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PRICING CONCEPTS

CHAPTER 11
THE IMPORTANCE OF PRICE

Discuss the importance of


pricing decisions to
the economy
and to the individual firm
THE IMPORTANCE OF PRICE

To
To the
the seller...
seller... To
To the
the consumer...
consumer...
Price
Price is
is revenue
revenue Price
Price is
is the
the cost
cost
of
of something
something

Price
Price allocates
allocates resources
resources
in
in a
a free-market
free-market economy
economy
WHAT IS PRICE?

Price
Price is that which is
given up in an exchange
to acquire a good or
service.
THE IMPORTANCE OF PRICE TO
MARKETING MANAGERS

The price charged to


Revenue customers multiplied by the
number of units sold.

Profit Revenue minus expenses.


TRENDS INFLUENCING PRICE

Flood
Flood of
of new
new products
products

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

Price
Price cutting
cutting as
as aa strategy
strategy to
to maintain
maintain or
or
regain
regain market
market share
share

Internet
Internet used
used for
for comparison
comparison shopping
shopping
REVIEW LEARNING OUTCOME
THE IMPORTANCE OF PRICING DECISIONS

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investmen


PRICING OBJECTIVES

List and explain a variety


of pricing objectives
PRICING OBJECTIVES

Profit-Oriented

Sales-Oriented

Status Quo
PROFIT-ORIENTED PRICING
OBJECTIVES

Profit-Oriented Pricing Objectives

Target
Target
Profit
Profit Satisfactory
Satisfactory Return
Returnonon
Maximization
Maximization Profits
Profits Investment
Investment
PROFIT MAXIMIZATION

Profit
Maximization
Setting prices so that
total revenue is as large
as possible relative to
total costs.
RETURN ON INVESTMENT

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

ROI = Net Profit after


taxes
Total assets
SALES-ORIENTED PRICING
OBJECTIVES

Sales-Oriented Pricing Objectives

Market
Market Sales
Sales
Share
Share Maximization
Maximization
MARKET SHARE

Market Share A company’s product


sales as a percentage
of total sales for that
industry.
SALES MAXIMIZATION

 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

Status Quo Pricing Objectives

Maintain
Maintain Meet
Meet
existing
existing competition’s
competition’s
prices
prices prices
prices
REVIEW LEARNING OUTCOME
PRICING OBJECTIVES
THE DEMAND
DETERMINANT OF PRICE

Explain the role of demand


in price determination
THE DEMAND
DETERMINANT OF PRICE

The quantity of a product that


will be sold in the market at
Demand
various prices for a specified
period.

The quantity of a product


that will be offered to the market
Supply
by a supplier at various prices
for a specific period.
THE DEMAND CURVE
THE SUPPLY CURVE
HOW DEMAND AND SUPPLY
ESTABLISH PRICE

Price The price at which demand


Equilibrium and supply are equal.

Consumers’ responsiveness
Elasticity
of Demand
or sensitivity to changes
in price.
PRICE EQUILIBRIUM
ELASTICITY OF DEMAND

Elastic Consumers buy more or less


Elastic of a product when the
Demand
Demand price changes.

Inelastic An increase or decrease in


Inelastic price will not significantly
Demand
Demand affect demand.

An increase in sales exactly


Unitary
Unitary offsets a decrease in prices,
Elasticity
Elasticity
and revenue is unchanged.
ELASTICITY OF DEMAND

Percentage change in quantity


Elasticity (E) =
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

Price
Price Goes...
Goes... Revenue
Revenue Goes...
Goes... Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity


ELASTICITY OF DEMAND
FACTORS THAT AFFECT ELASTICITY
OF DEMAND

Availability
Availability of
of substitutes
substitutes

Price
Price relative
relative to
to
purchasing
purchasing power
power

Product
Product durability
durability

A
A product’s
product’s other
other uses
uses

Rate
Rate of
of inflation
inflation
THE POWER OF
YIELD MANAGEMENT
SYSTEMS

Understand the concept of


yield management systems
YIELD MANAGEMENT
SYSTEMS

Yield A technique for


Management
adjusting prices that
Systems
uses complex
mathematical
software to profitably
fill unused capacity.
YIELD MANAGEMENT
SYSTEMS

Discounting
Discounting early
early purchases
purchases

Limiting
Limiting early
early sales
sales at
at discounted
discounted prices
prices

Overbooking
Overbooking capacity
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.

SOURCE: Kemba J.Dunham,


“Technology Proves a Boon for Some Landlords,”
Wall Street Journal, June 28, 2006, B10.
REVIEW LEARNING OUTCOME
YIELD MANAGEMENT SYSTEMS
THE COST DETERMINANT OF
PRICE

Describe cost-oriented
pricing strategies
THE COST DETERMINANT OF
PRICE

Types
Types of
of Costs
Costs

Variable
Variable Fixed
Fixed Cost
Cost
Cost
Cost

Varies
Varies with
with changes
changes Does
Does not
not change
change
in
in level
level of
of output
output as
as level
level of
of output
output changes
changes
THE COST DETERMINANT OF
PRICE

Markup
Markup pricing
pricing

Keystoning
Keystoning
Methods
Used to
Set Prices Profit
Profit Maximization
Maximization
Pricing
Pricing
Break-Even
Break-Even
Pricing
Pricing
MARKUP PRICING
The cost of buying the
product from the producer
Markup
plus amounts for profit and
Pricing
for expenses not
otherwise accounted for.

The practice of marking up


Keystoning prices by 100%, or doubling
the cost.
PROFIT MAXIMIZATION

A method of setting prices


Profit that occurs when marginal
Maximization revenue equals marginal cost.

The extra revenue associated


with selling an extra unit of
Marginal
output, or the change in total
Revenue
revenue with a one-unit change
in output.
BREAK-EVEN PRICING
BREAK-EVEN PRICING

Break-Even Total fixed costs


=
Quantity Fixed cost contribution

Fixed cost
Contribution
= Price - Avg. Variable Cost
REVIEW LEARNING OUTCOME
COST-ORIENTED PRICING STRATEGIES
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
OTHER DETERMINANTS OF
PRICE

Stages
Stages of
of the
the
Product
Product Life
Life Cycle
Cycle

Competition
Competition

Distribution
Distribution Strategy
Strategy

Promotion
Promotion Strategy
Strategy

Perceived
Perceived Quality
Quality
STAGES IN THE PRODUCT
LIFE CYCLE
Introducto Growth Maturit Decline
ry Stage y Stage
Stage Stage $
$ $ $ Decrease
High Stable Decrease Stable

High
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


DISTRIBUTION STRATEGY
Manufacturers
Manufacturers Wholesalers/Retailers
Wholesalers/Retailers

 Offer a larger profit  Sell against the brand


margin or trade
allowance  Buy gray-market
goods
 Use exclusive distribution

 Franchising

 Avoid business with price-


cutting discounters

 Develop brand loyalty


DISTRIBUTION STRATEGY

Selling against
Stocking well-known
the brand
branded items at high prices
in order to sell
store brands at discounted
prices.
THE IMPACT OF THE
INTERNET

Product
Product selection
selection

Second
Second opinions
opinions from
from expert
expert sites
sites

Shopping
Shopping bots
bots

Internet
Internet auctions
auctions
THE RELATIONSHIP OF
PRICE TO QUALITY

Prestige Pricing
Charging a high price to
help promote a high-
quality image.
DIMENSIONS OF QUALITY

Ease of use
Versatility
Durability
Serviceability
Performance
Prestige
REVIEW LEARNING OUTCOME
FACTORS AFFECTING PRICE
Q&A
SESSION
THANK YOU…