1 / 46

Importance of Pricing Decisions in the Economy and Firm

Understand the significance of pricing decisions, various pricing objectives, role of demand in price determination, cost-oriented pricing strategies, and factors affecting price.

debrajanderson
Download Presentation

Importance of Pricing Decisions in the Economy and Firm

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MKTG Lamb, Hair, McDaniel 2008-2009 17 CHAPTER Pricing Concepts Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University

  2. Learning Outcomes 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 LO1 LO2 LO3

  3. Learning Outcomes Understand the concept of yield management systems Describe cost-oriented pricing strategies Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price LO4 LO5 LO6

  4. To the seller...Price is revenue To the consumer...Price is the cost of something The Importance of Price Price allocates resources in a free-market economy LO1

  5. What Is Price? Price Price is that which is given up in an exchange to acquire a good or service. LO1

  6. Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. The Importance of Price to Marketing Managers LO1

  7. Flood of new products Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Internet used for comparison shopping Trends Influencing Price LO1

  8. Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment REVIEW LEARNING OUTCOME LO1 The Importance of Pricing Decisions

  9. Profit-Oriented Sales-Oriented Status Quo Pricing Objectives LO2

  10. Profit-Oriented Pricing Objectives Profit Maximization SatisfactoryProfits Target Return on Investment Profit-Oriented Pricing Objectives LO2

  11. Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization Profit Maximization LO2

  12. Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets Return on Investment Return on Investment LO2

  13. Sales-Oriented Pricing Objectives Market Share Sales Maximization http://www.target.com http://www.walmart.com http://www.jcpenney.com Online Sales-Oriented Pricing Objectives LO2

  14. Market Share Market Share A company’s product sales as a percentage of total sales for that industry. LO2

  15. Sales Maximization • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory LO2

  16. Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives LO2

  17. Profit-Oriented Profit Maximization Satisfactory Profits Target ROI Status Quo Sales-Oriented Market Share SalesMaximization Maintain Existing Price REVIEW LEARNING OUTCOME LO2 Pricing Objectives

  18. The Demand Determinant of Price 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 specific period. http://www.ubid.com Online LO3

  19. The Demand Curve LO3

  20. The Supply Curve LO3

  21. How Demand and Supply Establish Price Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. LO3

  22. Price Equilibrium LO3

  23. Elasticity of Demand LO3 Elastic Demand • Consumers buy more or lessof a product when the price changes. InelasticDemand • An increase or decrease in price will not significantly affect demand. UnitaryElasticity • An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.

  24. Elasticity of Demand Percentage change in quantity demanded of good A Elasticity (E) = 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

  25. Elasticity of Demand Price Goes... Revenue Goes... Demand is... Down Up Elastic Down Down Inelastic Up Up Inelastic Up Down Elastic Up or Down Stays the Same Unitary Elasticity LO3

  26. Elasticity of Demand LO3

  27. Factors that Affect Elasticity of Demand http://www.columbiahouse.com Online LO3 Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation

  28. Yield ManagementSystems Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO4

  29. Discounting early purchases Limiting early sales at discounted prices Overbooking capacity Yield Management Systems LO4

  30. REVIEW LEARNING OUTCOME LO4 Yield Management Systems

  31. The Cost Determinant of Price Types of Costs Variable Cost Fixed Cost Varies with changes in level of output Does not change as level of output changes LO5

  32. The Cost Determinant of Price Markup pricing Methods Used to Set Prices Keystoning Profit Maximization Pricing Break-Even Pricing LO5

  33. Markup Pricing Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. LO5

  34. Profit Maximization Profit Maximization A 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. LO5

  35. Break-Even Pricing LO5

  36. Break-Even Pricing Break-Even Quantity Fixed cost Contribution Total fixed costs Fixed cost contribution Price - Avg. Variable Cost = = LO5

  37. REVIEW LEARNING OUTCOME LO5 Cost-Oriented Pricing Strategies

  38. Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Other Determinants of Price LO6

  39. Introductory Stage Growth Stage Maturity Stage Decline Stage $ Decrease Stable High $ High $ Stable $ Decrease Stages in the Product Life Cycle LO6

  40. 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 LO6

  41. Distribution Strategy Manufacturers Wholesalers/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

  42. Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Distribution Strategy Selling againstthe brand LO6

  43. Product selection Second opinions from expert sites Shopping bots Internet auctions The Impact of the Internet LO6

  44. http://www.vivre.com http://www.bluefly.com Online The Relationship of Price to Quality Prestige Pricing Charging a high price to help promote a high-quality image. LO6

  45. Dimensions of Quality • Ease of use • Versatility • Durability • Serviceability • Performance • Prestige LO6

  46. REVIEW LEARNING OUTCOME LO6 Factors Affecting Price

More Related