CHAPTER 17 Pricing Concepts Designed by Eric Brengle B-books, Ltd. Prepared by Deborah Baker Texas Christian University Introduction to Marketing McDaniel, Lamb, Hair 9
Learning Outcomes LO I LO 2 LO 3 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
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 LO 5 LO 6 LO 4
The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm LO I
The Importance of Price LO I Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue
What Is Price? Price LO I Price is that which is given up in an exchange to acquire a good or service.
The Importance of Price to Marketing Managers LO I Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.
Trends Influencing Price LO I 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
REVIEW LEARNING OUTCOME The Importance of Pricing Decisions LO I Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment
Pricing Objectives List and explain a variety of pricing objectives LO 2
Pricing Objectives LO 2 Profit-Oriented Sales-Oriented Status Quo
Profit-Oriented Pricing Objectives LO 2 Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment
Profit Maximization LO 2 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs.
Return on Investment Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets.
Market Share Market Share LO 2 A company’s product sales as a percentage of total sales for that industry.
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
Sales Maximization LO 2
Status Quo Pricing Objectives LO 2 Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives
REVIEW LEARNING OUTCOME Pricing Objectives LO 2 Profit Maximization Satisfactory Profits Target ROI Profit-Oriented Sales-Oriented Market Share Sales Maximization Status Quo Maintain Existing Price
The Demand Determinant of Price Explain the role of demand in price determination LO 3
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. Online http://www.ubid.com
The Demand Curve LO 3
The Supply Curve LO 3
Tyson’s Meat Glut
Tyson Foods, the world’s largest processor, has an oversupply of meat:
Lower chicken consumption due to avian flu fears
export restrictions to Japan and South Korea due to mad cow disease
Mismatch between oversupply and reduced demand has created tremendous financial losses for the company.
Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly.
To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products.
LO 3 SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut ,” Wall Street Journal, June 28 , 2006, B9A.
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.
Price Equilibrium LO 3
Elasticity of Demand LO 3 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.
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.
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.
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
Biz Flix The Money Pit LO 3
Elasticity of Demand LO 3
Factors that Affect Elasticity of Demand LO 3 Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation Online http://www.columbiahouse.com
The Power of Yield Management Systems Understand the concept of yield management systems LO 4
Yield Management Systems LO 4 A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Yield Management Systems
Yield Management Systems LO 4 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity
Yield Management Systems
Rental property landlords use yield management systems to raise rents at a faster pace.
The M/PF Yield-Star Price Optimizer is similar to pricing systems used by airlines and car-rental companies.
It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent.
Tenants can also take advantage of the technology.
LO 4 SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords ,” Wall Street Journal, June 28, 2006, B10.
REVIEW LEARNING OUTCOME Yield Management Systems LO 4
The Cost Determinant of Price Describe cost-oriented pricing strategies LO 5
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
The Cost Determinant of Price LO 5 Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices
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.
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.
REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies LO 5
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
Other Determinants of Price LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle
Stages in the Product Life Cycle LO 6 $ Decrease Stable High Introductory Stage Growth Stage Decline Stage $ High $ Stable $ Decrease Maturity Stage
High prices may induce firms to enter the market
Competition can lead to price wars
Global competition may force firms to lower prices
Offer a larger profit margin or trade allowance
Use exclusive distribution
Avoid business with price-cutting discounters
Develop brand loyalty
LO 6 Manufacturers Wholesalers/Retailers
Sell against the brand
Buy gray-market goods
Distribution Strategy LO 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Selling against the brand
The Impact of the Internet LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection
The Relationship of Price to Quality LO 6 Prestige Pricing Charging a high price to help promote a high-quality image. Online http://www.vivre.com http://www.ashford.com
The $100,000 Family Car
The auto industry has a new sticker price on luxury: $100,000.
These cars are powerful mass market sedans, targeting households with incomes of $300,000 or more.
With sales of 9,000 cars sold last year, and 17,000 being built, it looks like massive oversupply.
The expensive models could lure buyers into the showroom.
LO 6 SOURCE: “The $100,000 Family Car ,” Wall Street Journal, March 12, 2006, W1.
Dimensions of Quality
Ease of use
REVIEW LEARNING OUTCOME Factors Affecting Price LO 6