Lamb, Hair, McDaniel

1. Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts

2. What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price=Perceived Value Price=Quality How availability information affects pricing decisions of a firm

3. Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment Price allocates resources in a free market economy Understanding Price

4. Profit-Oriented Profit Maximization Satisfactory Profits Target ROI Status Quo Sales-Oriented Market Share SalesMaximization Maintain Existing Price Pricing Objectives

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

6. Price Equilibrium

7. Elasticity of Demand 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.

8. 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. Elasticity of Demand

9. Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation

10. Elasticity Of Demand

11. Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. It is achieved by… • Discounting early purchases • Limiting early sales at discounted prices • Overbooking capacity

12. Cost Determinant of Price Many a times firms set their price based on the COST they incur in manufacturing a product. The notion of total cost, fixed cost, variable cost, Average total cost, average variable cost, and marginal cost are important for the purpose. Break-even analysis is helpful in this regard.

13. Marginal Cost and Marginal Revenue for Optimal Profit

14. Break-Even Pricing

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

16. Yield Management Systems

17. Stages in the PLC Price/qualityrelationship IntroductionGrowthMaturityDecline Uncertain consumers tend to rely on price to indicate quality (“You get what you pay for.”) Large customers pressure suppliers for price reductions and guaranteed margins Demandsof largecustomers – Convenience– Selling against the brand– Exclusive distribution Distribution Price used as a promotional tool – Consumers use shopping for bargains– Increased competition– Internet auctions Promotionstrategy Intranet and extranets Other Determinants of Price Factors Affecting Price – Other firms enter market– Price wars Competition Price

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

19. Online 13% Schools and Libraries 24% Online 2% Schools and Libraries 27% Book Clubs 5% Non-bookstore Retail 18% Book Clubs 16% Non-bookstore Retail 13% Traditional Retail 38% [+ 2% direct-to-consumer sales] Traditional Retail 42% 1998 2006 $22.5 Billion $28.5 Billion Net Publisher Revenue Impact of the Internet on Book Distribution SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal, March 22, 2007 B1

20. Ch 19 Discussion Questions Explain the three types of pricing objectives of the firm. What is profit maximization? How does break-even analysis explain profit maximization? What is yield management system? What role does it play in pricing? Discuss the (other) determinants of price. What role of Internet plays in Pricing Decisions? Explain.