© istockphoto.com/ktsimage lamb, hair, mcdaniel chapter 19 pricing concepts 2014-2015 1© cengage...

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Lamb, Hair, McDaniel

Chapter 19

Pricing Pricing ConceptsConcepts

2014-2015

1 © Cengage Learning 2015. All Rights Reserved.

• Discuss the importance of pricing decisions to the economy and to the individual firm

• List and explain a variety of pricing objectives• Explain the role of demand in price

determination• Understand the concept of yield management

systems• Describe cost-oriented pricing strategies• Demonstrate how the product life cycle,

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

© Cengage Learning 2015. All Rights Reserved. 2

The Importance of PriceThe Importance of Price

Price allocates resources in a free-market economyPrice allocates resources in a free-market economy


1

What is Price?What is Price?• The Sacrifice Effect of Price

– Price is that which is sacrificed to get a good or service.

• The Information Effect of Price– People infer quality information based on

price.• Value Is Based upon Perceived

Satisfaction– “Reasonable price” means “perceived

reasonable value.”


1

The Importance of Price to The Importance of Price to Marketing ManagersMarketing Managers

RevenueRevenueThe price charged to customers multiplied by the number of units sold.

The price charged to customers multiplied by the number of units sold.

ProfitProfit Revenue minus expenses.Revenue minus expenses.


1

Trends Influencing PriceTrends Influencing Price

Flood of new productsFlood of new products

Increased availability of bargain-priced private and generic brandsIncreased availability of bargain-priced private and generic brands

Price cutting as a strategy to maintain or regain market sharePrice cutting as a strategy to maintain or regain market share

Internet used for comparison shoppingInternet used for comparison shopping

U.S. recession from late 2007 to 2009.U.S. recession from late 2007 to 2009.


1

Pricing ObjectivesPricing Objectives

Profit Oriented

Sales Oriented

Status Quo


2


Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

2


Sales-Oriented Pricing Objectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

2


Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives

2

The DemandThe DemandDeterminant of PriceDeterminant of Price

DemandDemandThe 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 sold in the market at various prices for a specified period.

SupplySupplyThe quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.


3

How Demand and Supply How Demand and Supply Establish PriceEstablish Price

PriceEquilibrium

PriceEquilibrium

The price at which demand and supply are equal.

The price at which demand and supply are equal.

Elasticity of Demand

Elasticity of Demand

Consumers’ responsiveness or sensitivity to changes in price.

Consumers’ responsiveness or sensitivity to changes in price.


3

Exhibit 19.4Exhibit 19.4


3

Elasticity of DemandElasticity of Demand

Elastic Demand Elastic

Demand

Consumers buy more or lessof a product when the price changes.

InelasticDemand

InelasticDemand

An increase or a decrease in price will not significantly affect demand.

UnitaryElasticityUnitary

Elasticity

An increase in sales exactly offsets a decrease in prices, so total revenue remains the same.


3

Elasticity of DemandElasticity of Demand

If E > 1, demand is elastic.If E < 1, demand is inelastic.If E = 1, demand is unitary.


3

Factors that Affect Factors that Affect Elasticity of DemandElasticity of Demand

Availability of substitutesAvailability of substitutes

Price relative to purchasing power

Price relative to purchasing power

Product durabilityProduct durability

A product’s other usesA product’s other uses

Rate of inflationRate of inflation


3

Yield Management SystemsYield Management Systems

Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity


4

Yield Management SystemsYield Management Systems

Yield Management Systems (YMS) make it possible for a company to:

1. Stimulate demand when

demand is low

2. Maximize profits when

demand is high

.


4

The Cost Determinant of Price

Varies with changes in level of output

Varies with changes in level of output

Types of CostsTypes of Costs

VariableCost

VariableCost Fixed CostFixed Cost

Does not change as level of output changes

Does not change as level of output changes


5

The Cost Determinant The Cost Determinant of Priceof Price

Average Variable Cost (AVC): Total variable cost divided by quantity of output.Average Variable Cost (AVC): Total variable cost divided by quantity of output.

Average Total Cost (ATC): Total costs 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.

Marginal Cost (MC): The change in total costs associated with a one-unit change in output.


5

The Cost Determinant The Cost Determinant of Priceof Price


5

Markup PricingMarkup Pricing

Markup Pricing

Markup Pricing

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

KeystoningKeystoningThe practice of marking up prices by 100 percent, or doubling the cost.

The practice of marking up prices by 100 percent, or doubling the cost.


5

Profit MaximizationProfit Maximization

ProfitMaximization

ProfitMaximization

A method of setting prices that occurs when marginal revenue equals marginal cost.

A method of setting prices that occurs when marginal revenue equals marginal cost.

MarginalRevenue

(MR)

MarginalRevenue

(MR)

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.


5

Exhibit 19.7Exhibit 19.7Costs, Revenues, and Universal SportswearCosts, Revenues, and Universal Sportswear


Break-Even PricingBreak-Even Pricing


5

Other Determinants of Other Determinants of PricePrice

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle


6

The Relationship of The Relationship of Price to QualityPrice to Quality

Charging a high price to help

promote a high-quality

image.

Prestige PricingPrestige Pricing


6

When a purchase decision involves uncertainty, consumers tend to rely on a high

price as a predictor of good quality.

28

Ch 19 Discussion Questions

1. Explain the three types of pricing objectives of the firm.

2. What is profit maximization? How does break-even analysis explain profit maximization?

3. What is yield management system? What role does it play in pricing?

4. Explain the (other) determinants of price.5. What role of Internet plays in Pricing Decisions?

Explain.

© istockphoto.com/ktsimage lamb, hair, mcdaniel chapter 19 pricing concepts 2014-2015 1© cengage...

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