Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service...

Chapter 17Chapter 17Pricing ConceptsPricing Concepts

Chapter 17Chapter 17Pricing ConceptsPricing Concepts

IntroductionIntroductionIntroductionIntroduction• Price: the exchange value of a

good or service

some unit of value given up for something of value

Other TermsOther TermsOther TermsOther Terms

• Terms Used• Tuition• Fare• Fine• Tip• Bribe

Price CompetitionPrice CompetitionPrice CompetitionPrice Competition

CustomerCustomerNeedsNeeds

PricePriceCompetitionCompetition

Slippery slope.

CustomerCustomerNeedsNeeds

ProductProductCompetitionCompetition

PromotionPromotionCompetitionCompetition

DistributionDistributionCompetitionCompetition

Nonprice CompetitionNonprice CompetitionNonprice CompetitionNonprice Competition

Emphasize value and therefore increase quality AUCTION

The Importance of Price to The Importance of Price to MarketersMarketersThe Importance of Price to The Importance of Price to MarketersMarketers• Manage demandManage demand

• Adapt to competitive environmentAdapt to competitive environment

• Psychology of the consumerPsychology of the consumer

• BOTTOMLINE issuesBOTTOMLINE issues

The Nature of PriceThe Nature of PriceThe Nature of PriceThe Nature of Price

Profits = Total Revenues - Total Costs

or

Profits =(Price x Quantity Sold) - Total Costs

Steps in Setting the Right Steps in Setting the Right PricePriceSteps in Setting the Right Steps in Setting the Right PricePrice

Results lead to the right price

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing objectivesEstablish pricing objectives

Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing Objectives

Profit-orientedProfit-oriented• Profit Maximization:

• Target-Return Objectives:achieving a specified return on

either sales or investment

ROI = Net Profit after taxes Total assets


Profitability

Sales-orientedSales-oriented

• Sales maximization:

• Market-share objectives:for controlling a portion of the market

Price and Market SharePrice and Market SharePrice and Market SharePrice and Market Share


Meeting Competition

Meeting Competition

• Value PricingProfitability

Volume


Meeting Competition

PrestigePrestige

• Prestige Objectives: set at a relatively high level

Profitability

Volume

Competitive EnvironmentCompetitive EnvironmentCompetitive EnvironmentCompetitive Environment

• Number ofsellers

• Productdifferences

• Importance ofmarket mix

• Large numberof sellers

• Similar products

• Distribution isimportant

• Large numberof sellers

• Unique butsubstitutable

• Pricing isimportant-

• Differentiated

• products

• A few largecompetitors

• Similarproducts

• Promotion iskey to achieveperceivedproductdifferences

• Singleproducer

• Unique andunsubstitutable

• Unimportant

BASIS OFCOMPARISON

PURECOMPETITION

MONOPOLISTICCOMPETITION OLIGOPOLY MONOPOLY

Number of sellersMany One

PRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC THEORYPRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC THEORY

• Demand: schedule of the amounts of a firm’s good or service that consumers purchase at different prices during a specified period

• Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period.

Determination of DemandDetermination of DemandThe Demand Curve The Demand Curve Price/Quantity RelationshipPrice/Quantity Relationship

Determination of DemandDetermination of DemandThe Demand Curve The Demand Curve Price/Quantity RelationshipPrice/Quantity Relationship

Q1 200KQ1 200K

QuantityQuantity

$2.50 P1$2.50 P1

DD11

Pri

ceP

rice

Determination of DemandDetermination of DemandDetermination of DemandDetermination of Demand

200K 300K 200K 300K

QuantityQuantity

$2.50 P1$2.50 P1

DD11

Pri

ceP

rice

$2.00 P2$2.00 P2

Determination of DemandDetermination of DemandDetermination of DemandDetermination of Demand

200K 300K 400K 200K 300K 400K

QuantityQuantity

$2.50 P1$2.50 P1

DD11

Pri

ceP

rice

$2.00 P2$2.00 P2

$1.50 P3$1.50 P3

Determination of Demand Determination of Demand Price/Quantity Relationship Price/Quantity Relationship and Demand Increasingand Demand Increasing

Determination of Demand Determination of Demand Price/Quantity Relationship Price/Quantity Relationship and Demand Increasingand Demand Increasing

200K 400K200K 400K

QuantityQuantity

PP1 1 $2.50

DD11

DD22

Pri

ceP

rice

Shifting Demand Curves

The Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing StrategyThe Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing Strategy

• Elasticity: measure of consumers responsiveness to changes in price

Price Elasticity of Demand

% Change in Quantity Demanded

% Change in Price=

If Abs(elasticity) > 1 then DEMAND is ELASTIC

If Abs(elasticity) < 1 then DEMAND is INELASTIC

Determinants Of ElasticityDeterminants Of ElasticityDeterminants Of ElasticityDeterminants Of Elasticity

Availabilityof Substitutes

Luxury orNecessity

Portion ofBudget

Time

Determination of Demand - INELASTIC Determination of Demand - INELASTIC Determination of Demand - INELASTIC Determination of Demand - INELASTIC

QQ22 Q Q11 QuantityQuantity

PP11

PP22

Pri

ceP

rice

Demand is not very sensitive to price increases

Determination of Demand - ELASTIC Determination of Demand - ELASTIC Determination of Demand - ELASTIC Determination of Demand - ELASTIC

QQ22QuantityQuantity

PP11

PP22

QQ11

Pri

ceP

rice

Demand is very sensitive to price increases

Some Elasticity Some Elasticity CalculationsCalculationsSome Elasticity Some Elasticity CalculationsCalculations• % Change in Price = 10% (increase)• % Change in Quantity = -20% (decrease)• Abs(Elasticity) =

• Elastic?

Some Elasticity Some Elasticity CalculationsCalculationsSome Elasticity Some Elasticity CalculationsCalculations

• % Change in Price = +10% (increase)• % Change in Quantity = -5% (decrease)• Abs(Elasticity) =

• Elastic?

Elasticity and RevenuesElasticity and RevenuesElasticity and RevenuesElasticity and Revenues

• Baseline Case• 100 units sold @ $ 10 each• Total Revenues = $ 10 * 100 units = $1000.

• Case I• Let us drop price to $8.• Demand increases to 110 units.• Elasticity = • Revenue =


• Case II• Let us drop price to $8.• Demand increases to 150 units.• Demand = • Revenue =


When Price DECREASES, Total Revenues INCREASE for __________ products

When Price DECREASES, Total Revenues DECREASE for _________ products

Elasticity and RevenuesElasticity and RevenuesElasticity and RevenuesElasticity and RevenuesPrice 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

Careful : Revenues DO not equal profitability!

Analysis of Demand, Cost, Analysis of Demand, Cost, and Profit Relationshipsand Profit RelationshipsAnalysis of Demand, Cost, Analysis of Demand, Cost, and Profit Relationshipsand Profit Relationships•Fixed Costs – do not vary with # units produced

•Variable Costs – varies with # units produced

•Total Costs = Fixed Costs + Variable costs

Analysis of Demand, Cost, and Profit Relationships

Fixed CostsFixed CostsBreakeven Point =Breakeven Point = ______________________________________________________________

Per Unit Contribution to Fixed CostsPer Unit Contribution to Fixed Costs

==Fixed CostsFixed Costs______________________________________

Price - Variable CostsPrice - Variable Costs

Breakeven Analysis:

Evaluation of Breakeven Evaluation of Breakeven AnalysisAnalysisEvaluation of Breakeven Evaluation of Breakeven AnalysisAnalysis

• Effective tool in assessing the sales required for covering costs and achieving specified levels of profit. Sensitivity analysis.

• Easily understood


Determining the Breakeven Point

Quantity (Units of Production)Quantity (Units of Production)

Fixed CostsFixed Costs

Total RevenueTotal Revenue

Total Total CostsCosts

BreakevenBreakevenPointPointD

olla

rsD

olla

rs



Units of ProductionUnits of Production




BreakevenBreakevenPointPointD

olla

rsD

olla

rs

LossesLosses



Units of ProductionUnits of Production




BreakevenBreakevenPointPoint

ProfitsProfits

Do

llars

Do

llars

Breakeven AnalysisBreakeven AnalysisBreakeven AnalysisBreakeven Analysis

• Selling Price = $ 100 per unit• Variable costs = $ 50 per unit• Total Fixed Costs = $150, 000• Contribution =

Breakeven Point =Breakeven Point =______________________________________________________________Per Unit Contribution to Fixed CostsPer Unit Contribution to Fixed Costs


Breakeven (continued)Breakeven (continued)Breakeven (continued)Breakeven (continued)

• Breakeven point (in terms of unit sales) = _____ units

• Breakeven point (in terms of $ sales volume) = ____________ = $300,000

Other factors:Other factors:Pricing and the Life CyclePricing and the Life CycleOther factors:Other factors:Pricing and the Life CyclePricing and the Life CycleIntroductoryIntroductory

StageStageGrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

Pricing StrategiesPricing StrategiesPricing StrategiesPricing Strategies

• Skimming pricing strategy:

the use of a high price relative to competitive offerings.

SkimmingSkimming

Pricing StrategiesPricing StrategiesPricing StrategiesPricing Strategies

• Penetration pricing policy:the use of relatively low price

as compared with competitive offerings

Skimming

PenetrationPenetration

Psychological

Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service...

Documents

Transcript of Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service...