Download Pricing Concepts

Pricing Concepts
chapter
16
Chapter 16 Version 3e
Prepared by
Deborah Baker
Texas Christian University
©2003 South-Western
1
Learning Objectives
1. Discuss the importance of pricing decisions
to the economy and to the individual firm.
chapter
16
2. List and explain a variety of pricing
objectives.
3. Explain the role of demand in price
determination.
Chapter 16 Version 3e
©2003 South-Western
2
Learning Objectives (continued)
16
5. Describe cost-oriented pricing strategies.
chapter
4. Understand the concept of yield
management systems.
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.
Chapter 16 Version 3e
©2003 South-Western
3
Learning Objectives
16
8. Identify the legal and ethical constraints
on pricing decisions.
chapter
7. Describe the procedure for setting
the right price.
9. Explain how discounts, geographic pricing,
and other special pricing tactics can be
used to fine-tune the base price.
Chapter 16 Version 3e
©2003 South-Western
4
1
Learning Objective
Discuss the importance of
pricing decisions to the economy
and to the individual firm.
Chapter 16 Version 3e
©2003 South-Western
5
1
The Importance of Price
To the seller...
Price is revenue
and profit source
What is Price?
To the consumer...
Price is the cost
of something
In the broadest sense, price allocates
resources in a free-market economy
Chapter 16 Version 3e
©2003 South-Western
6
1
What is Price?
Price is that which is given
up in an exchange to
acquire a good or service.
Chapter 16 Version 3e
©2003 South-Western
7
The Importance of Price
to Marketing Managers
Revenue
The price charged to customers
multiplied by the
number of units sold.
Profit
Revenue minus expenses
Chapter 16 Version 3e
©2003 South-Western
1
8
1
The Importance of Price
Revenue = Unit Price  Number of units sold
 Revenue pays for every activity.
 What’s left over is Profit.
Marketers must select a price
that is not too high
or not too low,
a price that equals
the perceived value to target consumers
Chapter 16 Version 3e
©2003 South-Western
9
1
Trends Influencing Price Setting
High rate of
new product introduction
Trends
in the
Market
Increased availability of
bargain-priced dealer and
generic brands
Price cutting as a strategy to
maintain or regain
market share
More efficient and better
informed buyers
Chapter 16 Version 3e
©2003 South-Western
10
2
Learning Objective
List and explain a variety
of pricing objectives.
Chapter 16 Version 3e
©2003 South-Western
11
2
Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
12
2
Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Chapter 16 Version 3e
Satisfactory
Profits
©2003 South-Western
Target
Return on
Investment
13
2
Profit Maximization
Setting prices so that
total revenue is as large
as possible relative
to total costs.
Chapter 16 Version 3e
©2003 South-Western
14
2
Return on Investment
Net profit after taxes
divided by total assets.
ROI = Net Profit after taxes
Total assets
Chapter 16 Version 3e
©2003 South-Western
15
2
Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Share
Chapter 16 Version 3e
Sales
Maximization
©2003 South-Western
16
2
Market Share
A company’s product sales
as a percentage of total
sales for that industry.
Chapter 16 Version 3e
©2003 South-Western
17
2
Sales Maximization
 Short-term objective to maximize sales
 Ignores profits, competition, and the
marketing environment
 May be used to sell
off excess inventory
Chapter 16 Version 3e
©2003 South-Western
18
2
Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
Chapter 16 Version 3e
Meet
competition’s
prices
©2003 South-Western
19
3
Learning Objective
Explain the role of demand
in price determination.
Chapter 16 Version 3e
©2003 South-Western
20
3
Demand and Supply
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 specific period.
Chapter 16 Version 3e
©2003 South-Western
21
3
Elasticity of Demand
Consumers’ responsiveness
or sensitivity to changes
in price.
Chapter 16 Version 3e
©2003 South-Western
22
3
Elasticity of Demand
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
Chapter 16 Version 3e
©2003 South-Western
23
3
Elasticity of Demand
Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Chapter 16 Version 3e
©2003 South-Western
24
3
Factors that Affect Elasticity
Availability of Substitutes
Price relative to
Purchasing Power
Factors
That Affect
Elasticity
of
Demand
Chapter 16 Version 3e
Product Durability
Product’s Other Uses
©2003 South-Western
25
4
Learning Objective
Understand the concept of
yield management systems.
Chapter 16 Version 3e
©2003 South-Western
26
4
Yield Management Systems
A technique for adjusting
prices that uses complex
mathematical software
to profitably fill
unused capacity.
Chapter 16 Version 3e
©2003 South-Western
27
4
Yield Management Systems
Discounting
early purchases
YMS
Price
Adjustments
Limiting early sales at
discounted prices
Overbooking capacity
Chapter 16 Version 3e
©2003 South-Western
28
5
Learning Objective
Describe cost-oriented pricing strategies.
Chapter 16 Version 3e
©2003 South-Western
29
5
The Cost Determinant of Price
Types of Costs
Variable
Costs
Fixed Costs
Deviate with changes
in level of output
Do not deviate
as level of output changes
Chapter 16 Version 3e
©2003 South-Western
30
5
The Cost Determinant of Price
Methods used to set price
Markup pricing
Chapter 16 Version 3e
Break-even pricing
©2003 South-Western
31
5
Markup Pricing
Markup
Pricing
The cost of buying the product from
the producer plus amounts for
profit and for expenses not
otherwise accounted for.
Example:
If a pen costs $1.80 and sells for is
$2.20, the markup is $.40, or 22% of
cost
Chapter 16 Version 3e
©2003 South-Western
32
5
Break-Even Pricing
Total Revenue
Total Costs
Break-even point
Price
4,000
2,000
Fixed costs
0
Chapter 16 Version 3e
1,000
2,000
3,000
Quantity
©2003 South-Western
4,000
5,000
6,000
33
6
Learning Objective
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 16 Version 3e
©2003 South-Western
34
6
Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Other Factors
That
Influence
Price
Distribution Strategy
Promotion Strategy
Perceived Quality
Chapter 16 Version 3e
©2003 South-Western
35
6
Stages in the Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
$
$
$
$
High
Stable
Decrease
Decrease
Stable
High
Chapter 16 Version 3e
©2003 South-Western
36
6
Distribution Strategy
Convincing Distributors
to Carry Product
Offer a larger
profit margin
Chapter 16 Version 3e
Give dealers a large
trade allowance
©2003 South-Western
37
6
The Impact of the Internet
 Allows price and product comparisons
 Prices are coming down
 Data collection allows sellers to tailor
products and prices
Chapter 16 Version 3e
©2003 South-Western
38
6
Extranet
A private electronic network
that links a company
with its suppliers
and customers.
Chapter 16 Version 3e
©2003 South-Western
39
6
Prestige Pricing
Charging a high price to
help promote a high-quality
image.
Chapter 16 Version 3e
©2003 South-Western
40
6
Indicators of Quality
Retailer
Reputation
Appearance
Price
Brand Name
Chapter 16 Version 3e
©2003 South-Western
41
7
Learning Objective
Describe the procedure for
setting the right price.
Chapter 16 Version 3e
©2003 South-Western
42
7
Steps in Setting the Right Price
Establish pricing goals
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
Chapter 16 Version 3e
©2003 South-Western
43
7
Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
44
7
Price Strategy
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.
Chapter 16 Version 3e
©2003 South-Western
45
7
Choosing a Price Strategy
Price Skimming
Basic Strategies
for
Setting Prices
Penetration Pricing
Status Quo Pricing
Chapter 16 Version 3e
©2003 South-Western
46
7
Price Skimming
Inelastic Demand
Situations
when
Price
Skimming
is
Successful
Superior Product
Legal Protection of Product
Technological Breakthrough
Limited Production
Chapter 16 Version 3e
©2003 South-Western
47
7
Penetration Pricing
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to
reach the mass market.
Chapter 16 Version 3e
©2003 South-Western
48
7
Penetration Pricing
Disadvantages
Advantages
 Discourages or blocks
competition from
market entry
 Requires gear up for
mass production
 Selling large volumes
at low prices
 Strategy to gain
market share may fail
Chapter 16 Version 3e
©2003 South-Western
49
7
Status Quo Pricing
Disadvantages
Advantages
 Strategy may ignore
demand or cost
 Simplicity
 Safest route to longterm survival for small
firms
Chapter 16 Version 3e
©2003 South-Western
50
8
Learning Objective
Identify the legal and ethical constraints
on pricing decisions.
Chapter 16 Version 3e
©2003 South-Western
51
The Legality and Ethics of
Price Strategy
8
Unfair Trade Practices
Price Fixing
Issues
That Limit
Pricing
Decisions
Chapter 16 Version 3e
Price Discrimination
Predatory Pricing
©2003 South-Western
52
8
Unfair Trade Practice Acts
Laws that prohibit
wholesalers and retailers
from selling below cost.
Chapter 16 Version 3e
©2003 South-Western
53
8
Price Fixing
An agreement between two
or more firms on the
price they will charge
for a product.
Chapter 16 Version 3e
©2003 South-Western
54
8
Price Discrimination
The Robinson-Patman Act of 1936:
 Prohibits any firm from selling to two or
more different buyers at different prices
if the result would lessen competition
Chapter 16 Version 3e
©2003 South-Western
55
8
Robinson-Patman Act Defenses
Seller Defenses
Cost
Chapter 16 Version 3e
Market
Conditions
©2003 South-Western
Competition
56
8
Predatory Pricing
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.
Chapter 16 Version 3e
©2003 South-Western
57
9
Learning Objective
Explain how discounts, geographic
pricing, and other special
pricing tactics can be used to
fine-tune the base price.
Chapter 16 Version 3e
©2003 South-Western
58
Tactics for Fine-Tuning
the Base Price
9
Discounts
Fine-Tuning
Pricing
Tactics
Geographic Pricing
Special Pricing
Tactics
Chapter 16 Version 3e
©2003 South-Western
59
Tactics for Fine-Tuning
the Base Price
9
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Common
Tactics
for
Fine-Tuning
the Base Price
Chapter 16 Version 3e
Promotional Allowances
Rebates
Value-Based Pricing
©2003 South-Western
60
9
Value-Based Pricing
The price is set at a level
that seems to the customer
to be a good price
compared to the prices of
other options.
Chapter 16 Version 3e
©2003 South-Western
61
9
Trade Loading
The practice of temporarily
lowering the price to
induce wholesalers and
retailers to buy more
goods than can be sold
in a reasonable time.
Chapter 16 Version 3e
©2003 South-Western
62
9
Geographic Pricing
FOB Pricing
Common
Methods of
Geographic
Pricing
Uniform Delivered
Pricing
Zone Pricing
Freight Absorption
Pricing
Basing-Point
Pricing
Chapter 16 Version 3e
©2003 South-Western
63
9
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.
Chapter 16 Version 3e
©2003 South-Western
64
9
Geographic Pricing
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.
Chapter 16 Version 3e
©2003 South-Western
65
9
Special Pricing Tactics
Single-Price Tactic
All goods offered at the same price
Flexible Pricing
Professional
Services Pricing
Leader Pricing
Different customers pay different price
Used by professionals with experience,
training or certification
Sell product at near or below cost
Price Bundling
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-Part Pricing
Two separate charges to consume a single good
Bait Pricing
Odd-Even Pricing
Chapter 16 Version 3e
©2003 South-Western
66
9
Consumer Penalties
Businesses Impose
Consumer Penalties if...
An irrevocable
loss of revenue
is suffered
Chapter 16 Version 3e
Additional
transaction costs
are incurred
©2003 South-Western
67