Chapter 17 Pricing ConceptsChapter 17 Pricing Concepts

The Importance of PriceThe Importance of Price

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

In the broadest sense, price allocates resources in a In the broadest sense, price allocates resources in a free-market economyfree-market economy

What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...

Price is revenuePrice is revenueand profit sourceand profit source

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

The Importance of PriceThe Importance of Priceto Marketing Managersto Marketing Managers

RevenueRevenue The 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 expensesRevenue minus expenses

The Importance of PriceThe 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 Marketers must select a price that is not too highthat is not too high

or not too low, or not too low, a price that equals a price that equals

the perceived value to target consumersthe perceived value to target consumers

Trends Influencing Price SettingTrends Influencing Price Setting

Trends Trends in thein the

MarketMarket

Trends Trends in thein the

MarketMarket

High rate of new product introduction

High rate of new product introduction

Increased availability ofbargain-priced dealer and

generic brands

Increased availability ofbargain-priced dealer and

generic brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

More efficient and betterinformed buyers

More efficient and betterinformed buyers

Profit-Oriented Pricing Profit-Oriented Pricing ObjectivesObjectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

Sales-Oriented Pricing Sales-Oriented Pricing ObjectivesObjectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

Demand and SupplyDemand and Supply

DemandDemand 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 sold in the market at various

prices for a specified period.

SupplySupply

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The Demand CurveThe Demand Curve

D

DPri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120Quantity demanded

The Supply CurveThe Supply Curve

Quantity supplied

S

S

Pri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

Equilibrium PriceEquilibrium Price

Quantity demanded

S

S

Pri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

D

D

SurplusSurplus

ShortageShortage

PricePriceEquilibriumEquilibrium

Elasticity of DemandElasticity of Demand

Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

UnitaryUnitaryElasticityElasticityUnitaryUnitary

ElasticityElasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Elasticity of DemandElasticity of Demand

Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity

Elasticity of DemandElasticity of Demand

Elastic Demand CurveElastic Demand CurveD

D

Quantity

Pri

ce

D

D

Quantity

Pri

ce

Inelastic Demand CurveInelastic Demand Curve

Factors that Affect ElasticityFactors that Affect Elasticity

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

Availability of SubstitutesAvailability of Substitutes

Price relative toPurchasing Power

Price relative toPurchasing Power

Product DurabilityProduct Durability

Product’s Other UsesProduct’s Other Uses

Yield Management SystemsYield Management Systems

Discounting early purchases

Discounting early purchases

YMSPrice

Adjustments

YMSPrice

AdjustmentsLimiting early sales at

discounted pricesLimiting early sales at

discounted prices

Overbooking capacityOverbooking capacity

The Cost Determinant of PriceThe Cost Determinant of Price

Deviate with changes in level of output

Deviate with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

Do not deviate as level of output changes

The Cost Determinant of PriceThe Cost Determinant of Price

Target-ReturnPricing

Target-ReturnPricing

Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices

Break-Even PricingBreak-Even Pricing

QuantityQuantity

Pri

ceP

rice

2,0002,000

00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000

4,0004,000

Fixed costsFixed costs

LossLoss

ProfitProfitTotal RevenueTotal Revenue

Total CostsTotal CostsBreak-even pointBreak-even point

Break-Even PricingBreak-Even Pricing

Break-EvenQuantity = Total Fixed Costs

Fixed cost Contribution

Fixed costContribution = Price -- Avg. Variable Cost

Other Determinants of PriceOther Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice

Stages in the Product Life CycleStages in the Product Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh

The Impact of the InternetThe Impact of the Internet

• Allows price and product comparisons

• Prices are coming down

• Data collection allows sellers to tailor products and prices