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Pricing Concepts

17

chapter

Prepared by Deborah Baker Texas Christian University


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Learning Objectives
1. Discuss the importance of pricing decisions to the economy and to the individual firm.

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2. List and explain a variety of pricing objectives. 3. Explain the role of demand in price determination.

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Learning Objectives (continued)


4. Understand the concept of yield management systems.

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5. Describe cost-oriented pricing strategies. 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.
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chapter

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Learning Objective

Discuss the importance of pricing decisions to the economy and to the individual firm.

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The Importance of Price
To the seller... Price is revenue and profit source To the consumer... Price is the cost of something

What is Price?

In the broadest sense, price allocates resources in a free-market economy


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What is Price?

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

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The Importance of Price to Marketing Managers


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

Revenue

Profit

Revenue minus expenses

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The Importance of Price
Revenue = Unit Price Number of units sold
Revenue pays for every activity. Whats left over is Profit.

Marketers must select a price that is not too high or not too low, a price that equals the perceived value to target consumers
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Trends Influencing Price Setting
High rate of new product introduction Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers
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Trends in the Market

Learning Objective
List and explain a variety of pricing objectives.

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Pricing Objectives
Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

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Profit-Oriented Pricing Objectives


Profit-Oriented Pricing Objectives

Profit Maximization

Satisfactory Profits

Target Return on Investment

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Profit Maximization

Setting prices so that total revenue is as large as possible relative to total costs.

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Return on Investment
Net profit after taxes divided by total assets.

ROI = Net Profit after taxes Total assets


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Sales-Oriented Pricing Objectives


Sales-Oriented Pricing Objectives

Market Share

Sales Maximization

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Market Share

A companys product sales as a percentage of total sales for that industry.

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Sales Maximization
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment May be used to sell off excess inventory

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Status Quo Pricing Objectives


Status Quo Pricing Objectives

Maintain existing prices

Meet competitions prices

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Learning Objective
Explain the role of demand in price determination.

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Demand and Supply


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 offered to the market by a supplier at various prices for a specific period.

Demand

Supply

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The Demand Curve


2.50 D

2.00
Price 1.50 1.00 .50 D

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40 60 80 Quantity demanded
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The Supply Curve


2.50
2.00

3
S

Price

1.50
1.00 .50 0

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40 60 80 Quantity supplied
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Price Equilibrium

The price at which demand and supply are equal.

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Equilibrium Price
2.50 2.00 Price 1.50 D Surplus

3
S

Price Equilibrium S Shortage D 120


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1.00
.50 0

20

40

60

80

100

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Quantity demanded
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Elasticity of Demand

Consumers responsiveness or sensitivity to changes in price.

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Elasticity of Demand
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

Inelastic Demand

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


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Elasticity of Demand
Price Goes...
Down Down Up Up Up or Down
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Demand is...
Elastic Inelastic Inelastic Elastic Unitary Elasticity
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Revenue Goes...
Up Down Up Down Stays the Same
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Elasticity of Demand
Elastic Demand Curve D Inelastic Demand Curve

D Price

Price

D
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Factors that Affect Elasticity


Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand
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Product Durability Products Other Uses


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Learning Objective

Understand the concept of yield management systems.

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Yield Management Systems

A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.

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Yield Management Systems


Discounting early purchases
YMS Price Adjustments

Limiting early sales at discounted prices

Overbooking capacity
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Learning Objective

Describe cost-oriented pricing strategies.

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The Cost Determinant of Price


Types of Costs

Variable Costs

Fixed Costs

Deviate with changes in level of output


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Do not deviate as level of output changes


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The Cost Determinant of Price


Markup pricing
Keystoning

Methods Used to Set Prices

Profit Maximization Pricing Break-Even Pricing Target-Return Pricing

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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.

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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.
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Break-Even Pricing
Total Revenue
4,000

Price

Total Costs Break-even point

2,000

Fixed costs

0
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2,000

3,000

4,000

5,000

6,000
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Quantity

Break-Even Pricing
Break-Even Quantity
= Total Fixed Costs Fixed cost Contribution

Fixed cost Contribution

Price -- Avg. Variable Cost

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Learning Objective
Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price.

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Other Determinants of Price


Stages of the Product Life Cycle Competition Other Factors That Influence Price Distribution Strategy Promotion Strategy Perceived Quality
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Stages in the Product Life Cycle


Introductory Stage Growth Stage Maturity Stage Decline Stage

$
High

$
Stable

$
Decrease

$
Decrease
Stable

High

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Distribution Strategy
Convincing Distributors to Carry Product

Offer a larger profit margin

Give dealers a large trade allowance

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Selling Against the Brand


Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

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Regaining Price Control


Exclusive distribution system Franchising Avoid business with price-cutting discounters Package marked with selling price DEVELOP BRAND LOYALTY 2002 South-Western

Methods Used to Regain Price Control

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The Impact of the Internet


Allows price and product comparisons
Prices are coming down Data collection allows sellers to tailor products and prices

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Extranet

A private electronic network that links a company with its suppliers and customers.

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Prestige Pricing

Charging a high price to help promote a high-quality image.

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Indicators of Quality
Retailer Reputation Appearance

Price Brand Name


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