Lamb Hair Mc Daniel 2011 2012 CHAPTER 19

Learning Outcomes 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 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 2

Learning Outcomes 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 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 3

The Importance of Price Discuss the importance of pricing decisions to the economy and

The Importance of Price To the seller. . . Price is revenue To the consumer. . . Price is the cost of something Price allocates resources in a free-market economy LO 1 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 5

What Is Price? Price is that which is given up in an exchange to

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 LO 1 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 7

The Importance of Price to Marketing Managers Revenue Profit The price charged to customers multiplied by the number of units sold. Revenue minus expenses. LO 1 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 8

Trends Influencing Price Flood of new products Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Internet used for comparison shopping LO 1 Chapter 19 U. S. recession from late 2007 to 2009. Copyright © 2012 by Cengage Learning Inc. All rights reserved 9

Pricing Objectives List and explain a variety of pricing objectives LO 2 Chapter 19

Pricing Objectives Profit Oriented Sales Oriented Status Quo LO 2 Chapter 19 Copyright ©

Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment LO 2 Chapter

Profit Maximization Setting prices so that total revenue is as large as possible relative

Return on Investment (ROI) Net profit after taxes divided by total assets. ROI =

Sales-Oriented Pricing Objectives Market Share Sales Maximization LO 2 Chapter 19 Copyright © 2012

Market Share A company’s product sales as a percentage of total sales for that

Sales Maximization u Short-term objective to maximize sales u Ignores profits, competition, and the marketing environment u May be used to sell off excess inventory LO 2 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 17

Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices LO 2 Chapter 19

Exhibit 20. 1 New-Product Development Process Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine-tune with pricing tactics Results lead to the right price LO 1 Chapter 20 Copyright © 2012 by Cengage Learning Inc. All rights reserved 19

Establish Pricing Goals Pricing objectives fall into three categories: Profit-Oriented Sales-Oriented Status Quo LO

Choose a Price Strategy A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle. LO 1 Chapter 20 Copyright © 2012 by Cengage Learning Inc. All rights reserved 21

Choose a Price Strategy Price Skimming A firm charges a high introductory price, often coupled with heavy promotion. Penetration Pricing A firm charges a relatively low price for a product initially as a way to reach the mass market. Status Quo Pricing Charging a price identical to or very close to the competition’s price. LO 1 Chapter 20 Copyright © 2012 by Cengage Learning Inc. All rights reserved 22

Price Skimming Inelastic Demand Situations When Price Skimming Is Successful LO 1 Chapter 20 Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors Copyright © 2012 by Cengage Learning Inc. All rights reserved 23

Penetration Pricing Advantages § Can lead to lower cost per unit as production expands § Discourages or blocks competition from market entry § Boosts sales and provides large profit increases Disadvantages § Requires gear up for mass production § Selling large volumes at low prices § Strategy to gain market share may fail LO 1 Chapter 20 Copyright © 2012 by Cengage Learning Inc. All rights reserved 24

Status Quo Pricing Advantages Disadvantages § § Simplicity § Safest route to longterm survival for small firms Strategy may ignore demand and/or cost LO 1 Chapter 20 Copyright © 2012 by Cengage Learning Inc. All rights reserved 25

The Demand Determinant of Price Explain the role of demand in price determination LO

The Demand Determinant of Price Demand Supply 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 prices for a specific period. LO 3 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 27

Exhibit 19. 2 Demand Curve and Demand Schedule for Gourmet Cookies LO 3 Chapter

Exhibit 19. 3 Supply Curve and Supply Schedule for Gourmet Cookies LO 3 Chapter

How Demand Supply Establish Price Equilibrium The price at which demand supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. LO 3 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 30

Exhibit 19. 4 Equilibrium Price for Gourmet Cookies LO 3 Chapter 19 Copyright ©

LO 3 Chapter 19 Elasticity of Demand Elastic Demand u Consumers buy more or less of a product when the price changes. Inelastic Demand u An increase or a decrease in price will not significantly affect demand. Unitary Elasticity u An increase in sales exactly offsets a decrease in prices, so total revenue remains the same. Copyright © 2012 by Cengage Learning Inc. All rights reserved 32

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. LO 3 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 33

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 LO 3 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 34

Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses LO 3 Chapter 19 Rate of inflation Copyright © 2012 by Cengage Learning Inc. All rights reserved 35

The Power of Yield Management Systems Understand the concept of yield management systems LO

Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO 4 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 37

Yield Management Systems Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

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. . 4 LO Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 39

Yield Management Systems LO 4 Chapter 19 Capital Intensity Beyond the Book Supply Side of Product or Service High Office block House Airline seat Utilities Sport event Rental car Low Shirt Pencils Food Tropical fish Low High Perishability SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management, ” online at http: //www. managingchange. com/hynamic/yieldmgt. htm, accessed November 7, 2007. Copyright © 2012 by Cengage Learning Inc. All rights reserved 40

Yield Management Systems LO 4 Chapter 19 Variability of Demand Beyond the Book Demand Side of Product or Service 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 SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management, ” online at http: //www. managingchange. com/hynamic/yieldmgt. htm, accessed November 7, 2007. Copyright © 2012 by Cengage Learning Inc. All rights reserved 41

The Cost Determinant of Price Describe cost-oriented pricing strategies LO 5 Chapter 19 Copyright

The Cost Determinant of Price Types of Costs Variable Cost Fixed Cost Varies with changes in level of output Does not change as level of output changes LO 5 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 43

The Cost Determinant of Price Average Variable Cost (AVC) – total variable cost divided by quantity of output Average 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 output Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 44

The Cost Determinant of Price Markup pricing Methods Used to Set Prices LO 5 Chapter 19 Keystoning Profit Maximization Pricing Break-Even Pricing Copyright © 2012 by Cengage Learning Inc. All rights reserved 45

Markup Pricing Keystoning The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. The practice of marking up prices by 100 percent, or doubling the cost. LO 5 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 46

Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue (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. LO 5 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 47

Exhibit 19. 7 Costs, Revenues, and Universal Sportswear LO 5 Chapter 19 Copyright ©

Break-Even Pricing Break-Even Quantity Fixed cost Contribution = = Total fixed costs Fixed cost contribution Price - Avg. Variable Cost LO 5 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 49

Other Determinants of Price Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price LO 6 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 50

Other Determinants of Price Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy LO 6 Chapter 19 Perceived Quality Copyright © 2012 by Cengage Learning Inc. All rights reserved 51

Stages in the Product Life Cycle Introductory stage – prices high Growth stage – prices stabilize Maturity stage – price decreases Decline stage – price decreases LO 6 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 52

The Competition u High prices may induce firms to enter the market u Competition

Distribution Strategy Manufacturers u Offer a larger profit margin or trade allowance u Use exclusive distribution Wholesalers/Retailers u Sell against the brand u Buy gray-market goods u Franchising u Avoid business with pricecutting discounters u Develop brand loyalty LO 6 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 54

Distribution Strategy Selling against the brand Stocking well-known branded items at high prices in order to sell store brands at discounted prices. LO 6 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 55

The Impact of the Internet Shopping Bots Internet Auctions A program that searches the Web for the best price for a particular item. Business-to-business auctions are likely to be the dominant form of online auctions in the future. LO 6 Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 56

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 57

Demands of Large Customers Require suppliers to pay cash rebates if stores’ profit margins aren’t met. Fines for violations of ticketing, packing, and shipping rules. Chapter 19 Copyright © 2012 by Cengage Learning Inc. All rights reserved 58

The Relationship of Price to Quality Prestige Pricing Charging a high price to help

Dimensions of Quality 1. Ease of use 2. Versatility 3. Durability 4. Serviceability 5.

Chapter 19 Videos Beyond the Book Acid+All – Pricing Concepts Chapter 19 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/boo k_content/1439039429_lamb/company_c lips/ch 19. html Copyright © 2012 by Cengage Learning Inc. All rights reserved 61