chapter 17copyright ©2008 by south-western, a division of thomson learning. all rights reserved 1...

Chapter 17 Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 1

MKTG

Designed byAmy McGuire, B-books, Ltd.

Prepared byDeborah Baker, Texas Christian University

Lamb, Hair, McDaniel 2007-2008

Pricing Concepts1

7

CHAPTER


LO1

The Importance of Price

Price allocates resources in a free-market economyPrice allocates resources in a free-market economy

To the consumer...Price is the cost

of something

To the consumer...Price is the cost

of something

To the seller...Price is revenueTo the seller...

Price is revenue


LO1

What Is Price?

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

PricePrice


LO1

The Importance of Price to Marketing Managers

RevenueRevenueThe price charged to customers multiplied by the number of units sold.

The price charged to customers multiplied by the number of units sold.

ProfitProfit Revenue minus expenses.Revenue minus expenses.


LO1

Trends Influencing Price

Flood of new productsFlood of new products

Increased availability of bargain-priced private and generic brandsIncreased availability of bargain-priced private and generic brands

Price cutting as a strategy to maintain or regain market sharePrice cutting as a strategy to maintain or regain market share

Internet used for comparison shoppingInternet used for comparison shopping


REVIEW LEARNING OUTCOMELO1

The Importance of Pricing Decisions

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment


Pricing Objectives

LO2

Profit-Oriented

Sales-Oriented

Status Quo


Profit-Oriented Pricing Objectives

LO2

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment


Profit Maximization

LO2

Setting prices so that total

revenue is as large as possible

relative to total costs.

Profit Maximization

Profit Maximization


Return on Investment

LO2

ROI = Net Profit after taxes Total assets

Net profit after taxes divided

by total assets.

Return on

Investment

Return on

Investment


Sales-Oriented Pricing Objectives

LO2

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

Online

http://www.target.comhttp://www.walmart.comhttp://www.jcpenney.com


Market Share

LO2

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


Sales Maximization

LO2

Short-term objective to maximize sales

Ignores profits, competition, and the marketing environment

May be used to sell off excess inventory


Status Quo Pricing Objectives

LO2

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives



Pricing Objectives

ProfitMaximization

SatisfactoryProfits

TargetROI

Profit-Oriented

Sales-Oriented

MarketShare

SalesMaximization

Status Quo

MaintainExisting Price


The Demand Determinant of Price

LO3

DemandDemandThe 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 sold in the market at various prices for a specified period.

SupplySupplyThe quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

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 CurveLO3


The Supply CurveLO3


LO3B

eyond

the

Book

Tyson’s Meat Glut Tyson Foods, the world’s largest processor, has an

oversupply of meat:Lower chicken consumption due to avian flu fearsExport 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.

SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.


How Demand and Supply Establish Price

LO3

PriceEquilibrium

PriceEquilibrium

The price at which demand and supply are equal.

The price at which demand and supply are equal.

Elasticity of Demand

Elasticity of Demand

Consumers’ responsiveness or sensitivity to changes in price.

Consumers’ responsiveness or sensitivity to changes in price.


Price EquilibriumLO3


Elasticity of DemandLO3

Elastic Demand Elastic

Demand

Consumers buy more or lessof a product when the price changes.

InelasticDemand

InelasticDemand

An increase or decrease in price will not significantly affect demand.

UnitaryElasticityUnitary

Elasticity

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



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.



Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue 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


Biz Flix

LO3The Money Pit


Factors that Affect Elasticity of Demand

LO3

Availability of substitutesAvailability of substitutes

Price relative to purchasing powerPrice relative to purchasing power

Product durabilityProduct durability

A product’s other usesA product’s other uses

Rate of inflationRate of inflation

Online

http://www.columbiahouse.com


LO4

Yield Management Systems

Yield Management

Systems

Yield Management

SystemsA technique for adjusting

prices that uses complex

mathematical software to

profitably fill unused

capacity.


LO4


Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity


LO4B

eyond

the

Book


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.

SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.


The Cost Determinant of Price

LO5

Varies with changes in level of output

Varies with changes in level of output

Types of CostsTypes of Costs

VariableCost

VariableCost Fixed CostFixed Cost

Does not change as level of output changes

Does not change as level of output changes


The Cost Determinant of Price

LO5Break-Even

PricingBreak-Even

Pricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsUsed to

Set Prices

MethodsUsed to

Set Prices


Markup Pricing

LO5

Markup Pricing

Markup Pricing

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

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

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


Profit Maximization

LO5

ProfitMaximization

ProfitMaximization

A method of setting prices that occurs when marginal revenue equals marginal cost.

A method of setting prices that occurs when marginal revenue equals marginal cost.

MarginalRevenue

MarginalRevenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

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

LO5


Break-Even Pricing

LO5

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost



Cost-Oriented Pricing Strategies


Other Determinants of Price

LO6 Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle


Stages in the Product Life Cycle

LO6

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh


The Competition

LO6

High prices may induce firms to enter the market

Competition can lead to price wars

Global competition

may force firms to

lower prices


Distribution Strategy

LO6

ManufacturersManufacturers Wholesalers/RetailersWholesalers/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


Distribution Strategy

LO6

Stocking well-known branded items

at high prices in order to sell store

brands at discounted prices.

Selling againstthe brand

Selling againstthe brand


The Impact of the Internet

LO6

Internet auctions Internet auctions

Shopping bots Shopping bots

Second opinions from expert sites Second opinions from expert sites

Product selection Product selection


The Relationship of Price to Quality

LO6

Charging a high price to help

promote a high-quality image.

Online

http://www.vivre.comhttp://www.ashford.com

Prestige PricingPrestige Pricing


LO6B

eyond

the

Book

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.SOURCE: “The $100,000 Family Car,” Wall Street Journal, March 12, 2006, W1.


Dimensions of Quality

LO6

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige



Factors Affecting Price

chapter 17copyright ©2008 by south-western, a division of thomson learning. all rights reserved 1...

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