Pricing Concepts

Pricing Concepts
17
chapter
Prepared by Deborah Baker Texas Christian University

2002 South-Western 1
Chapter 17 Version 6e
Learning Objectives
1. Discuss the importance of pricing decisions to the economy and to the individual firm.
17
2. List and explain a variety of pricing objectives. 3. Explain the role of demand in price determination.
chapter
2002 South-Western
Learning Objectives (continued)

4. Understand the concept of yield management systems.
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5. Describe cost-oriented pricing strategies. 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.
chapter
1
Learning Objective
Discuss the importance of pricing decisions to the economy and to the individual firm.
2002 South-Western
1
The Importance of Price
To the seller... Price is revenue and profit source To the consumer... Price is the cost of something
What is Price?
In the broadest sense, price allocates resources in a free-market economy

Chapter 17 Version 6e 2002 South-Western 5
1
What is Price?
Price is that which is given up in an exchange to acquire a good or service.
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The Importance of Price to Marketing Managers

The price charged to customers multiplied by the number of units sold.
Revenue
Profit
Revenue minus expenses
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The Importance of Price
Revenue = Unit Price Number of units sold
Revenue pays for every activity. Whats left over is Profit.
Marketers must select a price that is not too high or not too low, a price that equals the perceived value to target consumers
1
Trends Influencing Price Setting
High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers
Trends in the Market
Learning Objective
List and explain a variety of pricing objectives.
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Pricing Objectives
Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
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Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives
Profit Maximization
Satisfactory Profits
Target Return on Investment
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Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
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Return on Investment
Net profit after taxes divided by total assets.
ROI = Net Profit after taxes Total assets

Sales-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives
Market Share
Sales Maximization
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Market Share
A companys product sales as a percentage of total sales for that industry.
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Sales Maximization
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 Objectives

Status Quo Pricing Objectives
Maintain existing prices
Meet competitions prices
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Learning Objective
Explain the role of demand in price determination.
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Demand and Supply

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 offered to the market by a supplier at various prices for a specific period.
Demand
Supply
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The Demand Curve

2.50 D
2.00
Price 1.50 1.00 .50 D
20
40 60 80 Quantity demanded
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100
120
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The Supply Curve

2.50
2.00
3
S
Price
1.50
1.00 .50 0
20
40 60 80 Quantity supplied
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100
120
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Price Equilibrium
The price at which demand and supply are equal.
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Equilibrium Price
2.50 2.00 Price 1.50 D Surplus
3
S
Price Equilibrium S Shortage D 120

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1.00
.50 0
20
40
60
80
100
Quantity demanded
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Elasticity of Demand
Consumers responsiveness or sensitivity to changes in price.
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Elastic Demand
Consumers buy more or less of a product when the price changes An increase or decrease in price will not significantly affect demand
Inelastic Demand
Unitary Elasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Price Goes...
Down Down Up Up Up or Down
3
Demand is...
Elastic Inelastic Inelastic Elastic Unitary Elasticity
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Revenue Goes...
Up Down Up Down Stays the Same
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Elastic Demand Curve D Inelastic Demand Curve
D Price
Price
D
Quantity
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Quantity
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Factors that Affect Elasticity

Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand
Product Durability Products Other Uses

Learning Objective
Understand the concept of yield management systems.
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Yield Management Systems
A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
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Yield Management Systems

Discounting early purchases
YMS Price Adjustments
Limiting early sales at discounted prices
Overbooking capacity
Learning Objective
Describe cost-oriented pricing strategies.
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The Cost Determinant of Price

Types of Costs
Variable Costs
Fixed Costs
Deviate with changes in level of output

Do not deviate as level of output changes

The Cost Determinant of Price

Markup pricing
Keystoning
Methods Used to Set Prices
Profit Maximization Pricing Break-Even Pricing Target-Return Pricing
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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.
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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.
Break-Even Pricing
Total Revenue
4,000
Price
Total Costs Break-even point
2,000
Fixed costs
0
1,000
2,000
3,000
4,000
5,000
6,000
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Quantity
Break-Even Pricing
Break-Even Quantity
= Total Fixed Costs Fixed cost Contribution
Fixed cost Contribution
Price -- Avg. Variable Cost
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Learning Objective
Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price.
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Other Determinants of Price

Stages of the Product Life Cycle Competition Other Factors That Influence Price Distribution Strategy Promotion Strategy Perceived Quality
Stages in the Product Life Cycle

Introductory Stage Growth Stage Maturity Stage Decline Stage
$
High
$
Stable
$
Decrease
$
Decrease
Stable
High
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Distribution Strategy
Convincing Distributors to Carry Product
Offer a larger profit margin
Give dealers a large trade allowance
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Selling 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 Control

Exclusive distribution system Franchising Avoid business with price-cutting discounters Package marked with selling price DEVELOP BRAND LOYALTY 2002 South-Western
Methods Used to Regain Price Control
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The Impact of the Internet

Allows price and product comparisons
Prices are coming down Data collection allows sellers to tailor products and prices
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Extranet
A private electronic network that links a company with its suppliers and customers.
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Prestige Pricing
Charging a high price to help promote a high-quality image.
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Indicators of Quality
Retailer Reputation Appearance
Price Brand Name


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Pricing Concepts

Prepared by Deborah Baker Texas Christian University

Learning Objectives (continued)

In the broadest sense, price allocates resources in a free-market economy

Price is that which is given up in an exchange to acquire a good or service.

The Importance of Price to Marketing Managers

Revenue minus expenses

Trends in the Market

Profit-Oriented Pricing Objectives

Target Return on Investment

ROI = Net Profit after taxes Total assets

Sales-Oriented Pricing Objectives

A companys product sales as a percentage of total sales for that industry.

Status Quo Pricing Objectives

Maintain existing prices

Meet competitions prices

Demand and Supply

The Demand Curve

The Supply Curve

The price at which demand and supply are equal.

Price Equilibrium S Shortage D 120

Consumers responsiveness or sensitivity to changes in price.

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Factors that Affect Elasticity

Product Durability Products Other Uses

Understand the concept of yield management systems.

Yield Management Systems

Yield Management Systems

Limiting early sales at discounted prices

Describe cost-oriented pricing strategies.

The Cost Determinant of Price

Deviate with changes in level of output

Do not deviate as level of output changes

The Cost Determinant of Price

Methods Used to Set Prices

Profit Maximization Pricing Break-Even Pricing Target-Return Pricing

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

Total Costs Break-even point

Fixed cost Contribution

Price -- Avg. Variable Cost

Other Determinants of Price

Stages in the Product Life Cycle

Offer a larger profit margin

Give dealers a large trade allowance

Selling Against the Brand

Regaining Price Control

Methods Used to Regain Price Control

The Impact of the Internet

Charging a high price to help promote a high-quality image.

Price Brand Name

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