Version 6e 4©2002 South-Western
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.
Chapter 17 Version 6e 5©2002 South-Western
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
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What is Price?What is Price?11
Price is that which is given
up in an exchange to
acquire a good or service.
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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
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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
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Chapter 17 Version 6e 10©2002 South-Western
Learning Objective Learning Objective 22
List and explain a variety List and explain a variety of pricing objectives.of pricing objectives.
Chapter 17 Version 6e 11©2002 South-Western
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
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Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-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.
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Return on InvestmentReturn on Investment
Net profit after taxes
divided by total assets.
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ROI = ROI = Net Profit after taxesNet Profit after taxes Total assetsTotal assets
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Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
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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
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Status Quo Pricing ObjectivesStatus Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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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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The Demand CurveThe Demand Curve
D
DPri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120Quantity demanded
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The Supply CurveThe Supply Curve
Quantity supplied
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
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Price EquilibriumPrice Equilibrium33
The price at which demand
and supply are equal.
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Equilibrium PriceEquilibrium Price33
Quantity demanded
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
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Elasticity of DemandElasticity of Demand
Consumers’ responsiveness or
sensitivity to changes
in price.
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Elasticity of DemandElasticity of Demand
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
UnitaryUnitaryElasticityElasticityUnitaryUnitary
ElasticityElasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged
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Elasticity of DemandElasticity of Demand
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
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Elasticity of DemandElasticity of DemandElastic Demand CurveElastic Demand Curve
D
D
Quantity
Pri
ce
D
D
Quantity
Pri
ce
Inelastic Demand CurveInelastic Demand Curve
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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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Learning Objective Learning Objective 44
Understand the concept of Understand the concept of yield management systems.yield management systems.
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Yield Management SystemsYield Management Systems
A technique for adjusting
prices that uses complex
mathematical software
to profitably fill
unused capacity.
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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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Learning Objective Learning Objective
Describe cost-oriented pricing strategies.Describe cost-oriented pricing strategies.
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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
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The Cost Determinant of PriceThe Cost Determinant of Price55
Target-ReturnPricing
Target-ReturnPricing
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsMethodsUsed toUsed to
Set PricesSet Prices
MethodsMethodsUsed toUsed to
Set PricesSet Prices
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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.
KeystoningKeystoning The practice of marking up pricesby 100%, or doubling the cost.The practice of marking up pricesby 100%, or doubling the cost.
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Profit MaximizationProfit Maximization55
ProfitMaximization
ProfitMaximization
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.
MarginalRevenueMarginalRevenue
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.
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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
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Break-Even PricingBreak-Even Pricing55
Break-EvenQuantity = Total Fixed Costs
Fixed cost Contribution
Fixed costContribution = Price -- Avg. Variable Cost
Chapter 17 Version 6e 40©2002 South-Western
Learning Objective Learning Objective 66
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.
Chapter 17 Version 6e 41©2002 South-Western
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
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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
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Selling Against the BrandSelling Against the Brand
Stocking well-known
branded items at high
prices in order to sell
store brands at
discounted prices.
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Regaining Price ControlRegaining Price Control66
DEVELOP BRAND LOYALTY
DEVELOP BRAND LOYALTY
Package marked with selling price
Package marked with selling price
Avoid business withprice-cutting discounters
Avoid business withprice-cutting discounters
FranchisingFranchising
Exclusive distribution system
Exclusive distribution system
MethodsMethodsUsed toUsed toRegainRegain
Price ControlPrice Control
MethodsMethodsUsed toUsed toRegainRegain
Price ControlPrice Control
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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
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ExtranetExtranet66
A private electronic network
that links a company
with its suppliers
and customers.
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Prestige PricingPrestige Pricing66
Charging a high price to
help promote a high-quality
image.
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Indicators of QualityIndicators of Quality66
Brand NameBrand Name
PricePrice
AppearanceAppearance
Retailer Retailer ReputationReputation
