Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel...

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1

Lamb, Hair, McDaniel

CHAPTER 19

Pricing Concepts

2011-2012

© iS

tock

phot

o.co

m/k

tsim

age


LO 1 Discuss the importance of pricing decisions to the economy and to the individual firm

LO 2 List and explain a variety of pricing objectives

LO 3 Explain the role of demand in price determination

Learning OutcomesLearning Outcomes


LO 4 Understand the concept of yield management systems

LO 5 Describe cost-oriented pricing strategies

LO 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

Learning OutcomesLearning Outcomes


Discuss the importance of pricing

decisions to the economy and to the

individual firm

The Importance of PriceThe Importance of Price

LO1


The Importance of Price

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

LO1


What Is Price?

Price is that which is

given up in an exchange

to acquire a good or

service.

PricePrice

LO1


What is Price?

• Sacrifice Effect of Price– What is sacrificed to get a good or service

• Money, Time, Dignity

• Information Effect of Price– Infer quality information based on price

• Higher quality = higher price• Convey status

• Value Based upon Perceived Satisfaction– Reasonable Price = Perceived Reasonable Value

• Exchange based on expectation of satisfaction

LO1


The Importance of Price to Marketing Managers

RevenueRevenueThe 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 expenses.Revenue minus expenses.

LO1


Trends Influencing Price

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

LO1 U.S. recession from late 2007 to 2009.U.S. recession from late 2007 to 2009.


List and explain a variety of pricing

objectives

Pricing ObjectivesPricing Objectives

LO2


Pricing Objectives

Profit Oriented

Sales Oriented

Status Quo

LO2


Profit-OrientedPricing Objectives

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

LO2


Profit Maximization

Setting prices so that total

revenue is as large as possible

relative to total costs.

Profit Maximization

Profit Maximization

LO2


Return on Investment

ROI = Net Profit after taxes Total assets

Net profit after taxes

divided by total assets.


(ROI)


(ROI)

LO2


Sales-OrientedPricing Objectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

LO2


Market Share

Market ShareMarket Share A company’s product sales as a percentage of total sales for that industry.

LO2


Sales Maximization

Short-term objective to maximize sales

Ignores profits, competition, and the marketing environment

May be used to sell off excess inventory

LO2


Status Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives

LO2


Explain the role of demand in price determination

The DemandThe DemandDeterminant of PriceDeterminant of Price

LO3


The DemandDeterminant of Price

DemandDemandThe 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.

SupplySupplyThe 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.

LO3


LO3

Exhibit 19.2Exhibit 19.2Demand Curve and Demand Demand Curve and Demand Schedule for Gourmet CookiesSchedule for Gourmet Cookies


LO3

Exhibit 19.3Exhibit 19.3Supply Curve and Supply Schedule Supply Curve and Supply Schedule for Gourmet Cookiesfor Gourmet Cookies


How Demand and Supply Establish Price

PriceEquilibrium

PriceEquilibrium

The price at which demand and supply are equal.

The price at which demand and supply are equal.

Elasticity of Demand


Consumers’ responsiveness or sensitivity to changes in price.

Consumers’ responsiveness or sensitivity to changes in price.

LO3


LO3

Exhibit 19.4Exhibit 19.4Equilibrium Price for Equilibrium Price for Gourmet CookiesGourmet Cookies



Elastic Demand Elastic

Demand

Consumers buy more or lessof a product when the price changes.

InelasticDemand

InelasticDemand

An increase or a decrease in price will not significantly affect demand.

UnitaryElasticityUnitary

Elasticity

An increase in sales exactly offsets a decrease in prices, so total revenue remains the same.

LO3



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.

LO3


Elasticity of DemandPrice 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

LO3


Factors that Affect Elasticity of Demand

Availability of substitutesAvailability of substitutes

Price relative to purchasing powerPrice relative to purchasing power

Product durabilityProduct durability

A product’s other usesA product’s other uses

Rate of inflationRate of inflation

LO3


Understand the concept of yield

management systems

The Power of Yield The Power of Yield Management SystemsManagement Systems

LO4


Yield Management Systems

LO4

Yield Management

Systems

Yield Management

SystemsA technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.



Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity

LO4



Yield Management Systems (YMS) make it possible for a company to:

1. stimulate demand when

demand is low, and

2. maximize profits when demand

is high.

. LO4


SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

Yield Management SystemsSupply Side of Product or Service

LO4

High Office block

House

Airline seat

Utilities

Sport event

Rental car

Low Shirt

Pencils

Food

Tropical fish

Low High

Cap

ital In

ten

sity

PerishabilityBeyo

nd

th

e

Book


SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.


Vari

ab

ilit

y o

f D

em

an

d

Demand Side of Product or Service

LO4

High Utilities

Highway use

Telephone

Airline seat

Sport event

Rental car

Mobile phone

Low Food

Music CD

Shirt

Office block

Laptop

House

Low High

Variability of Value

Beyo

nd

th

e

Book


Describe cost-oriented pricing strategies

The Cost Determinant of PriceThe Cost Determinant of Price

LO5


The Cost Determinant of Price

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

LO5



Average Variable Cost (AVC) – total variable cost divided by quantity of outputAverage Variable Cost (AVC) – total variable cost divided by quantity of output

Average Total Cost (ATC) – total costs divided by quantity of outputAverage Total Cost (ATC) – total costs divided by quantity of output

Marginal Cost (MC) – the change in total costs associated with a one-unit change in outputMarginal Cost (MC) – the change in total costs associated with a one-unit change in output



Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsUsed to

Set Prices

MethodsUsed to

Set Prices

LO5


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.

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

KeystoningKeystoningThe practice of marking up prices by 100 percent, or doubling the cost.

The practice of marking up prices by 100 percent, or doubling the cost.

LO5


Profit Maximization

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.

MarginalRevenue (MR)

MarginalRevenue (MR)

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.

LO5


LO5

Exhibit 19.7Exhibit 19.7Costs, Revenues, and Costs, Revenues, and Universal SportswearUniversal Sportswear


Break-Even Pricing

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost

LO5


Demonstrate how the product life cycle, competition,

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

perceptions of quality can affect price

Other Determinants of PriceOther Determinants of Price

LO6


Other Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

LO6


Stages in the Product Life Cycle

LO6

Introductory stage – prices highIntroductory stage – prices high

Growth stage – prices stabilizeGrowth stage – prices stabilize

Maturity stage – price decreasesMaturity stage – price decreases

Decline stage – price decreasesDecline stage – price decreases


The Competition

High prices may induce firms to enter the market

Competition can lead to price wars

LO6


Distribution StrategyManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers

Offer a larger profit margin or trade allowance

Use exclusive distribution

Franchising

Avoid business with price-cutting discounters

Develop brand loyalty

Sell against the brand

Buy gray-market goods

LO6


Distribution Strategy

Stocking well-known branded items at

high prices in order to sell store brands

at discounted prices.

Selling againstthe brand

Selling againstthe brand

LO6


The Impact of the Internet

LO6

Shopping BotsShopping BotsA program that searches the Web for the best price for a particular item.

A program that searches the Web for the best price for a particular item.

Internet AuctionsInternet AuctionsBusiness-to-business auctions are likely to be the dominant form of online auctions in the future.

Business-to-business auctions are likely to be the dominant form of online auctions in the future.


Promotion Strategy

Price is often used as a promotional tool to increase consumer interest. Examples:

1. Pittsburgh Zoo – $5 admission for wearing a tie-dye shirt

2. Crested Butte Ski Resort – free skiing between Thanksgiving and Christmas

3. Bugle Boy – uncut competition by offering pants to retailers at wholesale prices


Demands of Large Customers

Require suppliers to pay cash rebates if stores’ profit margins aren’t met.

Require suppliers to pay cash rebates if stores’ profit margins aren’t met.

Fines for violations of ticketing, packing, and shipping rules.

Fines for violations of ticketing, packing, and shipping rules.


The Relationship of Price to Quality

Charging a high price to

help promote a high-

quality image.

Prestige PricingPrestige Pricing

LO6


Dimensions of Quality

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige

LO6


Beyo

nd

th

e

BookChapter 19 Videos

Acid+All – Pricing Concepts

What role do the product life cycle, competition, and perceptions of quality play in Acid+All’s suggested retail price?

http://www.cengage.com/marketing/book_content/1439039429_lamb/company_clips/ch19.html

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel...

Documents

Transcript of Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel...