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- 1. Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts 2010-2011
- 2. 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 Outcomes
- 3. 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 Outcomes
- 4. The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm LO 1
- 5. The Importance of Price Price allocates resources in a free-market economy LO 1 To the consumer... Price is the cost of something To the seller... Price is revenue
- 6. What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price LO 1
- 7. What is Price? <ul><li>Sacrifice Effect of Price </li></ul><ul><ul><li>What is sacrificed to get a good or service </li></ul></ul><ul><ul><ul><li>Money, Time, Dignity </li></ul></ul></ul><ul><li>Information Effect of Price </li></ul><ul><ul><li>Infer quality information based on price </li></ul></ul><ul><ul><ul><li>Higher quality = higher price </li></ul></ul></ul><ul><ul><ul><li>Convey status </li></ul></ul></ul><ul><li>Value Based upon Perceived Satisfaction </li></ul><ul><ul><li>Reasonable Price = Perceived Reasonable Value </li></ul></ul><ul><ul><ul><li>Exchange based on expectation of satisfaction </li></ul></ul></ul>LO 1
- 8. Fashion’s Elite Wage War on Discounts <ul><li>Anna Wintour and Diane von Furstenburg </li></ul><ul><ul><li>Fashion’s Night Out: Joint effort between 700 stores in 11 countries </li></ul></ul><ul><ul><ul><li>Feature extended store hours and special events </li></ul></ul></ul><ul><ul><ul><ul><li>Giveaways and appearances by celebrities and designers. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Aims to attract customers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reverse the trend of discounting </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hope to increase consumer demand by cutting back their orders by about 20%. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>But if shoppers still won’t buy, there will be a need to offer sales in order to move inventory </li></ul></ul></ul></ul>Source: Binkley, Christina. “Fashion’s Elite Wage a War on Discounts,” The Wall Street Journal , August 13, 2009, D1, D6. LO 1
- 9. The Importance of Price to Marketing Managers LO 1 Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.
- 10. Trends Influencing Price LO 1 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
- 11. The Importance of Pricing Decisions LO 1 Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment
- 12. Pricing Objectives List and explain a variety of pricing objectives LO 2
- 13. Pricing Objectives LO 2 Profit-Oriented Sales-Oriented Status Quo
- 14. Profit-Oriented Pricing Objectives LO 2 Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment
- 15. Profit Maximization Profit Maximization LO 2 Setting prices so that total revenue is as large as possible relative to total costs.
- 16. Return on Investment Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets.
- 17. Sales-Oriented Pricing Objectives LO 2 Market Share Sales Maximization Sales-Oriented Pricing Objectives
- 18. Market Share Market Share A company’s product sales as a percentage of total sales for that industry. LO 2
- 19. Sales Maximization <ul><li>Short-term objective to maximize sales </li></ul><ul><li>Ignores profits, competition, and the marketing environment </li></ul><ul><li>May be used to sell off excess inventory </li></ul>LO 2
- 20. Status Quo Pricing Objectives LO 2 Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives
- 21. Pricing during a Recession <ul><li>Increase advertising when your competitors are cutting back to improve your market share and ROI at a lower cost. </li></ul><ul><li>Motivate distributors to stock your full product line: offer early-buy allowances, extended financing, and generous return policies. </li></ul><ul><li>Offer temporary price promotions, reduce quantity-discount thresholds, extend credit to long-standing customers, price smaller-pack sizes aggressively. </li></ul><ul><li>Know your cost structure to ensure that any cuts or consolidations will save money with minimum customer impact. </li></ul><ul><li>Source: Professor John Quelch, “Marketing Your Way Through a Recession,” Harvard Business School, Working Knowledge , March 3, 2008. </li></ul>LO 2
- 22. The Demand Determinant of Price Explain the role of demand in price determination LO 3
- 23. The Demand Determinant of Price LO 3 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.
- 24. The Demand Curve LO 3
- 25. The Supply Curve LO 3
- 26. How Demand and Supply Establish Price LO 3 Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price.
- 27. Price Equilibrium LO 3
- 28. Elasticity of Demand Elastic Demand <ul><li>Consumers buy more or less of a product when the price changes. </li></ul>Inelastic Demand <ul><li>An increase or decrease in price will not significantly affect demand. </li></ul>Unitary Elasticity <ul><li>An increase in sales exactly offsets a decrease in prices, and revenue is unchanged. </li></ul>LO 3
- 29. Elasticity of Demand LO 3 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.
- 30. Elasticity of Demand LO 3 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
- 31. Elasticity of Demand LO 3
- 32. Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation LO 3
- 33. The Power of Yield Management Systems Understand the concept of yield management systems LO 4
- 34. Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO 4 Yield Management Systems
- 35. Yield Management Systems LO 4 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity
- 36. Yield Management Systems <ul><li>Yield Management Systems (YMS) make it possible for a company to: </li></ul><ul><ul><li>stimulate demand when demand is low, and </li></ul></ul><ul><ul><li>maximize profits when demand is high. </li></ul></ul><ul><li>. </li></ul>LO 4
- 37. 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 Systems Supply Side of Product or Service LO 4 Capital Intensity Perishability High Office block House Airline seat Utilities Sport event Rental car Low Shirt Pencils Food Tropical fish Low High
- 38. 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 Systems Variability of Demand Demand Side of Product or Service LO 4 Variability of Value High Utilities Highway use Telephone Airline seat Sport event Rental car Mobile phone Low Food Music CD Shirt Office block Laptop House Low High
- 39. Yield Management Systems LO 4
- 40. The Cost Determinant of Price Describe cost-oriented pricing strategies LO 5
- 41. The Cost Determinant of Price LO 5 Varies with changes in level of output Types of Costs Variable Cost Fixed Cost Does not change as level of output changes
- 42. The Cost Determinant of Price LO 5 Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices
- 43. Markup Pricing LO 5 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.
- 44. Profit Maximization LO 5 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.
- 45. Break-Even Pricing LO 5
- 46. Break-Even Pricing LO 5 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost
- 47. REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies LO 5
- 48. Other Determinants of Price Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price LO 6
- 49. Other Determinants of Price LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle
- 50. Stages in the Product Life Cycle LO 6 Introductory Stage Growth Stage Decline Stage $ High $ Stable $ Decrease Maturity Stage $ Decrease Stable High
- 51. The Competition <ul><li>High prices may induce firms to enter the market </li></ul><ul><li>Competition can lead to price wars </li></ul><ul><li>Global competition may force firms to lower prices </li></ul>LO 6
- 52. Distribution Strategy Manufacturers Wholesalers/Retailers <ul><li>Offer a larger profit margin or trade allowance </li></ul><ul><li>Use exclusive distribution </li></ul><ul><li>Franchising </li></ul><ul><li>Avoid business with price-cutting discounters </li></ul><ul><li>Develop brand loyalty </li></ul><ul><li>Sell against the brand </li></ul><ul><li>Buy gray-market goods </li></ul>LO 6
- 53. Distribution Strategy Selling against the brand LO 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices.
- 54. The Impact of the Internet LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection
- 55. SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal , March 22, 2007 B1 Impact of the Internet on Book Distribution LO 6 Net Publisher Revenue 1998 2006 $22.5 Billion $28.5 Billion Online 13% Schools and Libraries 24% Book Clubs 5% Non-bookstore Retail 18% Traditional Retail 38% [+ 2% direct-to-consumer sales] Online 2% Schools and Libraries 27% Book Clubs 16% Non-bookstore Retail 13% Traditional Retail 42%
- 56. The Relationship of Price to Quality Charging a high price to help promote a high-quality image. Prestige Pricing LO 6
- 57. Dimensions of Quality <ul><li>Ease of use </li></ul><ul><li>Versatility </li></ul><ul><li>Durability </li></ul><ul><li>Serviceability </li></ul><ul><li>Performance </li></ul><ul><li>Prestige </li></ul>LO 6
- 58. REVIEW LEARNING OUTCOME Factors Affecting Price Price – Other firms enter market – Price wars Competition LO 6 – Convenience – Selling against the brand – Exclusive distribution Distribution Intranet and extranets – Consumers use shopping for bargains – Increased competition – Internet auctions Price used as a promotional tool Promotion strategy Large customers pressure suppliers for price reductions and guaranteed margins Demands of large customers Uncertain consumers tend to rely on price to indicate quality (“You get what you pay for.”) Price/quality relationship Introduction Growth Maturity Decline PLC

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