MKTG5 IE Ch19 PPT

Lamb, Hair, McDaniel 2011-2012
CHAPTER 19
Pricing Concepts
© iStockphoto.com/ktsimage
Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1
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

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

The Importance of Price
Discuss the
importance of pricing
decisions to the
economy and to the
individual firm
LO1
The Importance of Price
To
To the
the consumer...
consumer...
To
To the
the seller...
seller... Price
Price is
is the
the cost
cost
Price
Price is
is revenue
revenue of
of something
something
Price
Price allocates
allocates resources
resources
in
in aa free-market
free-market economy
economy
LO1
What Is Price?
Price
Price
Price is that which is given
up in an exchange to
acquire a good or service.
LO1
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
LO1
The Importance of Price to
Marketing Managers
The
Theprice
pricecharged
chargedtoto
Revenue
Revenue customers
customersmultiplied
multipliedby
bythe
the
number
numberofofunits
unitssold.
sold.
Profit
Profit Revenue
Revenueminus
minusexpenses.
expenses.
LO1
Trends Influencing Price
Flood
Floodof
ofnew
newproducts
products
Increased
Increasedavailability
availabilityof
ofbargain-priced
bargain-pricedprivate
private
and
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.
LO1
Pricing Objectives
List and explain a

variety of pricing
objectives
LO2
Pricing Objectives
Profit Oriented
Sales Oriented
Status Quo
LO2
Profit-Oriented
Pricing Objectives
Profit-Oriented Pricing Objectives
Target
Target
Profit
Profit Satisfactory
Satisfactory Return
Returnonon
Maximization
Maximization Profits
Profits Investment
Investment
LO2
Profit Maximization
Profit
Profit
Maximization
Maximization
Setting prices so that total

revenue is as large as possible
relative to total costs.
LO2
Return on Investment
Return
Return
on
onInvestment
Investment
(ROI)
(ROI)
Net profit after taxes

divided by total assets.
ROI = Net Profit after taxes

Total assets
LO2
Sales-Oriented
Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Market Sales
Sales
Share
Share Maximization
Maximization
LO2
Market Share
Market
Market Share
Share A company’s product
sales as a percentage
of total sales for that
industry.
LO2
Sales Maximization
 Short-term objective to
maximize sales
 Ignores profits, competition, and

the marketing environment
 May be used to sell off excess

inventory
LO2
Status Quo Pricing
Objectives
Status Quo Pricing Objectives
Maintain
Maintain Meet
Meet
existing
existing competition’s
competition’s
prices
prices prices
prices
LO2
Exhibit 20.1
New-Product Development
Process
Establish
Establish pricing
pricing goals
goals
Estimate
Estimate demand,
demand, costs,
costs, and
and profits
profits
Choose
Choose aa price
price strategy
strategy
Fine-tune
Fine-tune with
with pricing
pricing tactics
tactics
Results lead to the right price
LO1
Establish Pricing Goals
Pricing objectives fall into three categories:
Profit-Oriented
Sales-Oriented
Status Quo
LO1
Choose a Price Strategy
Price
PriceStrategy
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.
LO1
Choose a Price Strategy
Price
Price AAfirm
firmcharges
chargesaahigh
highintroductory
introductoryprice,
price,
Skimming
Skimming often
oftencoupled
coupledwith
withheavy
heavypromotion.
promotion.
AAfirm
firmcharges
chargesaarelatively
relativelylow
lowprice
pricefor
foraa
Penetration
Penetration product
productinitially
initiallyas
asaaway
waytotoreach
reachthe
the
Pricing
Pricing mass
massmarket.
market.
Status
StatusQuo
Quo Charging
Chargingaaprice
priceidentical
identicalto
toor
orvery
veryclose
close
Pricing
Pricing to
tothe
thecompetition’s
competition’sprice.
price.
LO1
Price Skimming
Inelastic Demand
Situations Unique Advantages/Superior

When
Price
Legal Protection of Product
Skimming
Is
Successful Technological Breakthrough
Blocked Entry to Competitors

LO1
Penetration Pricing
Advantages Disadvantages
 Can lead to lower cost  Requires gear up for
per unit as production
mass production
expands
 Selling large volumes
 Discourages or blocks
at low prices
competition from
market entry  Strategy to gain market
share may fail
 Boosts sales and
provides large profit
increases
LO1
Status Quo Pricing
Advantages Disadvantages
§ Simplicity § Strategy may ignore

demand and/or cost
§ Safest route to long-
term survival for small
firms
LO1
The Demand
Determinant of Price
Explain the role of

demand in price
determination
LO3
The Demand
Determinant of Price
The
Thequantity
quantityof
ofaaproduct
productthat
that
Demand
Demand will
willbe
besold
soldin
inthe
themarket
marketat
atvarious
various
prices
pricesfor
foraaspecified
specifiedperiod.
period.
The
Thequantity
quantityof
ofaaproduct
productthat
thatwill
will
Supply
Supply be
beoffered
offeredto
tothe
themarket
marketbybyaasupplier
supplier
at
atvarious
variousprices
pricesfor
foraaspecific
specificperiod.
period.
LO3
Exhibit 19.2
Demand Curve and Demand Schedule for Gourmet
Cookies
LO3
Exhibit 19.3
Supply Curve and Supply Schedule for Gourmet
Cookies
LO3
How Demand and Supply
Establish Price
Price
Price The
Theprice
priceat
atwhich
whichdemand
demandand
and
Equilibrium
Equilibrium supply
supplyare
areequal.
equal.
Elasticity
Elasticity Consumers’
Consumers’responsiveness
responsivenessoror
of
ofDemand
Demand sensitivity
sensitivityto
tochanges
changesin
inprice.
price.
LO3
Exhibit 19.4
Equilibrium Price for Gourmet Cookies
LO3
LO3
Elasticity of Demand
 Consumers buy more or less

Elastic
Elastic
Demand of a product when the
Demand price changes.
Inelastic  An increase or a decrease in

Inelastic price will not significantly
Demand
Demand affect demand.
 An increase in sales exactly

Unitary
Unitary offsets a decrease in prices,
Elasticity
Elasticity so total revenue remains the
same.

Percentage change in quantity

Elasticity (E) = 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.
LO3
Price
Price Goes...
Goes... Revenue
Revenue Goes...
Goes... Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
Up or Down Stays the Same Unitary Elasticity
LO3
Factors that Affect
Availability
Availability of
of substitutes
substitutes
Price
Price relative
relative to
to purchasing
purchasing power
power
Product
Product durability
durability
AA product’s
product’s other
other uses
uses
Rate
Rate of
of inflation
inflation
LO3
The Power of Yield
Management Systems
Understand the
concept of yield
management
systems
LO4
Yield Management Systems
Yield
Yield
Management
Management A technique for adjusting
Systems
Systems prices that uses complex
mathematical software
to profitably fill unused
capacity.
LO4
Discounting
Discountingearly
earlypurchases
purchases
Limiting
Limitingearly
earlysales
salesat
at discounted
discountedprices
prices
Overbooking
Overbookingcapacity
capacity
LO4
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
Supply Side of Product or Service
Office block Airline seat

High
Capital Intensity
House Utilities
Beyond the Book
Sport event
Rental car
Shirt Food
Low Pencils Tropical fish
Low High
Perishability
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
LO4 http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

Demand Side of Product or Service
Utilities Airline seat

Variability of High Highway use Sport event
Telephone Rental car
Beyond the Book
Mobile phone
Demand
Food Office block

Low Music CD Laptop
Shirt House
Low High
Variability of Value
SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at
LO4 http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

The Cost Determinant of Price
Describe cost-oriented
pricing strategies
LO5
Types
Types of
of Costs
Costs
Variable
Variable Fixed
Fixed Cost
Cost
Cost
Cost
Varies
Varies with
with changes
changes Does
Does not
not change
change
in
in level
level of
of output
output as
as level
level of
of output
output changes
changes
LO5
Average
AverageVariable
VariableCost
Cost(AVC)
(AVC)––total
totalvariable
variable
cost
costdivided
dividedby
byquantity
quantityof
ofoutput
output
Average
AverageTotal
TotalCost
Cost(ATC)
(ATC)––total
totalcosts
costsdivided
divided
by
byquantity
quantityof
ofoutput
output
Marginal
MarginalCost
Cost(MC)
(MC)––the
thechange
changein
intotal
totalcosts
costs
associated
associatedwith
withaaone-unit
one-unitchange
changein
inoutput
output

Markup
Markup pricing
pricing
Keystoning
Keystoning
Methods
Used to
Set Prices Profit
Profit Maximization
Maximization
Pricing
Pricing
Break-Even
Break-Even
Pricing
Pricing
LO5
Markup Pricing
The
Thecost
costofofbuying
buyingthe
theproduct
product
Markup
Markup from
fromthe
theproducer
producerplus
plusamounts
amounts
Pricing
Pricing for
forprofit
profitand
andfor
forexpenses
expensesnot
not
otherwise
otherwiseaccounted
accountedfor.
for.
The
Thepractice
practiceof
ofmarking
markingup
upprices
prices
Keystoning
Keystoning by
by100
100percent,
percent,or
ordoubling
doublingthe
the
cost.
cost.
LO5
Profit Maximization
AAmethod
methodof
ofsetting
settingprices
pricesthat
that
Profit
Profit occurs
occurswhen
whenmarginal
marginalrevenue
revenue
Maximization
Maximization equals
equalsmarginal
marginalcost.
cost.
The
Theextra
extrarevenue
revenueassociated
associated
Marginal
Marginal with
withselling
sellingan
anextra
extraunit
unitof
ofoutput,
output,
Revenue or
orthe
thechange
changeinintotal
totalrevenue
revenuewith
Revenue(MR)
(MR) with
aaone-unit
one-unitchange
changeininoutput.
output.
LO5
Exhibit 19.7
Costs, Revenues, and Universal
Sportswear
LO5
Break-Even Pricing
Break-Even Total fixed costs

=
Quantity Fixed cost contribution
Fixed cost
Contribution
= Price - Avg. Variable Cost
LO5
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
LO6
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
LO6
Stages in the
Product Life Cycle
Introductory
Introductory stage
stage –– prices
prices high
high
Growth
Growth stage
stage –– prices
prices stabilize
stabilize
Maturity
Maturity stage
stage –– price
price decreases
decreases
Decline
Decline stage
stage –– price
price decreases
decreases
LO6
The Competition
 High prices may induce firms to

enter the market
 Competition can lead to price

wars
LO6
Manufacturers
Manufacturers Wholesalers/Retailers
Wholesalers/Retailers
 Offer a larger profit margin or  Sell against the brand

trade allowance
 Use exclusive distribution  Buy gray-market goods
 Franchising
 Avoid business with price-

cutting discounters
 Develop brand loyalty
LO6
Selling
Sellingagainst
against
the
thebrand
brand
Stocking well-known branded items at
high prices in order to sell store brands
at discounted prices.
LO6
The Impact of the Internet
AAprogram
programthat
thatsearches
searchesthe
theWeb
Web
Shopping
ShoppingBots
Bots for
forthe
thebest
bestprice
pricefor
foraaparticular
particular
item.
item.
Business-to-business
Business-to-businessauctions
auctionsare
are
Internet
Internet Auctions
Auctions likely
likelyto
tobe
bethe
thedominant
dominantform
formof
of
online
onlineauctions
auctionsin
inthe
thefuture.
future.
LO6
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

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.

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

help promote a high-
quality image.
LO6
Dimensions of Quality
1. Ease of use
2. Versatility
3. Durability
4. Serviceability
5. Performance
6. Prestige
LO6
Chapter 19 Videos
Acid+All – Pricing Concepts

Beyond the Book
What role do the product life cycle, competition,

and perceptions of quality play in Acid+All’s
suggested retail price?
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Lamb, Hair, McDaniel 2011-2012

LO 1 Discuss the importance of pricing decisions to the

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

LO 4 Understand the concept of yield management

LO 5 Describe cost-oriented pricing strategies

LO 6 Demonstrate how the product life cycle,

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

List and explain a

Setting prices so that total

Net profit after taxes

ROI = Net Profit after taxes

Sales-Oriented Pricing Objectives

 Ignores profits, competition, and

 May be used to sell off excess

Status Quo Pricing Objectives

Results lead to the right price

Situations Unique Advantages/Superior

Blocked Entry to Competitors

§ Simplicity § Strategy may ignore

Explain the role of

 Consumers buy more or less

Inelastic  An increase or a decrease in

 An increase in sales exactly

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 32

Percentage change in quantity

Percentage change in price of good A

If E is greater than 1, demand is elastic.

Down Down Inelastic

Up or Down Stays the Same Unitary Elasticity

Yield Management Systems (YMS)

1. stimulate demand when

Office block Airline seat

LO4 http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 40

Utilities Airline seat

Food Office block

LO4 http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 41

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 44

Break-Even Total fixed costs

Demonstrate how the product

 High prices may induce firms to

 Competition can lead to price

 Offer a larger profit margin or  Sell against the brand

 Use exclusive distribution  Buy gray-market goods

 Avoid business with price-

 Develop brand loyalty

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 57

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 58

Charging a high price to

Acid+All – Pricing Concepts

What role do the product life cycle, competition,

Chapter 19 Copyright ©2012 by Cengage Learning Inc. All rights reserved 61

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