Chapter 15 Pricing Concepts Prepared by Deborah Baker

Chapter 15 Objectives 1. Discuss the importance of pricing decisions to the economy and to the individual firm. 2. List and explain a variety of pricing objectives. 3. Explain the role of demand in price determination. (continued) Chapter 15 Ver 2 e © 2000 South-Western College Publishing 2

Chapter 15 Objectives 4. Describe cost-oriented pricing strategies. 5. Demonstrate how the product life cycle, competition, distribution and promotion strategies, the impact of the Internet, demands of large customers, and perceptions of quality can affect price. 6. Describe the procedure for setting the right price. (continued) Chapter 15 Ver 2 e © 2000 South-Western College Publishing 3

Chapter 15 Objectives 7. Identify the legal and ethical constraints on pricing decisions. 8. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. Chapter 15 Ver 2 e © 2000 South-Western College Publishing 4

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 15 Ver 2 e © 2000 South-Western College Publishing 5

The Importance of Price Revenue = Unit Price X number of units sold u Revenue pays for every activity. u 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 15 Ver 2 e © 2000 South-Western College Publishing 6

The Importance of Price 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 15 Ver 2 e © 2000 South-Western College Publishing 7

Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives Chapter 15

Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Chapter 15 Ver 2 e Satisfactory Profits

Pricing Objectives Sales-Oriented Pricing Objectives Market Share Chapter 15 Ver 2 e Sales Maximization

Pricing Objectives Status Quo Pricing Objectives Maintain existing prices Chapter 15 Ver 2 e

The Demand Curve 2. 50 D Price 2. 00 1. 50 D 1. 00.

The Supply Curve S 2. 50 Price 2. 00 1. 50 1. 00. 50

Equilibrium Price 2. 50 S Surplus D Price 2. 00 Price Equilibrium 1. 50

Elasticity of Demand Elastic Demand u Consumers buy more or less of a product when the price changes Inelastic Demand u An increase or decrease in price will not significantly affect demand Unitary Elasticity u An increase in sales exactly offsets a decrease in prices, and revenue is unchanged Chapter 15 Ver 2 e © 2000 South-Western College Publishing 15

Elasticity of Demand Price Goes. . . Revenue Goes. . . Demand is. . . Down Up Elastic Down Inelastic Up Up Inelastic Up Down Elastic Up or Down Stays the Same Unitary Elasticity Chapter 15 Ver 2 e © 2000 South-Western College Publishing 16

Elasticity of Demand Elastic Demand Curve D Inelastic Demand Curve Price D D D

Factors That Affect Elasticity Availability of Substitutes Price relative to Purchasing Power Factors That Affect Elasticity of Demand Chapter 15 Ver 2 e Product Durability Product’s Other Uses © 2000 South-Western College Publishing 18

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 15 Ver 2 e © 2000 South-Western College Publishing 19

The Cost Determinant of Price Markup pricing Keystoning Methods Used to Set Prices Profit Maximization Pricing Break-Even Pricing Chapter 15 Ver 2 e Target-Return Pricing © 2000 South-Western College Publishing 20

Break-Even Analysis fi o r P Total Revenue t Total Costs 4, 000 Price Break-even point ss Lo 2, 000 Fixed costs 0 1, 000 2, 000 3, 000 4, 000 5, 000 6, 000 Quantity Chapter 15 Ver 2 e © 2000 South-Western College Publishing 21

Other Determinants of Price Stages of the Product Life Cycle Competition Other Factors That Influence Price Distribution Strategy Promotion Strategy Perceived Quality Chapter 15 Ver 2 e © 2000 South-Western College Publishing 22

Price and Stages in the PLC Introductory Stage Growth Stage Maturity Stage Decline Stage

Distribution Strategy Convincing Distributors to Carry Product Offer a larger profit margin Chapter 15

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 15 Ver 2 e © 2000 South-Western College Publishing 25

Choose a Price Strategy Price Skimming Basic Strategies for Setting Prices Penetration Pricing Status

Price Skimming Inelastic Demand Superior Product Situations when Price Skimming is Successful Legal Protection of Product Technological Breakthrough Limited Production Chapter 15 Ver 2 e © 2000 South-Western College Publishing 27

Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Issues That Limit Pricing Decisions Chapter 15 Ver 2 e Price Discrimination Predatory Pricing © 2000 South-Western College Publishing 28

Fine Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Common Tactics for Fine-Tuning the Base Price Chapter 15 Ver 2 e Promotional Allowances Rebates Value-Based Pricing © 2000 South-Western College Publishing 29

Geographic Pricing FOB Pricing Uniform Delivered Pricing Common Methods of Geographic Pricing Zone Pricing Freight Absorption Pricing Chapter 15 Ver 2 e Basing-Point © 2000 South-Western College Publishing Pricing 30

Special Pricing Tactics Single-Price Tactic All goods at the same price Flexible Pricing Different customers pay different price Professional Services Pricing Used by professionals with experience, training or certification Price Lining Several line items at specific price points Leader Pricing Sell product at near or below cost Bait Pricing Price Bundling Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two-Part Pricing Two separate charges to consume a single good Odd-Even Pricing Chapter 15 Ver 2 e © 2000 South-Western College Publishing 31