Part I: THE WORLD OF MARKETING. 1. An Overview of Marketing. 2. Strategic Planning for Competitive Advantage. 3. Ethics and Social Responsibility. 4. The Marketing Environment. 5. Developing a Global Vision. Part II: ANALYZING MARKET OPPORTUNITIES. 6. Consumer Decision Making. 7. Business Marketing. 8. Segmenting and Targeting Markets. 9. Marketing Research. Part III: PRODUCT DECISIONS. 10. Product Concepts. 11. Developing and Managing Products. 12. Services and Nonprofit Organization Marketing. Part IV: DISTRIBUTION DECISIONS. 13. Supply Chain Management. 14. Marketing Channels and Retailing. Part V: PROMOTION AND COMMUNICATION STRATEGIES. 15. Marketing Communications. 16. Advertising, Public Relations, and Sales Promotion. 17. Personal Selling and Sales Management. 18. Social Media and Marketing. Part VI: PRICING DECISIONS. 19. Pricing Concepts. 20. Setting the Right Price.
Pricing Concepts Chapter 19 2014-2015 © Cengage Learning 2015 All Rights Reserved © iStockphoto.com/ktsimage Lamb, Hair, McDaniel Discuss the importance of pricing decisions to the economy and to the individual firm List and explain a variety of pricing objectives Explain the role of demand in price determination © Cengage Learning 2015 All Rights Reserved Understand the concept of yield management systems Describe cost-oriented pricing strategies Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price © Cengage Learning 2015 All Rights Reserved The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm © Cengage Learning 2015 All Rights Reserved The Importance of Price Price Price allocates allocates resources resources in in aa free-market free-market economy economy © Cengage Learning 2015 All Rights Reserved What is Price? • The Sacrifice Effect of Price – Price is that which is sacrificed to get a good or service • The Information Effect of Price – People infer quality information based on price • Value Is Based upon Perceived Satisfaction – “Reasonable price” means “perceived reasonable value.” © Cengage Learning 2015 All Rights Reserved The Importance of Price to Marketing Managers Revenue Revenue The Theprice pricecharged chargedto to customers customersmultiplied multipliedby by the thenumber numberof ofunits unitssold sold Profit Profit Revenue Revenueminus minusexpenses expenses © Cengage Learning 2015 All Rights Reserved Trends Influencing Price Flood Floodof ofnew newproducts products Increased Increasedavailability availabilityof ofbargain-priced bargain-priced private privateand andgeneric genericbrands brands Price Pricecutting cuttingas asaastrategy strategyto tomaintain maintainor or regain regainmarket marketshare share Internet Internetused usedfor forcomparison comparisonshopping shopping U.S U.S.recession recessionfrom fromlate late2007 2007to to2009 2009 © Cengage Learning 2015 All Rights Reserved Pricing Objectives List and explain a variety of pricing objectives © Cengage Learning 2015 All Rights Reserved Pricing Objectives Profit Oriented Sales Oriented Status Quo © Cengage Learning 2015 All Rights Reserved 10 Markup Pricing The Thecost costof ofbuying buyingthe theproduct product from fromthe theproducer producerplus plusamounts amounts for forprofit profitand andfor forexpenses expensesnot not otherwise otherwiseaccounted accountedfor for Markup Markup Pricing Pricing Keystoning Keystoning The Thepractice practiceof ofmarking markingup up prices pricesby by100 100percent, percent,or or doubling doublingthe thecost cost © Cengage Learning 2015 All Rights Reserved 37 Profit Maximization Profit Profit Maximization Maximization Marginal Marginal Revenue Revenue (MR) (MR) AAmethod methodof ofsetting settingprices pricesthat that occurs occurswhen whenmarginal marginalrevenue revenue equals equalsmarginal marginalcost cost The Theextra extrarevenue revenueassociated associated with withselling sellingan anextra extraunit unitof ofoutput, output, or orthe thechange changeinintotal totalrevenue revenuewith with aaone-unit one-unitchange changeininoutput output © Cengage Learning 2015 All Rights Reserved 38 Exhibit 19.7 Costs, Revenues, and Universal Sportswear © Cengage Learning 2015 All Rights Reserved 39 Break-Even Pricing © Cengage Learning 2015 All Rights Reserved 40 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 41 © Cengage Learning 2015 All Rights Reserved Other Determinants of Price Stages Stages of of the the Product Product Life Life Cycle Cycle Competition Competition Distribution Distribution Strategy Strategy Promotion Promotion Strategy Strategy Perceived Perceived Quality Quality © Cengage Learning 2015 All Rights Reserved 42 Stages in the Product Life Cycle Introductory Introductory stage: stage: Price Price is is high high Growth Growth stage: stage: Price Price stabilizes stabilizes Maturity Maturity stage: stage: Price Price decreases decreases Decline Decline stage: stage: Price Price decreases decreases © Cengage Learning 2015 All Rights Reserved 43 The Competition High prices may induce firms to enter the market Competition can lead to price wars © Cengage Learning 2015 All Rights Reserved 44 Distribution Strategy Manufacturers Manufacturers • • • • • Offer a larger profit margin or trade allowance Use exclusive distribution Franchising Avoid business with price-cutting discounters Develop brand loyalty Wholesalers/Retailers Wholesalers/Retailers • • Sell against the brand Buy gray-market goods © Cengage Learning 2015 All Rights Reserved 45 The Impact of the Internet Shopping Shopping Bots Bots AAprogram programthat thatsearches searchesthe theWeb Web for forthe thebest bestprice pricefor foraaparticular particular item item Internet Internet Auctions Auctions Business-to-business Business-to-businessauctions auctions are arelikely likelyto tobe bethe thedominant dominantform form of ofonline onlineauctions auctionsininthe thefuture future © Cengage Learning 2015 All Rights Reserved 46 Promotion Strategy Price is often used as a promotional tool to increase consumer interest © Cengage Learning 2015 All Rights Reserved 47 Demands of Large Customers Require Requiresuppliers suppliersto topay paycash cash rebates rebatesififstores’ stores’profit profitmargins margins aren’t aren’tmet met Fines Finesfor forviolations violationsof ofticketing, ticketing, packing, packing,and andshipping shippingrules rules © Cengage Learning 2015 All Rights Reserved 48 The Relationship of Price to Quality When a purchase decision involves uncertainty, consumers tend to rely on a high price as a predictor of good quality Prestige Pricing Charging a high price to help promote a highquality image © Cengage Learning 2015 All Rights Reserved 49 Dimensions of Quality Ease of use Versatility Durability Serviceability Performance Prestige © Cengage Learning 2015 All Rights Reserved 50 Chapter 19 Video Ski Butternut Ski Butternut is a ski mountain in the Berkshires dedicated to offering a great family ski value In this video, Matt Sawyer discusses the various ways that Ski Butternut uses pricing to drive new business and local business to the mountain He also discusses how correct pricing can help the next year’s business model through season pass sales CLICK TO PLAY VIDEO 51 © Cengage Learning 2015 All Rights Reserved [...]... Reserved 19 Exhibit 19. 2 Price per package of gourmet cookies ($) Packages of gourmet cookies demanded per week Price per package of gourmet cookies ($) Packages of gourmet cookies demanded per week 3.00 35 1.50 85 2.50 50 1.00 120 2.00 65 © Cengage Learning 2015 All Rights Reserved 20 Exhibit 19. 3 Price per package of gourmet cookies ($) Packages of gourmet cookies supplied per week Price per package of. .. role of demand in price determination 18 © Cengage Learning 2015 All Rights Reserved 3 The Demand Determinant of Price Demand Demand Supply Supply The Thequantity quantityof ofaaproduct productthat that will willbe besold soldininthe themarket marketat atvarious various prices pricesfor foraaspecified specifiedperiod period The Thequantity quantityof ofaaproduct productthat thatwill will be beoffered offeredto... Reserved The Cost Determinant of Price Describe costoriented pricing strategies 33 © Cengage Learning 2015 All Rights Reserved 5 The Cost Deter m inant of Price Types Types of of Costs Costs Variable Variable Cost Cost Fixed Fixed Cost Cost Varies Varies with with changes changes in in level level of of output output Does Does not not change change as as level level of of output output changes changes...Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Profit Maximization Maximization Satisfactory Satisfactory Profits Profits Target Target Return Returnon on Investment Investment 2 © Cengage Learning 2015 All Rights Reserved 11 Profit Maximization Setting prices so that total revenue is as large as possible... Availability Availability of of substitutes substitutes Price Price relative relative to to purchasing purchasing power power Product Product durability durability AAproduct’s product’s other other uses uses Rate Rate of of inflation inflation 3 © Cengage Learning 2015 All Rights Reserved 27 The Power of Dynamic Pricing and Yield Management Systems Understand the concept of yield management systems... Cengage Learning 2015 All Rights Reserved 34 The Cost Determinant of Price Average AverageVariable VariableCost Cost(AVC): (AVC):Total Totalvariable variable cost costdivided dividedby byquantity quantityof ofoutput output Average AverageTotal TotalCost Cost(ATC): (ATC):Total Totalcosts costs divided dividedby byquantity quantityof ofoutput output Marginal MarginalCost Cost(MC): (MC):The Thechange... November 7, 2007 31 © Cengage Learning 2015 All Rights Reserved Yield Management Systems Variability of Demand 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... All Rights Reserved 22 Exhibit 19. 4 3 © Cengage Learning 2015 All Rights Reserved 23 Elasticity of Demand 3 Elastic Elastic Demand Demand Consumers buy more or less of a product when the price changes Inelastic Inelastic Demand Demand An increase or a decrease in price will not significantly affect demand Unitary Unitary Elasticity Elasticity An increase in sales exactly offsets a decrease in prices,... sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory 2 © Cengage Learning 2015 All Rights Reserved 16 Status Quo Pricing Objectives Status Quo Pricing Objectives Maintain Maintain existing existing prices prices Meet Meet competition’s competition’s prices prices 2 © Cengage Learning 2015 All Rights Reserved 17 The Demand Determinant of Price Explain... Systems Yield Management Systems (YMS) make it possible for a company to: 1 Stimulate demand when demand is low 2 Maximize profits when demand is high 4 © Cengage Learning 2015 All Rights Reserved 30 Capital Intensity Yield Management Systems 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 ... Importance of Price to Marketing Managers Revenue Revenue The Theprice pricecharged chargedto to customers customersmultiplied multipliedby by the thenumber numberof ofunits unitssold sold Profit Profit... Reserved 10 Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Profit Maximization Maximization Satisfactory Satisfactory Profits Profits Target Target Return Returnon on Investment... Rights Reserved 19 Exhibit 19. 2 Price per package of gourmet cookies ($) Packages of gourmet cookies demanded per week Price per package of gourmet cookies ($) Packages of gourmet cookies demanded