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Chapter 19: Pricing Concepts

Prepared & Designed by Laura Rush, B-books, Ltd.

Copyright Cengage Learning 1


2013
Learning Outcomes

LO1 Discuss the importance of pricing decisions


to the economy and to the individual firm

LO2 List and explain a variety of pricing objectives

LO3 Explain the role of demand in price


determination

Copyright Cengage Learning 2


2013
Learning Outcomes

LO4 Understand the concept of yield management


systems

LO5 Describe cost-oriented pricing strategies

Demonstrate how the product life cycle,


competition, distribution and promotion
LO6 strategies, guaranteed price matching,
customer demands, the Internet, and
perceptions of quality can affect price

Copyright Cengage Learning 3


2013
The Importance of Price

Discuss the importance of


pricing decisions to
the economy
and to the individual firm.

LO1 Copyright 2013 by Cengage


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4
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 aa free-market
free-market economy
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

Revenue - The price charged to


customers multiplied by the
number of units sold.

Profit - Revenue minus expenses.

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Trends Influencing Price

Flood
Floodof
ofnew
newproducts
products

Increased
Increasedavailability
availabilityof
ofbargain-priced
bargain-pricedprivate
private
and
andgeneric
genericbrands
brands

Price
Pricecutting
cuttingas
asaastrategy
strategyto
tomaintain
maintainor
or
regain
regainmarket
marketshare
share

Internet
Internetused
usedfor
forcomparison
comparisonshopping
shopping

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Review Learning Outcome
The Importance of Pricing Decisions

Price X Sales Unit = Revenue

Revenue Costs = Profit

Profit drives growth, salary increases, and corporate investment

LO1 Copyright 2013 by Cengage 9


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Pricing Objectives

List and explain a variety of


pricing objectives.

LO2 Copyright 2013 by Cengage 10


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Pricing Objectives

Profit-Oriented

Sales-Oriented

Status Quo

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Profit-Oriented Pricing
Objectives

Profit-Oriented Pricing Objectives

Target
Target
Profit
Profit Satisfactory
Satisfactory Return
Return on
on
Maximization
Maximization Profits
Profits Investment
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
Market Sales
Sales
Share
Share Maximization
Maximization
Online
http://www.target.com
http://www.walmart.com
http://www.jcpenney.com

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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
Maintain Meet
Meet
existing
existing competitions
competitions
prices
prices prices
prices

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Review Learning Outcome
Pricing Objectives

Profit-Oriented

Profit Satisfactory Target


Maximization Profits ROI

Sales-Oriented Status Quo

Market Sales
Maintain
Share Maximization
Existing Price

LO2 Copyright 2013 by Cengage 19


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The Demand Determinant of Price

Explain the role of demand in


price determination.

LO3 Copyright 2013 by Cengage 20


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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
specified period.

Online
http://www.ubid.com Copyright 2013 by Cengage Learning Inc. 21
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The Demand Curve

22
The Supply Curve

23
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.

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Price Equilibrium

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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.

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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.

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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
Unitary
Up or Down Stays the Same
Elasticity
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Elasticity of Demand

29
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

AAproducts
productsother
other uses
uses
Online
http://www.columbiahouse.com
Rate
Rate of
of inflation
inflation

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Creating Pricing Power

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Review Learning Outcome
Role of Demand in Price Determination

32
LO3
The Power of
Yield Management Systems

Understand the concept of


yield management systems.

LO4 Copyright 2013 by Cengage


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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
Discountingearly
earlypurchases
purchases

Limiting
Limitingearly
earlysales
salesat
atdiscounted
discounted prices
prices

Overbooking
Overbookingcapacity
capacity

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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.

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Review Learning Outcome
Yield Management Systems

LO4
37
The Cost Determinant of Price

Describe cost-oriented pricing


strategies.

LO5 Copyright 2013 by Cengage 38


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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

Copyright 2013 by Cengage Learning Inc. 39


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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

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Markup Pricing

Markup Pricing The cost of buying the


product from the producer plus
amounts for profit expenses n
ot otherwise accounted for.

Keystoning The practice of marking


up prices by 100%, or doubling the cost.

Copyright 2013 by Cengage Learning Inc. 41


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Profit Maximization

Profit Maximization The 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

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Break-Even Pricing

Break-Even Total fixed costs


=
Quantity Fixed cost contribution

Fixed cost
Contribution
= Price - Avg. Variable Cost

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Review Learning Outcome
Cost-Oriented Pricing Strategies

LO5 45
Other Determinants of Price

Demonstrate how the


product life cycle, competition,
distribution and promotion
strategies, guaranteed price
matching, customer demands,
the Internet, and perceptions of
quality can affect price.

LO6 Copyright 2013 by Cengage 46


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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

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Stages in the Product Life Cycle

Introductory Growth Maturity Decline


Stage Stage Stage Stage

$ $ $ $
Decrease
High Stable Decrease
Stable

High

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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

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Distribution Strategy
Manufacturers
Manufacturers Wholesalers/Retailers
Wholesalers/Retailers

Offer a larger profit margin Sell against the brand


or trade allowance
Buy gray-market goods
Use exclusive distribution

Franchising

Avoid business with price-


cutting discounters

Develop brand loyalty

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Distribution Strategy

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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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

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Promotion Strategy/Price
Guarantee
Promotion Strategy
Price used as promotional tool
Pricing can also be a tool for trade promotions

Price Guarantee
Match any competitors price
Signals to target market it is positioned as a low-
price dealer

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The Relationship of Price to Quality

Prestige Pricing - Charging a high


price to help promote a high-
quality image.

Online
http://www.vivre.com
http://www.ashford.com
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Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige

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Review Learning Outcome
Factors Affecting Price

Copyright 2013 by Cengage


LO6 Learning Inc. All Rights Reserved
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Chapter 19 Company Clip

Staking a position as a prestige product in


the antacid market, Acid+All has packaged
its tiny little pills in a tin and priced them
much higher than its competitors products.

http://www.cengage.com/marketing/book_content/
9781111821647_lamb/videos/ch19.html

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