module 2 pricing strategy
TRANSCRIPT
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Module II
Pricing ConceptsPricing Concepts
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Learning ObjectiveLearning Objective
Discuss the
importance of
pricing decisions to
the economy and to
the individual firm.
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On Line
http://www.mlb.com
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In the broadest sense,In the broadest sense,price allocates resourcesprice allocates resources
in a free-market economyin a free-market economy
In the broadest sense,In the broadest sense,
price allocates resourcesprice allocates resources
in a free-market economyin a free-market economy
The Importance of PriceThe Importance of Price
To the consumer...To the consumer...
Price is the costPrice is the cost
of somethingof something
To the consumer...To the consumer...
Price is the costPrice is the cost
of somethingof something
To the seller...To the seller...
Price is revenuePrice is revenue
and profit sourceand profit source
To the seller...To the seller...
Price is revenuePrice is revenue
and profit sourceand profit source
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What Is Price?What Is Price?
Price is that which is givenup in an exchange to
acquire a good or service.
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The Importance of PriceThe Importance of Price
to Marketing Managersto Marketing Managers
Revenue
Revenue
Profit
Profit
The price charged to customers
multiplied by the
number of units sold.
The price charged to customers
multiplied by the
number of units sold.
Revenue minus expenses
Revenue minus expenses
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The Importance of PriceThe Importance of Price
To earn a profit,To earn a profit,
marketers must select a pricemarketers must select a price
that is not too highthat is not too highor not too low,or not too low,
a price that equalsa price that equals
the perceived value to target consumersthe perceived value to target consumers
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Revenue = Unit Price Number of units sold Revenue pays for every activity.
Whats left over is Profit.
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Trends Influencing Price SettingTrends Influencing Price Setting11
Flood of newproduct introductions
Flood of newproduct introductions
Increased availability ofbargain-priced private and
generic brands
Increased availability of
bargain-priced private andgeneric brands
Price cutting as a strategy tomaintain or regain
market share
Price cutting as a strategy tomaintain or regain
market share
A general decline in consumerconfidence after terrorist attacks
A general decline in consumerconfidence after terrorist attacks
TrendsTrendsin thein the
MarketMarket
TrendsTrendsin thein the
MarketMarket
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Learning ObjectiveLearning Objective
List and explain a
variety of pricing
objectives.
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Pricing ObjectivesPricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Profit
Maximization
Profit
Maximization
Satisfactory
Profits
Satisfactory
Profits
TargetReturn on
Investment
TargetReturn on
Investment
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Profit MaximizationProfit Maximization
Setting prices so thattotal revenue is as large
as possible relative
to total costs.
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Return on InvestmentReturn on Investment
Net profit after taxes
divided by total assets.
ROI =ROI = Net Profit after taxesNet Profit after taxesTotal assetsTotal assets
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Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Market
Share
Market
Share
Sales
Maximization
Sales
Maximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
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Market ShareMarket Share
A companys product sales
as a percentage of total
sales for that industry.
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Sales MaximizationSales Maximization
Short-term objective to maximize sales
Ignores profits, competition, and themarketing environment
May be used to sell
off excess inventory
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Status Quo Pricing ObjectivesStatus Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetitionsprices
Meetcompetitions
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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On Line
http://www.target.comhttp://www.walmart.com
http://www.jcpenney.com
On Line
http://www.target.comhttp://www.walmart.com
http://www.jcpenney.com
http://www.target.com/http://www.walmart.com/http://www.jcpenney.com/http://www.jcpenney.com/http://www.walmart.com/http://www.target.com/http://www.jcpenney.com/http://www.walmart.com/http://www.target.com/ -
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Learning ObjectiveLearning Objective
Explain the role of
demand in pricedetermination.
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Demand and SupplyDemand and Supply
DemandDemand
SupplySupply
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.
The quantity of a product
that will be offered to the market
by a supplier at various pricesfor a specific period.
The quantity of a product
that will be offered to the market
by a supplier at various pricesfor a specific period.
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The Demand CurveThe Demand Curve
D
DPr
ice
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
Quantity demanded
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On Line
http://www.uBid.com
On Line
http://www.uBid.comThe Supply CurveThe Supply Curve
Quantity supplied
S
S
Pr
ice
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
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Price EquilibriumPrice Equilibrium
The price at which demand
and supply are equal.
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Equilibrium PriceEquilibrium Price
Quantity demanded
S
S
Pr
ice
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
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Elasticity of DemandElasticity of Demand
Consumers responsiveness
or sensitivity to changes
in price.
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Elasticity of DemandElasticity of Demand
ElasticElasticDemandDemand
ElasticElasticDemandDemand
Consumers buy more or lessof a product when theprice changes
InelasticInelasticDemandDemand
InelasticInelasticDemandDemand
An increase or decrease inprice will not significantlyaffect demand
UnitaryUnitaryElasticityElasticity
UnitaryUnitaryElasticityElasticity
An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged
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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
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Elasticity of DemandElasticity of Demand
Elastic Demand CurveElastic Demand Curve
D
D
Quantity
Pr
ice
D
D
Quantity
Pr
ice
Inelastic Demand CurveInelastic Demand Curve
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Factors that AffectFactors 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 products other usesA products other uses
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On Line
http://www.columbiahouse.com
On Line
http://www.columbiahouse.com
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Learning ObjectiveLearning Objective
Understand the
concept of yieldmanagement
systems.
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Yield Management SystemsYield Management Systems
A technique for adjusting
prices that uses complexmathematical software
to profitably fill
unused capacity.
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Yield Management SystemsYield Management Systems
Price AdjustmentsPrice Adjustments
Discountingearly purchases
Discountingearly purchases
Limiting early sales atdiscounted prices
Limiting early sales atdiscounted prices
Overbooking capacityOverbooking capacity
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Learning ObjectiveLearning Objective
Describe cost-orientedpricing strategies.
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The Cost Determinant of PriceThe Cost Determinant of Price55
Deviate with changesin level of output
Deviate with changesin level of output
Types of CostsTypes of CostsTypes of CostsTypes of Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed Costs
Fixed CostsFixed Costs
Do not deviateas level of output changes
Do not deviateas level of output changes
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The Cost Determinant of PriceThe Cost Determinant of Price
Target-ReturnPricing
Target-ReturnPricing
Break-EvenPricing
Break-Even
Pricing
Profit MaximizationPricing
Profit MaximizationPricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsMethodsUsed toUsed to
Set PricesSet Prices
MethodsMethodsUsed toUsed to
Set PricesSet Prices
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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%, or doubling the cost.
The practice of marking up prices
by 100%, or doubling the cost.
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Profit MaximizationProfit Maximization
Profit
Maximization
Profit
Maximization
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
Marginal
Revenue
The extra revenue associated with
selling an extra unit of output, orthe change in total revenue with a
one-unit change in output.
The extra revenue associated with
selling an extra unit of output, orthe change in total revenue with a
one-unit change in output.
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Break-Even PricingBreak-Even Pricing
QuantityQuantity
Pr
ice
Pr
ice
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
Loss
Loss
Profit
ProfitTotal RevenueTotal Revenue
Total CostsTotal Costs
Break-even pointBreak-even point
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Break-Even PricingBreak-Even Pricing
Break-EvenQuantity
=Total Fixed Costs
Fixed cost Contribution
Fixed cost
Contribution = Price -- Avg. Variable Cost
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Learning ObjectiveLearning Objective
Demonstrate how the
product life cycle,
competition, distribution
and promotion strategies,customer demands, the
Internet and extranets,
and perceptions ofquality can affect price.
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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
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On Line
http://www.fragrancenet.com
On Line
http://www.fragrancenet.comStages in theStages in the
Product Life CycleProduct Life Cycle
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
Rs.Rs.HighHigh
Rs.Rs.StableStable
Rs.Rs.DecreaseDecrease
MaturityMaturityStageStage
Rs.Rs.DecreaseDecrease
StableStable
HighHigh
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Distribution StrategyDistribution Strategy
Offer a largerprofit margin
Offer a largerprofit margin
Convincing distributorsConvincing distributorsto carry productto carry product
Convincing distributorsConvincing distributorsto carry productto carry product
Give dealers a largetrade allowance
Give dealers a largetrade allowance
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Selling Against the BrandSelling Against the Brand
Stocking well-known
branded items at highprices in order to sell
store brands at
discounted prices.
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Regaining Price ControlRegaining Price Control66
DEVELOPBRAND LOYALTY
DEVELOPBRAND LOYALTY
Package marked withselling price
Package marked withselling price
Avoid business withprice-cutting discounters
Avoid business withprice-cutting discounters
FranchisingFranchising
Exclusivedistribution system
Exclusivedistribution system
Place goods on consignmentPlace goods on consignment
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On Line
http://www.botspot.com
On Line
http://www.botspot.com
The Impact of the InternetThe Impact of the Internet
Buyers can compare products and prices
Sellers can collect detailed customer data
Online merchants can compare othermerchants prices and adjust their own easily
Bargaining power is created between
buyers and sellers
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ExtranetExtranet
A private electronic network
that links a companywith its suppliers
and customers.
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Prestige PricingPrestige Pricing
Charging a high price to
help promote a high-quality
image.
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On Line
http://www.debeers.comhttp://www.rolex.com
On Line
http://www.debeers.com
http://www.rolex.com
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Dimensions of QualityDimensions of Quality66
VersatilityVersatility
DurabilityDurability
ServiceabilityServiceability
Ease of UseEase of Use
PerformancePerformance
PrestigePrestige