MKTG

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. The Importance of Price LO1 Discuss the importance of pricing decisions to the economy and to the individual firm

5. 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

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

7. 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

8. 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

9. 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

10. Pricing Objectives LO2 List and explain a variety of pricing objectives

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

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

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

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

15. 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

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

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

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

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

20. The Demand Determinant of Price LO3 Explain the role of demand in price determination

21. 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

22. The Demand Curve LO3

23. The Supply Curve LO3

24. 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

25. Price Equilibrium LO3

26. 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.

27. 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

28. 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

29. Biz Flix The Money Pit LO3

30. Elasticity of Demand LO3

31. 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

32. The Power of Yield Management Systems LO4 Understand the concept of yield management systems

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

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

35. Yield Management Systems LO4 • Yield Management Systems (YMS) make it possible for a company to: • stimulate demand when demand is low, and • maximize profits when demand is high. • . Beyond the Book

36. High Capital Intensity Low High Perishability Low Yield Management Systems LO4 Supply Side of Product or Service Beyond the Book SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

37. High Low Variability of Value High Low Yield Management Systems LO4 Demand Side of Product or Service Variability of Demand Beyond the Book SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

38. REVIEW LEARNING OUTCOME LO4 Yield Management Systems

39. The Cost Determinant of Price LO5 Describe cost-oriented pricing strategies

40. 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

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

42. 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

43. 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

44. Break-Even Pricing LO5

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

46. REVIEW LEARNING OUTCOME LO5 Cost-Oriented Pricing Strategies

47. Other Determinants of Price LO6 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

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

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

50. 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