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2011 2-19marketing-110719013216-phpapp01
- 1. 1 Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts 2010-2011
- 2. 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 OutcomesLearning Outcomes
- 3. 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 OutcomesLearning Outcomes
- 4. 4 Discuss the importance of pricing decisions to the economy and to the individual firm The Importance of PriceThe Importance of Price LO1
- 5. 5 The Importance of Price Price allocates resources in a free-market economy To the consumer... Price is the cost of something To the seller... Price is revenue LO1
- 6. 6 What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price LO1
- 7. 7 What is Price? • Sacrifice Effect of Price – What is sacrificed to get a good or service • Money, Time, Dignity • Information Effect of Price – Infer quality information based on price • Higher quality = higher price • Convey status • Value Based upon Perceived Satisfaction – Reasonable Price = Perceived Reasonable Value • Exchange based on expectation of satisfaction LO1
- 8. 8 Fashion’s Elite Wage War on Discounts • Anna Wintour and Diane von Furstenburg – Fashion’s Night Out: Joint effort between 700 stores in 11 countries • Feature extended store hours and special events – Giveaways and appearances by celebrities and designers. – Aims to attract customers – Reverse the trend of discounting – Hope to increase consumer demand by cutting back their orders by about 20%. – But if shoppers still won’t buy, there will be a need to offer sales in order to move inventory Source: Binkley, Christina. “Fashion’s Elite Wage a War on Discounts,” The Wall Street Journal, August 13, 2009, D1, D6. LO1
- 9. 9 The Importance of Price to Marketing Managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. LO1
- 10. 10 Trends Influencing Price 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 LO1
- 11. 11 The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment LO1
- 12. 12 List and explain a variety of pricing objectives Pricing ObjectivesPricing Objectives LO2
- 14. 14 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment LO2
- 15. 15 Profit Maximization Setting prices so that total revenue is as large as possible relative to total costs. Profit Maximization LO2
- 16. 16 Return on Investment ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets. Return on Investment LO2
- 17. 17 Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives LO2
- 18. 18 Market Share Market Share A company’s product sales as a percentage of total sales for that industry. LO2
- 19. 19 Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory LO2
- 20. 20 Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives LO2
- 21. 21 Pricing during a Recession Increase advertising when your competitors are cutting back to improve your market share and ROI at a lower cost. Motivate distributors to stock your full product line: offer early-buy allowances, extended financing, and generous return policies. Offer temporary price promotions, reduce quantity-discount thresholds, extend credit to long-standing customers, price smaller-pack sizes aggressively. Know your cost structure to ensure that any cuts or consolidations will save money with minimum customer impact. Source: Professor John Quelch, “Marketing Your Way Through a Recession,” Harvard Business School, Working Knowledge, March 3, 2008.LO2
- 22. 22 Explain the role of demand in price determination The DemandThe Demand Determinant of PriceDeterminant of Price LO3
- 23. 23 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. LO3
- 26. 26 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
- 28. 28 Elasticity of Demand Elastic Demand Consumers buy more or less of a product when the price changes. Inelastic Demand An increase or decrease in price will not significantly affect demand. Unitary Elasticity An increase in sales exactly offsets a decrease in prices, and revenue is unchanged. LO3
- 29. 29 Elasticity of Demand 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. LO3
- 30. 30 Elasticity of Demand Price Goes...Price Goes... Revenue Goes...Revenue Goes... Demand is...Demand is... Down Up Elastic Down Down Inelastic Up Up Inelastic Up Down Elastic Up or Down Stays the Same Unitary Elasticity LO3
- 32. 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 LO3
- 33. 33 Understand the concept of yield management systems The Power of YieldThe Power of Yield Management SystemsManagement Systems LO4
- 34. 34 Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO4 Yield Management Systems
- 35. 35 Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity LO4
- 36. 36 Yield Management Systems Yield Management Systems (YMS) make it possible for a company to: 1. stimulate demand when demand is low, and 2. maximize profits when demand is high. . LO4
- 37. 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 LO4 High Office block House Airline seat Utilities Sport event Rental car Low Shirt Pencils Food Tropical fish Low High CapitalIntensity Perishability
- 38. 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 Variabilityof Demand Demand Side of Product or Service LO4 High Utilities Highway use Telephone Airline seat Sport event Rental car Mobile phone Low Food Music CD Shirt Office block Laptop House Low High Variability of Value
- 40. 40 Describe cost-oriented pricing strategies The Cost Determinant of PriceThe Cost Determinant of Price LO5
- 41. 41 The Cost Determinant of Price Varies with changes in level of output Types of Costs Variable Cost Fixed Cost Does not change as level of output changes LO5
- 42. 42 The Cost Determinant of Price Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices LO5
- 43. 43 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
- 44. 44 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
- 46. 46 Break-Even Pricing Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost LO5
- 47. 47 REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies LO5
- 48. 48 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price Other Determinants of PriceOther Determinants of Price LO6
- 49. 49 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle LO6
- 50. 50 Stages in the Product Life Cycle IntroductoryIntroductory StageStage GrowthGrowth StageStage DeclineDecline StageStage $$ HighHigh $$ StableStable $$ DecreaseDecrease MaturityMaturity StageStage $$ DecreaseDecrease StableStable HighHigh LO6
- 51. 51 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
- 52. 52 Distribution Strategy Manufacturers Wholesalers/Retailers Offer a larger profit margin or trade allowance Use exclusive distribution Franchising Avoid business with price- cutting discounters Develop brand loyalty Sell against the brand Buy gray-market goods LO6
- 53. 53 Distribution Strategy Stocking well-known branded items at high prices in order to sell store brands at discounted prices. Selling against the brand LO6
- 54. 54 The Impact of the Internet Internet auctions Shopping bots Second opinions from expert sites Product selection LO6
- 55. 55 SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal, March 22, 2007 B1Net 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% Impact of the Internet on Book Distribution LO6
- 56. 56 The Relationship of Price to Quality Charging a high price to help promote a high- quality image. Prestige Pricing LO6
- 57. 57 Dimensions of Quality 1. Ease of use 2. Versatility 3. Durability 4. Serviceability 5. Performance 6. Prestige LO6
- 58. 58 REVIEW LEARNING OUTCOME Factors Affecting Price Price – 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 – Other firms enter market – Price wars Introduction Growth Maturity Decline PLC Competition LO6