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Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1
Lamb, Hair, McDaniel
CHAPTER 19
Pricing Concepts
2011-2012
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Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 2
LO 1 Discuss the importance of pricing decisions to the economy and to the individual firm
LO 2 List and explain a variety of pricing objectives
LO 3 Explain the role of demand in price determination
Learning OutcomesLearning Outcomes
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 3
LO 4 Understand the concept of yield management systems
LO 5 Describe cost-oriented pricing strategies
LO 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
Learning OutcomesLearning Outcomes
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 4
Discuss the importance of pricing
decisions to the economy and to the
individual firm
The Importance of PriceThe Importance of Price
LO1
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 5
The Importance of Price
Price allocates resources in a free-market economyPrice allocates resources in a free-market economy
To the consumer...Price is the cost
of something
To the consumer...Price is the cost
of something
To the seller...Price is revenueTo the seller...
Price is revenue
LO1
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 6
What Is Price?
Price is that which is
given up in an exchange
to acquire a good or
service.
PricePrice
LO1
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 7
What is Price?
• Sacrifice Effect of Price– What is sacrificed to get a good or service
• Money, Time, Dignity
• Information Effect of Price– Infer quality information based on price
• Higher quality = higher price• Convey status
• Value Based upon Perceived Satisfaction– Reasonable Price = Perceived Reasonable Value
• Exchange based on expectation of satisfaction
LO1
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 8
The Importance of Price to Marketing 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.
LO1
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 9
Trends 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
LO1 U.S. recession from late 2007 to 2009.U.S. recession from late 2007 to 2009.
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 10
List and explain a variety of pricing
objectives
Pricing ObjectivesPricing Objectives
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 11
Pricing Objectives
Profit Oriented
Sales Oriented
Status Quo
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 12
Profit-OrientedPricing Objectives
Profit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 13
Profit Maximization
Setting prices so that total
revenue is as large as possible
relative to total costs.
Profit Maximization
Profit Maximization
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 14
Return on Investment
ROI = Net Profit after taxes Total assets
Net profit after taxes
divided by total assets.
Return on Investment
(ROI)
Return on Investment
(ROI)
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 15
Sales-OrientedPricing Objectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing Objectives
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 16
Market Share
Market ShareMarket Share A company’s product sales as a percentage of total sales for that industry.
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 17
Sales Maximization
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 18
Status Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing Objectives
LO2
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 19
Explain the role of demand in price determination
The DemandThe DemandDeterminant of PriceDeterminant of Price
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 20
The DemandDeterminant 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.
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 21
LO3
Exhibit 19.2Exhibit 19.2Demand Curve and Demand Demand Curve and Demand Schedule for Gourmet CookiesSchedule for Gourmet Cookies
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 22
LO3
Exhibit 19.3Exhibit 19.3Supply Curve and Supply Schedule Supply Curve and Supply Schedule for Gourmet Cookiesfor Gourmet Cookies
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 23
How Demand and Supply Establish 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.
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 24
LO3
Exhibit 19.4Exhibit 19.4Equilibrium Price for Equilibrium Price for Gourmet CookiesGourmet Cookies
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 25
Elasticity 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.
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 26
Elasticity of Demand
Elasticity (E) =Percentage change in quantity
demanded of good A
Percentage change in price of good A
If E is greater than 1, demand is elastic.If E is less than 1, demand is inelastic.If E is equal to 1, demand is unitary.
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 27
Elasticity of DemandPrice 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
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 28
Factors that Affect Elasticity of Demand
Availability of substitutesAvailability of substitutes
Price relative to purchasing powerPrice relative to purchasing power
Product durabilityProduct durability
A product’s other usesA product’s other uses
Rate of inflationRate of inflation
LO3
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 29
Understand the concept of yield
management systems
The Power of Yield The Power of Yield Management SystemsManagement Systems
LO4
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 30
Yield Management Systems
LO4
Yield Management
Systems
Yield Management
SystemsA technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 31
Yield Management Systems
Discounting early purchasesDiscounting early purchases
Limiting early sales at discounted pricesLimiting early sales at discounted prices
Overbooking capacityOverbooking capacity
LO4
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 32
Yield Management Systems
Yield Management Systems (YMS) make it possible for a company to:
1. stimulate demand when
demand is low, and
2. maximize profits when demand
is high.
. LO4
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 33
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Yield Management SystemsSupply Side of Product or Service
LO4
High Office block
House
Airline seat
Utilities
Sport event
Rental car
Low Shirt
Pencils
Food
Tropical fish
Low High
Cap
ital In
ten
sity
PerishabilityBeyo
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Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 34
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Yield Management Systems
Vari
ab
ilit
y o
f D
em
an
d
Demand Side of Product or Service
LO4
High Utilities
Highway use
Telephone
Airline seat
Sport event
Rental car
Mobile phone
Low Food
Music CD
Shirt
Office block
Laptop
House
Low High
Variability of Value
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Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 35
Describe cost-oriented pricing strategies
The Cost Determinant of PriceThe Cost Determinant of Price
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 36
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
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 37
The Cost Determinant of Price
Average Variable Cost (AVC) – total variable cost divided by quantity of outputAverage Variable Cost (AVC) – total variable cost divided by quantity of output
Average Total Cost (ATC) – total costs divided by quantity of outputAverage 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 outputMarginal Cost (MC) – the change in total costs associated with a one-unit change in output
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 38
The Cost Determinant of Price
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsUsed to
Set Prices
MethodsUsed to
Set Prices
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 39
Markup 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.
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 40
Profit 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.
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 41
LO5
Exhibit 19.7Exhibit 19.7Costs, Revenues, and Costs, Revenues, and Universal SportswearUniversal Sportswear
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 42
Break-Even Pricing
Break-EvenQuantity = Total fixed costs
Fixed cost contribution
Fixed costContribution = Price - Avg. Variable Cost
LO5
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 43
Demonstrate how the product life cycle, competition,
distribution and promotion strategies, customer demands, the Internet and extranets, and
perceptions of quality can affect price
Other Determinants of PriceOther Determinants of Price
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 44
Other Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 45
Stages in the Product Life Cycle
LO6
Introductory stage – prices highIntroductory stage – prices high
Growth stage – prices stabilizeGrowth stage – prices stabilize
Maturity stage – price decreasesMaturity stage – price decreases
Decline stage – price decreasesDecline stage – price decreases
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 46
The Competition
High prices may induce firms to enter the market
Competition can lead to price wars
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 47
Distribution StrategyManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers
Offer a larger profit margin or trade allowance
Use exclusive distribution
Franchising
Avoid business with price-cutting discounters
Develop brand loyalty
Sell against the brand
Buy gray-market goods
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 48
Distribution Strategy
Stocking well-known branded items at
high prices in order to sell store brands
at discounted prices.
Selling againstthe brand
Selling againstthe brand
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 49
The Impact of the Internet
LO6
Shopping BotsShopping BotsA program that searches the Web for the best price for a particular item.
A program that searches the Web for the best price for a particular item.
Internet AuctionsInternet AuctionsBusiness-to-business auctions are likely to be the dominant form of online auctions in the future.
Business-to-business auctions are likely to be the dominant form of online auctions in the future.
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 50
Promotion Strategy
Price is often used as a promotional tool to increase consumer interest. Examples:
1. Pittsburgh Zoo – $5 admission for wearing a tie-dye shirt
2. Crested Butte Ski Resort – free skiing between Thanksgiving and Christmas
3. Bugle Boy – uncut competition by offering pants to retailers at wholesale prices
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 51
Demands of Large Customers
Require suppliers to pay cash rebates if stores’ profit margins aren’t met.
Require suppliers to pay cash rebates if stores’ profit margins aren’t met.
Fines for violations of ticketing, packing, and shipping rules.
Fines for violations of ticketing, packing, and shipping rules.
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 52
The Relationship of Price to Quality
Charging a high price to
help promote a high-
quality image.
Prestige PricingPrestige Pricing
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 53
Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
LO6
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 54
Beyo
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BookChapter 19 Videos
Acid+All – Pricing Concepts
What role do the product life cycle, competition, and perceptions of quality play in Acid+All’s suggested retail price?
http://www.cengage.com/marketing/book_content/1439039429_lamb/company_clips/ch19.html