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Chapter 17 Pricing Concepts
Lamb, Hair, McDaniel
2010-2011
Learning Outcomes
CHAPTER 19
Pricing Concepts
Learning Outcomes
LO 1 Discuss the importance of pricing decisions
to the economy and to the individual firm
LO 4 Understand the concept of yield
management systems
LO 2 List and explain a variety of pricing
objectives
LO 5 Describe cost-oriented pricing strategies
LO 3 Explain the role of demand in price
determination
1
2
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
3
1
Chapter 17 Pricing Concepts
The Importance of Price
The Importance of Price
To the seller...
Price is revenue
Discuss the
importance of pricing
decisions to the
economy and to the
individual firm
LO1
What Is Price?
To the consumer...
Price is the cost
of something
Price
Price is that which is
given up in an
exchange to acquire a
good or service.
Price allocates resources
in a free-market economy
4
LO1
5
LO1
6
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Chapter 17 Pricing Concepts
What is Price?
Fashion’s Elite Wage War on Discounts
• Sacrifice Effect of Price
• Anna Wintour and Diane von Furstenburg
– What is sacrificed to get a good or service
– Fashion’s Night Out: Joint effort between 700
stores in 11 countries
• Money, Time, Dignity
• Information Effect of Price
Revenue
• Feature extended store hours and special events
– Infer quality information based on price
– Giveaways and appearances by celebrities and
designers.
– Aims to attract customers
– Reverse the trend of discounting
– Hope to increase consumer demand by cutting back their
orders by about 20%.
– But if shoppers still won’t buy, there will be a need to offer
sales in order to move inventory
• Higher quality = higher price
• Convey status
• Value Based upon Perceived Satisfaction
– Reasonable Price = Perceived Reasonable Value
• Exchange based on expectation of satisfaction
LO1
The Importance of Price to
Marketing Managers
7
LO1
Source: Binkley, Christina. “Fashion’s Elite Wage a War on Discounts,” The Wall Street Journal, August 13, 2009, D1, D6.
Profit
8
LO1
The price charged to
customers multiplied by the
number of units sold.
Revenue minus expenses.
9
3
Chapter 17 Pricing Concepts
The Importance
of Pricing Decisions
Trends Influencing Price
Pricing Objectives
Flood of new products
Price X Sales Unit = Revenue
Increased availability of bargain-priced private
and generic brands
List and explain a
variety of pricing
objectives
Revenue – Costs = Profit
Price cutting as a strategy to maintain or
regain market share
Profit drives growth, salary increases, and corporate investment
Internet used for comparison shopping
LO1
LO1
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11
LO2
12
4
Chapter 17 Pricing Concepts
Pricing Objectives
Profit Maximization
Profit-Oriented
Pricing Objectives
Profit-Oriented
Profit
Maximization
Profit-Oriented Pricing Objectives
Sales-Oriented
Profit
Maximization
Status Quo
LO2
Satisfactory
Profits
LO2
13
Setting prices so that total
revenue is as large as possible
relative to total costs.
Target
Return on
Investment
14
LO2
15
5
Chapter 17 Pricing Concepts
Sales-Oriented
Pricing Objectives
Return on Investment
Return
on
Investment
Market Share
Market Share
Sales-Oriented Pricing Objectives
Net profit after taxes
divided by total assets.
ROI =
LO2
Market
Share
Net Profit after taxes
Total assets
16
LO2
Sales
Maximization
17
LO2
A company’s
product sales as a
percentage of total
sales for that
industry.
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Chapter 17 Pricing Concepts
Sales Maximization
Pricing during a Recession
Status Quo Pricing
Objectives
Short-term objective to maximize
sales
Increase advertising when your competitors are cutting back
to improve your market share and ROI at a lower cost.
Status Quo Pricing Objectives
Motivate distributors to stock your full product line: offer
early-buy allowances, extended financing, and generous
return policies.
Ignores profits, competition, and
the marketing environment
Maintain
existing
prices
May be used to sell off excess
inventory
LO2
Offer temporary price promotions, reduce quantity-discount
thresholds, extend credit to long-standing customers, price
smaller-pack sizes aggressively.
Meet
competition’s
prices
Know your cost structure to ensure that any cuts or
consolidations will save money with minimum customer
impact.
LO2
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20
LO2
Source: Professor John Quelch, “Marketing Your Way Through a Recession,” Harvard Business
School, Working Knowledge, March 3, 2008.
21
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Chapter 17 Pricing Concepts
The Demand
Determinant of Price
The Demand
Determinant of Price
Demand
Explain the role of
demand in price
determination
LO3
Supply
22
LO3
The Demand Curve
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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24
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Chapter 17 Pricing Concepts
How Demand and Supply
Establish Price
The Supply Curve
LO3
25
LO3
Price
Equilibrium
The price at which demand and
supply are equal.
Elasticity
of Demand
Consumers’ responsiveness or
sensitivity to changes in price.
Price Equilibrium
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LO3
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Chapter 17 Pricing Concepts
Elasticity of Demand
Elastic
Demand
Consumers buy more or less
of a product when the
price changes.
Elasticity (E)
Inelastic
Demand
Unitary
Elasticity
LO3
Elasticity of Demand
Elasticity of Demand
An increase or decrease in
price will not significantly
affect demand.
=
Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
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.
An increase in sales exactly
offsets a decrease in prices,
and revenue is unchanged.
Up or Down
28
LO3
29
LO3
Stays the Same Unitary Elasticity
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Chapter 17 Pricing Concepts
Factors that Affect
Elasticity of Demand
Elasticity of Demand
The Power of Yield
Management Systems
Availability of substitutes
Price relative to purchasing power
Understand the
concept of yield
management
systems
Product durability
A product’s other uses
Rate of inflation
LO3
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LO3
32
LO4
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Chapter 17 Pricing Concepts
Yield Management Systems
Yield
Management
Systems
Yield Management Systems
Yield Management Systems
Yield Management Systems (YMS)
make it possible for a company to:
Discounting early purchases
A technique for adjusting
prices that uses complex
mathematical software to
profitably fill unused
capacity.
1. stimulate demand when
demand is low, and
2. maximize profits when demand
is high.
Limiting early sales at discounted prices
Overbooking capacity
.
LO4
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LO4
35
LO4
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Chapter 17 Pricing Concepts
Demand Side of Product or Service
High
Office block
House
Airline seat
Utilities
Sport event
Rental car
Low
Shirt
Pencils
Food
Tropical fish
Low
High
Variability of
Demand
Yield Management Systems
Supply Side of Product or Service
Capital Intensity
Yield Management Systems
Utilities
Highway use
Telephone
Airline seat
Sport event
Rental car
Mobile phone
Low
Food
Music CD
Shirt
Office block
Laptop
House
Low
High
Variability of Value
Perishability
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
LO4
High
Yield Management Systems
37
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
LO4
38
LO4
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Chapter 17 Pricing Concepts
The Cost Determinant of Price
The Cost Determinant of Price
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
Describe cost-oriented
pricing strategies
LO5
40
Markup pricing
LO5
Methods
Used to
Set Prices
Keystoning
Profit Maximization
Pricing
Break-Even
Pricing
41
LO5
42
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Chapter 17 Pricing Concepts
Markup Pricing
Markup
Pricing
Keystoning
LO5
Profit Maximization
The cost of buying the product
from the producer plus amounts
for profit and for expenses not
otherwise accounted for.
Profit
Maximization
Marginal
Revenue
The practice of marking up prices
by 100%, or doubling the cost.
43
LO5
Break-Even Pricing
A method of setting prices that
occurs when marginal revenue
equals marginal cost.
The extra revenue associated
with selling an extra unit of output,
or the change in total revenue with
a one-unit change in output.
LO5
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Chapter 17 Pricing Concepts
Break-Even Pricing
REVIEW LEARNING OUTCOME
Other Determinants of Price
Cost-Oriented Pricing
Strategies
Break-Even
Quantity
Fixed cost
Contribution
LO5
=
=
Total fixed costs
Fixed cost contribution
Demonstrate how the product
life cycle, competition,
distribution and promotion
strategies, customer demands,
the Internet and extranets, and
perceptions of quality can
affect price
Price - Avg. Variable Cost
LO5
46
47
LO6
48
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Chapter 17 Pricing Concepts
Stages in the
Product Life Cycle
Other Determinants of Price
Stages of the
Product Life Cycle
Introductory
Stage
Competition
Distribution Strategy
Growth
Stage
The Competition
Maturity
Stage
Decline
Stage
Decrease
$
$
$
High
Stable
Decrease
High prices may induce firms to
enter the market
$
Competition can lead to price
wars
Stable
Promotion Strategy
Global competition may force
firms to lower prices
High
Perceived Quality
LO6
LO6
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50
LO6
51
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Chapter 17 Pricing Concepts
Distribution Strategy
Manufacturers
Distribution Strategy
The Impact of the Internet
Wholesalers/Retailers
Product selection
Offer a larger profit margin or
trade allowance
Sell against the
brand
Selling against
the brand
Use exclusive distribution
Franchising
Second opinions from expert sites
Stocking well-known branded items at
high prices in order to sell store brands
at discounted prices.
Buy gray-market
goods
Shopping bots
Avoid business with pricecutting discounters
Internet auctions
Develop brand loyalty
LO6
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LO6
53
LO6
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Chapter 17 Pricing Concepts
The Relationship of
Price to Quality
Impact of the Internet on Book Distribution
Online 13%
Online 2%
Non-bookstore Retail
1. Ease of use
Schools and Libraries
24%
Schools and Libraries
27%
Book Clubs 16%
Prestige Pricing
Book Clubs 5%
2. Versatility
Non-bookstore Retail
18%
3. Durability
Charging a high price to
help promote a highquality image.
13%
Traditional Retail 42%
Dimensions of Quality
Traditional Retail 38%
4. Serviceability
[+ 2% direct-to-consumer
sales]
1998
$22.5 Billion
LO6
5. Performance
2006
$28.5 Billion
Net Publisher Revenue
6. Prestige
SOURCE: Jeffrey A. Trachtenberg, “Borders
Business Plan Gets a Rewrite,” Wall Street
Journal, March 22, 2007 B1
55
LO6
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LO6
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Chapter 17 Pricing Concepts
Lamb, Hair, McDaniel
REVIEW LEARNING OUTCOME
Factors Affecting Price
2010-2011
Learning Outcomes
CHAPTER 20
PLC
Price/quality
relationship
Demands
of large
customers
Large customers
pressure
suppliers for
price reductions
and guaranteed
margins
Promotion
strategy
LO6
Uncertain
consumers
tend to rely on
price to indicate
quality (“You get
what you pay
for.”)
Introduction
Growth
Maturity
Decline
LO 1 Describe the procedure for setting the right
price
Setting the Right Price
– Other firms
enter market
– Price wars
Competition
LO 2 Identify the legal and ethical constraints on
pricing decisions
Price
– Convenience
– Selling against
the brand
– Exclusive
Distribution
distribution
Price used as
a promotional – Consumers
use shopping
tool
for bargains
– Increased
competition
– Internet auctions
LO 3 Explain how discounts, geographic pricing,
and other special pricing tactics can be
used to fine-tune the base price
Intranet and extranets
58
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60
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Chapter 17 Pricing Concepts
How to Set a Price on a
Product or Service
How to Set a Price on a
Product or Service
Learning Outcomes
Establish pricing goals
LO 4 Discuss product line pricing
Estimate demand, costs, and profits
Describe the
procedure for
setting the
right price
LO 5 Describe the role of pricing during periods of
inflation and recession
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
61
LO1
62
LO1
63
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Chapter 17 Pricing Concepts
Establish Pricing Goals
Profit-Oriented
Price Strategy
Sales-Oriented
Status Quo
LO1
Choose a Price Strategy
Choose a Price Strategy
64
LO1
A basic, long-term pricing
framework, which
establishes the initial price
for a product and the
intended direction for
price movements over the
product life cycle.
65
Price
Skimming
A firm charges a high introductory price,
often coupled with heavy promotion.
Penetration
Pricing
A firm charges a relatively low price for a
product initially as a way to reach the
mass market.
Status Quo
Pricing
Charging a price identical to or very close
to the competition’s price.
LO1
66
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Chapter 17 Pricing Concepts
Price Skimming
Inelastic Demand
Situations
When
Price
Skimming
Is Successful
Status Quo Pricing
Advantages
Advantages
Discourages or blocks
competition from market
entry
Boosts sales and
provides large profit
increases
Unique Advantages/Superior
Legal Protection of Product
Technological Breakthrough
Penetration Pricing
Disadvantages
Requires gear up for
mass production
Selling large volumes at
low prices
Strategy to gain market
share may fail
Simplicity
Safest route to long-term
survival for small firms
Disadvantages
Strategy may ignore
demand and/or cost
Can justify production
expansion
Blocked Entry to Competitors
LO1
67
LO1
68
LO1
69
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Chapter 17 Pricing Concepts
Establish
price
goals
The Legality and Ethics of
Price Strategy
The Legality and Ethics of
Price Strategy
Setting the Right Price
Unfair Trade Practices
High $
Estimate demand,
costs, and profits
Skimming
Choose a
price strategy
Price Fixing
Identify the legal and
ethical constraints
on pricing decisions
Status quo
Penetration
Price Discrimination
Low $
Evaluate
results
LO1
Fine-tune
base price
Predatory Pricing
Set price
$x.yy
70
LO2
71
LO2
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24
Chapter 17 Pricing Concepts
The Legality and Ethics of
Price Strategy
Price Discrimination
Price Discrimination
The Robinson-Patman Act of 1936:
LO2
Unfair Trade
Practices
Laws that prohibit wholesalers
and retailers from selling
below cost.
Price
Fixing
An agreement between two
or more firms on the price they
will charge for a product.
The Robinson-Patman Act of 1936:
There must be price discrimination.
Transaction must occur in interstate commerce.
Seller must discriminate by price among two or
more purchasers.
Products sold must be commodities or tangible
goods.
Products sold must be of like grade and quality.
There must be significant competitive injury.
73
LO2
Seller Defenses
Cost
74
LO2
Market
Conditions
Competition
75
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Chapter 17 Pricing Concepts
Tactics for Fine-Tuning
the Base Price
Tactics for FineFine-Tuning
the Base Price
Predatory Pricing
Predatory
Pricing
Discounts
Explain how discounts,
geographic pricing, and
other special pricing
tactics can be used to
fine-tune the base price
The practice of charging a very
low price for a product with the
intent of driving competitors out
of business or out of a market.
LO2
76
LO3
Geographic pricing
Special pricing tactics
77
LO3
78
26
Chapter 17 Pricing Concepts
Discounts,
Allowances, Rebates,
and Value-Based Pricing
Quantity Discounts
Promotional Allowances
Cash Discounts
Rebates
Functional Discounts
Zero Percent Financing
Seasonal Discounts
Value-Based Pricing
LO3
Value-Based Pricing
Value-based Pricing: Step 1
Companies that set prices using a
cost-plus model—adding a
predetermined percentage to a
product’s cost/unit to produce a
profit—may be leaving money on the
table.
Value-Based Setting the price at a
level that seems to the
Pricing
customer to be a good
price compared to the
prices of other options.
79
LO3
Instead, a company should use the
cost-plus model to determine its
pricing threshold and then use valuebased pricing to set the best price.
80
LO3
Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be
Costly,” MarketingNews, January 15, 2008.
81
27
Chapter 17 Pricing Concepts
Value-based Pricing: Step 2
Now, ask customers what would be
an acceptable price, what would be
an expensive price, and what would
be a prohibitively expensive price.
How to determine value? It’s simple. Really.
Ask your customers: What do they like about
you? What don’t they like?
Their responses represent the perceived
value of your product in the marketplace.
1. Managers attempt to buy market share through
aggressive pricing.
The best price usually falls between
“expensive” and “prohibitively
expensive.”
The attributes that will determine the
perceived value of your product include
product quality, on-time delivery, customer
service, technical service, and price.
LO3
Pricing Products
Too Low
Value-based Pricing: Step 3
2. Managers tend to make pricing decisions based on
current costs, current competitor prices, and shortterm share gains rather than on long-term
profitability.
Customers want value and they’re
willing to pay for it.
82
LO3
83
LO3
84
28
Chapter 17 Pricing Concepts
Other Pricing Tactics
Geographic Pricing
FOB Origin
Pricing
The buyer absorbs the freight
costs from the shipping point
(“free on board”).
Uniform
Delivered
Pricing
The seller pays the freight charges
and bills the purchaser an
identical, flat freight charge.
Zone Pricing
The U.S. is divided into zones, and
a flat freight rate is charged to
customers in a given zone.
Freight
Absorption
Pricing
The seller pays for all or part of
the freight charges and does not
pass them on to the buyer.
Basing-Point
Pricing
The seller designates a location as
a basing point and charges all buyers
the freight costs from that point.
LO3
Single-Price Tactic
All goods offered at the same price
Flexible Pricing
Different customers pay different price
Professional
Services Pricing
Used by professionals with experience,
training or certification
Price Lining
Several line items at specific price points
Leader Pricing
Sell product at near or below cost
Bait Pricing
Odd-Even Pricing
Price Bundling
Two-Part Pricing
85
LO3
Consumer Penalties
Businesses Impose
Consumer Penalties If...
An irrevocable
loss of revenue
is suffered
Lure customers through false or misleading
price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a
single package
Two separate charges to consume a single good
Additional
transaction costs
are incurred
LO3
86
87
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Chapter 17 Pricing Concepts
Fine-Tuning the Base Price
Product Line Pricing
Product Line Pricing
Pricing Tactics
Discounts
Quantity
• cumulative
• noncumulative
Cash
Geographic
FOB
origin
Seasonal
Consumer
Penalties
Single price
Flexible
Uniform
delivered
Functional
(trade)
Promotional
(trade)
Other Tactics
Zone
Discuss product
line pricing
Price lining
Leader
Freight
absorption
Product Line
Pricing
Professional
services
Setting prices for an
entire line of products.
Bait
Rebate
0% Financing
Value-based
LO3
Basingpoint
Odd–even
Bundling
Unbundling
Two-part
88
LO4
89
LO4
90
30
Chapter 17 Pricing Concepts
Relationships
among Products
Pricing during Difficult
Economic Times
Joint Costs
Complementary
Joint Costs
Substitutes
Costs that are shared in
the manufacturing and
marketing of several
products in a product
line.
Describe the role
of pricing during
periods of inflation
and recession
Neutral
LO4
91
LO4
92
LO5
93
31
Chapter 17 Pricing Concepts
Inflation
Cost-Oriented Tactics
Cost-Oriented Tactics
Problems with CostCost-Oriented Tactics
Cost-Oriented Tactics
High Inflation
Demand-Oriented Tactics
LO5
94
Delayed-quotation
pricing
•
A high volume of sales on an item with a low profit margin
may still make the item highly profitable.
•
Eliminating a product may reduce economies
of scale.
Escalator pricing
•
Eliminating a product may affect the price-quality image of the
entire line.
Hold prices
constant, but
add new fees
LO5
95
LO5
96
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Chapter 17 Pricing Concepts
Cost-Oriented Tactics
Demand-Oriented Tactics
Demand-Oriented Tactics
Cultivate selected demand
Price
Shading
Maintaining
a Fixed
Gross Margin
LO5
Increased
Production
Costs
Strategies to
Make Demand
More Inelastic
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
Create unique offerings
Change the package design
Heighten buyer dependence
97
LO5
98
LO5
99
33
Chapter 17 Pricing Concepts
Pricing During
Inflation and Recession
Supplier Strategies
during Recession
Recession
Inflation
Recession
Contract
product lines
Renegotiating contracts
Cost-oriented
tactics
Delayedquotation pricing
Value-based
Price
Bundling
Unbundling
Value-Based Pricing
Escalator
pricing
Offering help
Select
demand
Demand-oriented
tactics
Keeping the pressure on
Bundling or Unbundling
New products
Product
New product
categories
Unique offering
Renegotiate
contracts
Change package
design
Offer help
Suppliers
Increase buyer
dependence
Paring down suppliers
LO5
100
LO5
LO5
101
Keep pressure
on suppliers
Reduce number
of suppliers
102
34