Chapter 17 Pricing ConceptsChapter 17 Pricing Concepts
The Importance of PriceThe Importance of Price
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
In the broadest sense, price allocates resources in a In the broadest sense, price allocates resources in a free-market economyfree-market economy
What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...
Price is revenuePrice is revenueand profit sourceand profit source
To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source
The Importance of PriceThe Importance of Priceto Marketing Managersto Marketing Managers
RevenueRevenue The 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 expensesRevenue minus expenses
The Importance of PriceThe Importance of Price
Revenue = Unit Price Number of units sold
Revenue pays for every activity. What’s left over is Profit.
Marketers must select a price Marketers must select a price that is not too highthat is not too high
or not too low, or not too low, a price that equals a price that equals
the perceived value to target consumersthe perceived value to target consumers
Trends Influencing Price SettingTrends Influencing Price Setting
Trends Trends in thein the
MarketMarket
Trends Trends in thein the
MarketMarket
High rate of new product introduction
High rate of new product introduction
Increased availability ofbargain-priced dealer and
generic brands
Increased availability ofbargain-priced dealer and
generic brands
Price cutting as a strategy tomaintain or regain
market share
Price cutting as a strategy tomaintain or regain
market share
More efficient and betterinformed buyers
More efficient and betterinformed buyers
Profit-Oriented Pricing Profit-Oriented Pricing ObjectivesObjectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
Sales-Oriented Pricing Sales-Oriented Pricing ObjectivesObjectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
Demand and SupplyDemand and Supply
DemandDemand 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 sold in the market at various
prices for a specified period.
SupplySupply
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
The Demand CurveThe Demand Curve
D
DPri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120Quantity demanded
The Supply CurveThe Supply Curve
Quantity supplied
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
Equilibrium PriceEquilibrium Price
Quantity demanded
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
Elasticity of DemandElasticity of Demand
Elastic Elastic Demand Demand Elastic Elastic
Demand Demand
Consumers buy more or lessof a product when the price changes
InelasticInelasticDemandDemandInelasticInelasticDemandDemand
An increase or decrease in price will not significantly affect demand
UnitaryUnitaryElasticityElasticityUnitaryUnitary
ElasticityElasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged
Elasticity of DemandElasticity of Demand
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
Elasticity of DemandElasticity of Demand
Elastic Demand CurveElastic Demand CurveD
D
Quantity
Pri
ce
D
D
Quantity
Pri
ce
Inelastic Demand CurveInelastic Demand Curve
Factors that Affect ElasticityFactors that Affect Elasticity
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
Availability of SubstitutesAvailability of Substitutes
Price relative toPurchasing Power
Price relative toPurchasing Power
Product DurabilityProduct Durability
Product’s Other UsesProduct’s Other Uses
Yield Management SystemsYield Management Systems
Discounting early purchases
Discounting early purchases
YMSPrice
Adjustments
YMSPrice
AdjustmentsLimiting early sales at
discounted pricesLimiting early sales at
discounted prices
Overbooking capacityOverbooking capacity
The Cost Determinant of PriceThe Cost Determinant of Price
Deviate with changes in level of output
Deviate with changes in level of output
Types of CostsTypes of CostsTypes of CostsTypes of Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs
Do not deviate as level of output changes
Do not deviate as level of output changes
The Cost Determinant of PriceThe Cost Determinant of Price
Target-ReturnPricing
Target-ReturnPricing
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsMethodsUsed toUsed to
Set PricesSet Prices
MethodsMethodsUsed toUsed to
Set PricesSet Prices
Break-Even PricingBreak-Even Pricing
QuantityQuantity
Pri
ceP
rice
2,0002,000
00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000
4,0004,000
Fixed costsFixed costs
LossLoss
ProfitProfitTotal RevenueTotal Revenue
Total CostsTotal CostsBreak-even pointBreak-even point
Break-Even PricingBreak-Even Pricing
Break-EvenQuantity = Total Fixed Costs
Fixed cost Contribution
Fixed costContribution = Price -- Avg. Variable Cost
Other Determinants of PriceOther Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
Stages in the Product Life CycleStages in the Product Life Cycle
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
StableStable
HighHigh
The Impact of the InternetThe Impact of the Internet
• Allows price and product comparisons
• Prices are coming down
• Data collection allows sellers to tailor products and prices