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1 Learning Objective
Discuss the importance of pricing decisions to the economy and to the individual firm.
Chapter 16 Version 3e
©2003 South-Western
1
1 The Importance of Price To the seller... Price is revenue and profit source
What is Price?
To the consumer... Price is the cost of something
In the broadest sense, price allocates resources in a free-market economy Chapter 16 Version 3e
©2003 South-Western
2
1 What is Price?
Price is that which is given up in an exchange to acquire a good or service.
Chapter 16 Version 3e
©2003 South-Western
3
The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by the number of units sold.
Profit
Revenue minus expenses
Chapter 16 Version 3e
©2003 South-Western
1
4
1 The 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 that is not too high or not too low, a price that equals the perceived value to target consumers Chapter 16 Version 3e
©2003 South-Western
5
1 Trends Influencing Price Setting High rate of new product introduction
Trends in the Market
Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers
Chapter 16 Version 3e
©2003 South-Western
6
2
Learning Objective List and explain a variety of pricing objectives.
Chapter 16 Version 3e
©2003 South-Western
7
2
Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
8
2
Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives
Profit Maximization
Chapter 16 Version 3e
Satisfactory Profits
©2003 South-Western
Target Return on Investment
9
2
Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
Chapter 16 Version 3e
©2003 South-Western
10
2
Return on Investment Net profit after taxes divided by total assets.
ROI = Net Profit after taxes Total assets Chapter 16 Version 3e
©2003 South-Western
11
2
Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives
Market Share
Chapter 16 Version 3e
Sales Maximization
©2003 South-Western
12
2
Market Share
A company’s product sales as a percentage of total sales for that industry.
Chapter 16 Version 3e
©2003 South-Western
13
2
Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory
Chapter 16 Version 3e
©2003 South-Western
14
2
Status Quo Pricing Objectives Status Quo Pricing Objectives
Maintain existing prices
Chapter 16 Version 3e
Meet competition’s prices
©2003 South-Western
15
3
Learning Objective Explain the role of demand in price determination.
Chapter 16 Version 3e
©2003 South-Western
16
3
Demand and Supply
Demand
The quantity of a product that will be sold in the market at various prices for a specified period.
Supply
The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
Chapter 16 Version 3e
©2003 South-Western
17
3
Elasticity of Demand
Consumers’ responsiveness or sensitivity to changes in price.
Chapter 16 Version 3e
©2003 South-Western
18
3
Elasticity of Demand Elastic Demand
Consumers buy more or less of a product when the price changes
Inelastic Demand
An increase or decrease in price will not significantly affect demand
Chapter 16 Version 3e
©2003 South-Western
19
3
Elasticity of Demand Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Chapter 16 Version 3e
©2003 South-Western
20
3
Factors that Affect Elasticity Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand Chapter 16 Version 3e
Product Durability Product’s Other Uses ©2003 South-Western
21
4
Learning Objective
Understand the concept of yield management systems.
Chapter 16 Version 3e
©2003 South-Western
22
4
Yield Management Systems
A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
Chapter 16 Version 3e
©2003 South-Western
23
4
Yield Management Systems Discounting early purchases YMS Price Adjustments
Limiting early sales at discounted prices
Overbooking capacity Chapter 16 Version 3e
©2003 South-Western
24
5
Learning Objective
Describe cost-oriented pricing strategies.
Chapter 16 Version 3e
©2003 South-Western
25
5
The Cost Determinant of Price Types of Costs
Variable Costs
Fixed Costs
Deviate with changes in level of output
Do not deviate as level of output changes
Chapter 16 Version 3e
©2003 South-Western
26
5
The Cost Determinant of Price Methods used to set price
Markup pricing
Chapter 16 Version 3e
Break-even pricing
©2003 South-Western
27
5
Markup Pricing Markup Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise ed for. Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of cost
Chapter 16 Version 3e
©2003 South-Western
28
5
Break-Even Pricing Total Revenue
Total Costs Break-even point
Price
4,000
2,000
Fixed costs
0 Chapter 16 Version 3e
1,000
2,000
3,000
Quantity
©2003 South-Western
4,000
5,000
6,000 29
6
Learning Objective Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price.
Chapter 16 Version 3e
©2003 South-Western
30
6
Other Determinants of Price Stages of the Product Life Cycle Competition Other Factors That Influence Price
Distribution Strategy Promotion Strategy Perceived Quality
Chapter 16 Version 3e
©2003 South-Western
31
6
Stages in the Product Life Cycle Introductory Stage
Growth Stage
Maturity Stage
Decline Stage
$
$
$
$
High
Stable
Decrease
Decrease Stable
High
Chapter 16 Version 3e
©2003 South-Western
32
6
Distribution Strategy Convincing Distributors to Carry Product
Offer a larger profit margin
Chapter 16 Version 3e
Give dealers a large trade allowance
©2003 South-Western
33
6
The Impact of the Internet Allows price and product comparisons Prices are coming down Data collection allows sellers to tailor products and prices
Chapter 16 Version 3e
©2003 South-Western
34
6
Extranet
A private electronic network that links a company with its suppliers and customers.
Chapter 16 Version 3e
©2003 South-Western
35
6
Prestige Pricing
Charging a high price to help promote a high-quality image.
Chapter 16 Version 3e
©2003 South-Western
36
6
Indicators of Quality Retailer Reputation Appearance
Price Brand Name Chapter 16 Version 3e
©2003 South-Western
37
7 Learning Objective
Describe the procedure for setting the right price.
Chapter 16 Version 3e
©2003 South-Western
38
7 Steps in Setting the Right Price Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine tune with pricing tactics
Results lead to the right price Chapter 16 Version 3e
©2003 South-Western
39
7 Pricing Objectives Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
40
7 Price Strategy A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle. Chapter 16 Version 3e
©2003 South-Western
41
Discuss the importance of pricing decisions to the economy and to the individual firm.
Chapter 16 Version 3e
©2003 South-Western
1
1 The Importance of Price To the seller... Price is revenue and profit source
What is Price?
To the consumer... Price is the cost of something
In the broadest sense, price allocates resources in a free-market economy Chapter 16 Version 3e
©2003 South-Western
2
1 What is Price?
Price is that which is given up in an exchange to acquire a good or service.
Chapter 16 Version 3e
©2003 South-Western
3
The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by the number of units sold.
Profit
Revenue minus expenses
Chapter 16 Version 3e
©2003 South-Western
1
4
1 The 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 that is not too high or not too low, a price that equals the perceived value to target consumers Chapter 16 Version 3e
©2003 South-Western
5
1 Trends Influencing Price Setting High rate of new product introduction
Trends in the Market
Increased availability of bargain-priced dealer and generic brands Price cutting as a strategy to maintain or regain market share More efficient and better informed buyers
Chapter 16 Version 3e
©2003 South-Western
6
2
Learning Objective List and explain a variety of pricing objectives.
Chapter 16 Version 3e
©2003 South-Western
7
2
Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
8
2
Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives
Profit Maximization
Chapter 16 Version 3e
Satisfactory Profits
©2003 South-Western
Target Return on Investment
9
2
Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
Chapter 16 Version 3e
©2003 South-Western
10
2
Return on Investment Net profit after taxes divided by total assets.
ROI = Net Profit after taxes Total assets Chapter 16 Version 3e
©2003 South-Western
11
2
Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives
Market Share
Chapter 16 Version 3e
Sales Maximization
©2003 South-Western
12
2
Market Share
A company’s product sales as a percentage of total sales for that industry.
Chapter 16 Version 3e
©2003 South-Western
13
2
Sales Maximization Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory
Chapter 16 Version 3e
©2003 South-Western
14
2
Status Quo Pricing Objectives Status Quo Pricing Objectives
Maintain existing prices
Chapter 16 Version 3e
Meet competition’s prices
©2003 South-Western
15
3
Learning Objective Explain the role of demand in price determination.
Chapter 16 Version 3e
©2003 South-Western
16
3
Demand and Supply
Demand
The quantity of a product that will be sold in the market at various prices for a specified period.
Supply
The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
Chapter 16 Version 3e
©2003 South-Western
17
3
Elasticity of Demand
Consumers’ responsiveness or sensitivity to changes in price.
Chapter 16 Version 3e
©2003 South-Western
18
3
Elasticity of Demand Elastic Demand
Consumers buy more or less of a product when the price changes
Inelastic Demand
An increase or decrease in price will not significantly affect demand
Chapter 16 Version 3e
©2003 South-Western
19
3
Elasticity of Demand Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Chapter 16 Version 3e
©2003 South-Western
20
3
Factors that Affect Elasticity Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand Chapter 16 Version 3e
Product Durability Product’s Other Uses ©2003 South-Western
21
4
Learning Objective
Understand the concept of yield management systems.
Chapter 16 Version 3e
©2003 South-Western
22
4
Yield Management Systems
A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity.
Chapter 16 Version 3e
©2003 South-Western
23
4
Yield Management Systems Discounting early purchases YMS Price Adjustments
Limiting early sales at discounted prices
Overbooking capacity Chapter 16 Version 3e
©2003 South-Western
24
5
Learning Objective
Describe cost-oriented pricing strategies.
Chapter 16 Version 3e
©2003 South-Western
25
5
The Cost Determinant of Price Types of Costs
Variable Costs
Fixed Costs
Deviate with changes in level of output
Do not deviate as level of output changes
Chapter 16 Version 3e
©2003 South-Western
26
5
The Cost Determinant of Price Methods used to set price
Markup pricing
Chapter 16 Version 3e
Break-even pricing
©2003 South-Western
27
5
Markup Pricing Markup Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise ed for. Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of cost
Chapter 16 Version 3e
©2003 South-Western
28
5
Break-Even Pricing Total Revenue
Total Costs Break-even point
Price
4,000
2,000
Fixed costs
0 Chapter 16 Version 3e
1,000
2,000
3,000
Quantity
©2003 South-Western
4,000
5,000
6,000 29
6
Learning Objective Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price.
Chapter 16 Version 3e
©2003 South-Western
30
6
Other Determinants of Price Stages of the Product Life Cycle Competition Other Factors That Influence Price
Distribution Strategy Promotion Strategy Perceived Quality
Chapter 16 Version 3e
©2003 South-Western
31
6
Stages in the Product Life Cycle Introductory Stage
Growth Stage
Maturity Stage
Decline Stage
$
$
$
$
High
Stable
Decrease
Decrease Stable
High
Chapter 16 Version 3e
©2003 South-Western
32
6
Distribution Strategy Convincing Distributors to Carry Product
Offer a larger profit margin
Chapter 16 Version 3e
Give dealers a large trade allowance
©2003 South-Western
33
6
The Impact of the Internet Allows price and product comparisons Prices are coming down Data collection allows sellers to tailor products and prices
Chapter 16 Version 3e
©2003 South-Western
34
6
Extranet
A private electronic network that links a company with its suppliers and customers.
Chapter 16 Version 3e
©2003 South-Western
35
6
Prestige Pricing
Charging a high price to help promote a high-quality image.
Chapter 16 Version 3e
©2003 South-Western
36
6
Indicators of Quality Retailer Reputation Appearance
Price Brand Name Chapter 16 Version 3e
©2003 South-Western
37
7 Learning Objective
Describe the procedure for setting the right price.
Chapter 16 Version 3e
©2003 South-Western
38
7 Steps in Setting the Right Price Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine tune with pricing tactics
Results lead to the right price Chapter 16 Version 3e
©2003 South-Western
39
7 Pricing Objectives Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
Chapter 16 Version 3e
©2003 South-Western
40
7 Price Strategy A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle. Chapter 16 Version 3e
©2003 South-Western
41
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