PRICING

Key Concepts

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 REVENUE

To the seller...Price is REVENUE

What Is Price?

Price is that which is given up in an exchange to acquire a good or service.

PricePrice

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.

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

The Importance of Pricing Decisions

Price X Sales Unit = Revenue

Revenue – Costs = Profit

Profit drives growth, salary increases, and corporate investment

Pricing Objectives

Profit-Oriented

Sales-Oriented

Status Quo

Pricing Objectives

ProfitMaximization

SatisfactoryProfits

TargetROI

Profit-Oriented

Sales-Oriented

MarketShare

SalesMaximization

Status Quo

MaintainExisting Price

Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

Profit Maximization

Setting prices so that total

revenue is as large as possible

relative to total costs.

Profit Maximization

Profit Maximization

Return on Investment

ROI = Net Profit after taxes Total assets

Net profit after taxes divided

by total assets.

Return on

Investment

Return on

Investment

Sales-Oriented Pricing Objectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing Objectives

Market Share

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

Sales Maximization

Short-term objective to maximize sales

Ignores profits, competition, and the marketing environment

May be used to sell off excess inventory

Status Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing Objectives

The Demand Determinant 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.

The Demand Curve

The Supply Curve

Tyson’s Meat Glut Tyson Foods, the world’s largest processor, has an oversupply of

meat:Lower chicken consumption due to avian flu fearsExport restrictions to Japan and South Korea

due to mad cow disease

Mismatch between oversupply and reduced demand has created tremendous financial losses for the company.

Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly.

To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products.

SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.

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.

Price Equilibrium

Elasticity of Demand

Elastic Demand Elastic

Demand

Consumers buy more or lessof a product when the price changes.

InelasticDemand

InelasticDemand

An increase or decrease in price will not significantly affect demand.

UnitaryElasticityUnitary

Elasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.

Elasticity of Demand

Price 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

Elasticity of Demand

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

Yield Management Systems

Yield Management

Systems

Yield Management

SystemsA technique for adjusting

prices that uses complex

mathematical software to

profitably fill unused

capacity.

E.g. Airfare changes

closer to the flight date

How Yield Management Systems Work

Discounting early purchasesDiscounting early purchases

Limiting early sales at discounted pricesLimiting early sales at discounted prices

Overbooking capacityOverbooking capacity

Yield Management Systems

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

The Cost Determinant of Price

Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

Keystoning – 2X CostKeystoning – 2X Cost

Markup pricingMarkup pricing

MethodsUsed to

Set Prices

MethodsUsed to

Set Prices

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

MarginalRevenue

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.

Break-Even Pricing

Break-Even Pricing

Break-EvenQuantity = Total fixed costs

Fixed cost contribution

Fixed costContribution = Price - Avg. Variable Cost

Yield Management Systems

Rental property landlords use yield management systems to raise rents at a faster pace.

The M/PF Yield-Star Price Optimizer is similar to pricing systems used by airlines and car-rental companies.

It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent.

Tenants can also take advantage of the technology.

SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.

Cost-Oriented Pricing Strategies

Other Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

Factors Affecting Price

Stages in the Product Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh

The Competition High prices may induce firms to enter

the market

Competition can lead to price wars

Global competition

may force firms to

lower prices

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

Distribution Strategy

Stocking well-known branded items

at high prices in order to sell store

brands at discounted prices.

E.g. Wal-Mart sells Equate brand

drugs/lotions against

Tylenol/Johnson & Johnson

Selling againstthe brand

Selling againstthe brand

The Impact of the Internet

Internet auctions Internet auctions

Shopping bots Shopping bots

Second opinions from expert sites Second opinions from expert sites

Product selection Product selection

The Relationship of Price to Quality

Charging a high price to help

promote a high-quality image.

Prestige PricingPrestige Pricing

Dimensions of Quality

1. Ease of use

2. Versatility

3. Durability

4. Serviceability

5. Performance

6. Prestige