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Lamb, Hair, McDaniel
2011-2012
Chapter 19
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Pricing Concepts
Learning Outcomes
LO 1 Discuss the importance of pricing decisions to the
economy and to the individual firm
LO 2 List and explain a variety of pricing objectives
LO 3 Explain the role of demand in price determination
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Learning Outcomes
LO 4 Understand the concept of yield management systems
LO 5 Describe cost-oriented pricing strategies
LO 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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The Importance of Price
Discuss the importance
of pricing decisions to
the economy and to the
individual firm
LO1
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The Importance of Price
To the seller...
Price is revenue
To the consumer...
Price is the cost
of something
Price allocates resources
in a free-market economy
LO1
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What Is Price?
PRICE
A literal definition of Price is the
amount of money that is given
up in an exchange to acquire a
good or service.
LO1
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What is the meaning of Price?
• Sacrifice Effect of Price
– What is sacrificed to get a good or service
• Money, Time, Dignity
• Information Effect of Price
– Infer quality information based on price
• Higher quality = higher price
• Convey status
• Value Based upon Perceived Satisfaction
– Reasonable Price = Perceived Reasonable Value
• Exchange based on expectation of satisfaction
LO1
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The Importance of Price to
Marketing Managers
Revenue
Profit
Revenue = The price charged to
customers ($1) multiplied by the
number of units sold (100).
Revenue minus expenses.
LO1
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Trends Influencing Price
Flood of new products
Increased availability of bargain-priced private and generic brands
Price cutting as a strategy to maintain or regain market share
Internet used for comparison shopping
Economic factors and trends in your own country
LO1
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Pricing Objectives
List and explain a variety
of pricing objectives
LO2
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Pricing Objectives
Profit Oriented
Sales Oriented
Status Quo
LO2
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Profit-Oriented
Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
LO2
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Profit Maximization
Profit
Maximization
Setting prices so that total revenue is as
large as possible or as large as our profit
organizations have been set.
LO2
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Return on Investment
Return
on Investment
(ROI)
Net profit after taxes
divided by total assets.
ROI =
Net Profit after taxes
Total assets
LO2
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Sales-Oriented
Pricing Objectives
Sales-Oriented Pricing Objectives
Increase Market
Share
Sales
Maximization
LO2
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Market Share
Market Share
A company’s product
sales as a percentage of
total sales for that
industry.
LO2
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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
LO2
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Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
prices
LO2
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The Demand
Determinant of Price
Explain the role of
demand in price
determination
LO3
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The Demand
Determinant of Price
Demand
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.
LO3
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Exhibit 19.2
Demand Curve and Demand Schedule for Gourmet
Cookies
LO3
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Exhibit 19.3
Supply Curve and Supply Schedule for Gourmet
Cookies
LO3
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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.
LO3
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Exhibit 19.4
Equilibrium Price for Gourmet Cookies
LO3
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LO3
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Elasticity of Demand
Elastic
Demand
 Consumers buy more or less
of a product when the
price changes.
Inelastic
Demand
 An increase or a decrease in
price will not significantly
affect demand.
Unitary
Elasticity
 An increase in sales exactly
offsets a decrease in prices,
so total revenue remains the
same.
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Elasticity of Demand
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.
LO3
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Elasticity of Demand
Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Up or Down
Stays the Same Unitary Elasticity
LO3
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Factors that Affect
Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
A product’s other uses
LO3
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Rate of inflation
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The Cost Determinant of Price
Describe cost-oriented
pricing strategies
LO5
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The Cost Determinant of Price
Types of Costs
Variable
Cost
Fixed Cost
Varies with changes
in level of output
Does not change
as level of output changes
LO5
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The Cost Determinant of Price
Average Variable Cost (AVC) – total variable cost
divided by quantity of output
Average Total Cost (ATC) – total costs divided by
quantity of output
Marginal Cost (MC) – the change in total costs
associated with a one-unit change in output
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The Cost Determinant of Price
Markup pricing
Methods
Used to
Set Prices
LO5
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Keystoning
Profit Maximization
Pricing
Break-Even
Pricing
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Markup Pricing
Markup
Pricing
Keystoning
The cost of buying the product
from the producer plus amounts
for profit and for expenses not
otherwise accounted for.
The practice of marking up prices
by 100 percent, or doubling the
cost.
LO5
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Profit Maximization
Profit
Maximization
A method of setting prices that
occurs when marginal revenue
equals marginal cost.
LO5
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Break-Even Pricing
Break-Even
Quantity
Fixed cost
Contribution
=
=
Total fixed costs
Fixed cost contribution
Price - Avg. Variable Cost
LO5
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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
LO6
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Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
LO6
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Perceived Quality
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Stages in the Product Life Cycle
Introductory stage – prices high
Growth stage – prices stabilize
Maturity stage – price decreases
Decline stage – price decreases
LO6
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The Competition
 High prices may induce firms to
enter the market
 Competition can lead to price wars
LO6
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Distribution Strategy
Manufacturers
 Offer a larger profit margin or
trade allowance
Wholesalers/Retailers
 Sell against the brand
 Buy gray-market goods
 Use exclusive distribution
 Franchising
 Avoid business with pricecutting discounters
 Develop brand loyalty
LO6
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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.
LO6
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Promotion Strategy
Price is often used as a promotional tool to increase
consumer interest. Examples:
1. Pittsburgh Zoo – $5 admission for wearing a tiedye shirt
2. Crested Butte Ski Resort – free skiing between
Thanksgiving and Christmas
3. Bugle Boy – uncut competition by offering pants
to retailers at wholesale prices
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The Relationship of Price to Quality
Prestige Pricing
Charging a high price to
help promote a highquality image.
LO6
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Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
LO6
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Beyond the Book
Chapter 19 Videos
Chapter 19
Acid+All – Pricing Concepts
What role do the product life cycle, competition, and
perceptions of quality play in Acid+All’s suggested retail
price?
http://www.cengage.com/marketing/book_c
ontent/1439039429_lamb/company_clips/ch1
9.html
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