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Lamb, Hair, McDaniel
MKTG2008-2009
17
CHAPTER
Designed by
Amy McGuire, B-books, Ltd.
Chapter 17
Pricing Concepts
Prepared by
Deborah Baker, Texas Christian University
Copyright ©2009 Cengage Learning Inc. All rights reserved
1
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
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
2
Learning Outcomes
LO4
Understand the concept of yield
management systems
LO5
Describe cost-oriented pricing strategies
LO6
Demonstrate how the product life cycle,
competition, distribution and promotion
strategies, customer demands, the
Internet and extranets, and perceptions
of quality can affect price
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
3
LO1
The Importance of Price
Discuss the
importance of pricing
decisions to the
economy and to the
individual firm
Chapter 17
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4
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
Chapter 17
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5
What Is Price?
Price
Price is that which is given up
in an exchange to acquire a
good or service.
LO1
Chapter 17
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6
The Importance of Price to
Marketing Managers
Revenue
Profit
The price charged to
customers multiplied by the
number of units sold.
Revenue minus expenses.
LO1
Chapter 17
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7
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
LO1
Chapter 17
Internet used for comparison shopping
Copyright ©2009 Cengage Learning Inc. All rights reserved
8
LO1 REVIEW LEARNING OUTCOME
The Importance of Pricing Decisions
Price X Sales Unit = Revenue
Revenue – Costs = Profit
Profit drives growth, salary increases, and corporate investment
Chapter 17
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9
LO2
Pricing Objectives
List and explain a
variety of pricing
objectives
Chapter 17
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10
Pricing Objectives
Profit-Oriented
Sales-Oriented
Status Quo
LO2
Chapter 17
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11
Profit-Oriented Pricing
Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
LO2
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
12
Profit Maximization
Profit
Maximization
Setting prices so that total
revenue is as large as possible
relative to total costs.
LO2
Chapter 17
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13
Return on Investment
Return
on
Investment
Net profit after taxes divided
by total assets.
ROI =
Net Profit after taxes
Total assets
LO2
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
14
Sales-Oriented Pricing
Objectives
Sales-Oriented Pricing Objectives
Market
Share
http://www.target.com
http://www.walmart.com
http://www.jcpenney.com
LO2
Chapter 17
Sales
Maximization
Online
Copyright ©2009 Cengage Learning Inc. All rights reserved
15
Market Share
Market Share
A company’s product sales
as a percentage of total
sales for that industry.
LO2
Chapter 17
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16
Sales Maximization
 Short-term objective to maximize sales
 Ignores profits, competition, and the
marketing environment
 May be used to sell
off excess inventory
LO2
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
17
Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
prices
LO2
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
18
LO2 REVIEW LEARNING OUTCOME
Pricing Objectives
Profit-Oriented
Profit
Maximization
Satisfactory
Profits
Target
ROI
Sales-Oriented
Market
Share
Chapter 17
Sales
Maximization
Copyright ©2009 Cengage Learning Inc. All rights reserved
Status Quo
Maintain
Existing Price
19
LO3 The Demand Determinant of Price
Explain the role of
demand in price
determination
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
20
LO3
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.
http://www.ubid.com
Online
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
21
LO3 The Demand Curve
Chapter 17
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22
LO3 The Supply Curve
Chapter 17
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23
LO3
Chapter 17
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.
Copyright ©2009 Cengage Learning Inc. All rights reserved
24
LO3 Price Equilibrium
Chapter 17
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25
LO3 Elasticity of Demand
Chapter 17
Elastic
Demand
 Consumers buy more or less
of a product when the
price changes.
Inelastic
Demand
 An increase or decrease in
price will not significantly
affect demand.
Unitary
Elasticity
 An increase in sales exactly
offsets a decrease in prices,
and revenue is unchanged.
Copyright ©2009 Cengage Learning Inc. All rights reserved
26
LO3 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.
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
27
LO3 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
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
28
Biz Flix
LO3
Chapter 17
The
Money Pit
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29
LO3 Elasticity of Demand
Chapter 17
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30
LO3
Factors that Affect
Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
A product’s other uses
Rate of inflation
http://www.columbiahouse.com
Online
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
31
LO4
The Power of Yield
Management Systems
Understand the
concept of yield
management
systems
Chapter 17
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32
Yield Management Systems
Yield
Management
Systems
A technique for adjusting
prices that uses complex
mathematical software to
profitably fill unused
capacity.
LO4
Chapter 17
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33
Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
LO4
Chapter 17
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34
Beyond the Book
LO4 Yield Management Systems
Chapter 17
Yield Management Systems (YMS)
make it possible for a company to:
1. stimulate demand when
demand is low, and
2. maximize profits when
demand is high.
.
Copyright ©2009 Cengage Learning Inc. All rights reserved
35
Beyond the Book
LO4 Yield Management Systems
Chapter 17
Supply Side of Product or Service
High
Office block
House
Airline seat
Utilities
Sport event
Rental car
Shirt
Pencils
Food
Tropical fish
Capital
Intensity
Low
Low
Perishability
High
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Copyright ©2009 Cengage Learning Inc. All rights reserved
36
Beyond the Book
LO4 Yield Management Systems
Chapter 17
Demand Side of Product or Service
High
Utilities
Highway use
Telephone
Airline seat
Sport event
Rental car
Mobile phone
Food
Music CD
Shirt
Office block
Laptop
House
Variability of
Demand
Low
Low
Variability of
Value
High
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Copyright ©2009 Cengage Learning Inc. All rights reserved
37
LO4 REVIEW LEARNING OUTCOME
Yield Management Systems
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
38
LO5
The Cost Determinant of Price
Describe cost-oriented
pricing strategies
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
39
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
Chapter 17
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40
The Cost Determinant of Price
Markup pricing
Methods
Used to
Set Prices
LO5
Chapter 17
Keystoning
Profit Maximization
Pricing
Break-Even
Pricing
Copyright ©2009 Cengage Learning Inc. All rights reserved
41
Markup Pricing
The cost of buying the product
from the producer plus amounts
for profit and for expenses not
otherwise accounted for.
Markup
Pricing
Keystoning
The practice of marking up prices
by 100%, or doubling the cost.
LO5
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
42
Profit Maximization
Profit
Maximization
Marginal
Revenue
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
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
43
Break-Even Pricing
LO5
Chapter 17
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44
Break-Even Pricing
Break-Even
Quantity
Fixed cost
Contribution
=
=
Total fixed costs
Fixed cost contribution
Price - Avg. Variable Cost
LO5
Chapter 17
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45
LO5 REVIEW LEARNING OUTCOME
Cost-Oriented
Pricing Strategies
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
46
LO6
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
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
47
Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
LO6
Chapter 17
Perceived Quality
Copyright ©2009 Cengage Learning Inc. All rights reserved
48
Stages in the Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
$
$
$
High
Stable
Decrease
Decline
Stage
$
Decrease
Stable
High
LO6
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
49
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
LO6
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
50
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
LO6
Chapter 17
 Develop brand loyalty
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51
Distribution Strategy
Selling against
the brand
Stocking well-known branded items
at high prices in order to sell store
brands at discounted prices.
LO6
Chapter 17
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52
The Impact of the Internet
Product selection
Second opinions from expert sites
Shopping bots
Internet auctions
LO6
Chapter 17
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53
LO6
Impact of the Internet on Book Distribution
Beyond the Book
Online 13%
Chapter 17
Online 2%
Schools and Libraries
24%
Schools and Libraries
27%
Book Clubs 5%
Book Clubs 16%
Non-bookstore Retail
18%
Non-bookstore Retail
13%
Traditional Retail 42%
Traditional Retail 38%
[+ 2% direct-to-consumer
sales]
1998
$22.5 Billion
2006
$28.5 Billion
Net Publisher Revenue
SOURCE: Jeffrey A. Trachtenberg, “Borders
Business Plan Gets a Rewrite,” Wall Street
Journal, March 22, 2007 B1
Copyright ©2009 Cengage Learning Inc. All rights reserved
54
The Relationship of
Price to Quality
Prestige Pricing
Charging a high price to
help promote a highquality image.
LO6
Chapter 17
http://www.vivre.com
http://www.bluefly.com
Online
Copyright ©2009 Cengage Learning Inc. All rights reserved
55
Beyond the Book
LO6 Prestige Pricing
Chapter 17
When Tiffany & Co. created a line of more
affordable silver jewelry to broaden its
offerings to the upper-middle classes it
took a gamble with its reputation as an
upscale luxury brand. Tiffany’s managers
began to worry about alienating its core
clientele—the older, affluent, and
conservative customer who prizes
exclusivity.
Tiffany decided to protect its brand equity by
significantly raising prices on its silver
jewelry beyond the reach of “aspirational”
customers while aggressively courting its
affluent customers. Still, Tiffany lost some
wealthy customers who complained that
“everyone has Tiffany jewelry now.”
SOURCE: Ellen Byron “To Refurbish Its Image, Tiffany Risks Profits,” Wall Street Journal, 1/10/07 A1.
Copyright ©2009 Cengage Learning Inc. All rights reserved
56
Beyond the Book
LO6 Premium Pets
Chapter 17
 The pet-care market is a $47-billion industry
in the United States
 17.4 million of the 52.8 million pet-owning households
qualify as “premium” or “uber” owners, sparing no
expense on high-end products for their pets
 Uber owners tripled their pet-supply spending
between 1995 and 2005 (from $5.2 billion to $18.6
billion)
 Products for pets that are made to resemble products
for humans—with familiar brand names—are growing
the most in popularity
SOURCE: Tom Ehart, “’Functional Pampering’ by ‘Uber Owners’ to drive Premium Pet Products
Market Growth,” Packaged Facts, August 31, 2007.
Copyright ©2009 Cengage Learning Inc. All rights reserved
57
Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
LO6
Chapter 17
Copyright ©2009 Cengage Learning Inc. All rights reserved
58
LO6 REVIEW LEARNING OUTCOME
Factors Affecting Price
Chapter 17
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59