Lamb, Hair, McDaniel

2011-2012

CHAPTER 19

Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

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Pricing Concepts

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

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

The Importance of Price

Discuss the
importance of pricing
decisions to the
economy and to the
individual firm

LO1
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

The Importance of Price

To
To the
the seller...
seller...
Price
Price is
is revenue
revenue

To
To the
the consumer...
consumer...
Price
Price is
is the
the cost
cost
of
of something
something

Price
Price allocates
allocates resources
resources
in
in aa free-market
free-market economy
economy

LO1
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

What Is Price?

Price
Price

Price is that which is

given up in an exchange
to acquire a good or
service.

LO1
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Copyright 2012 by Cengage Learning Inc. All rights reserved

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
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

The Importance of Price to

Marketing Managers

Revenue
Revenue

Profit
Profit

The
Theprice
pricecharged
chargedto
to
customers
customersmultiplied
multipliedby
bythe
the
number
numberof
ofunits
unitssold.
sold.

Revenue
Revenueminus
minusexpenses.
expenses.

LO1
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Copyright 2012 by Cengage Learning Inc. All rights reserved

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

LO1
Chapter 19

U.S.
U.S.recession
recessionfrom
fromlate
late2007
2007to
to2009.
2009.
Copyright 2012 by Cengage Learning Inc. All rights reserved

Pricing Objectives

List and explain a

variety of pricing
objectives

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

10

Pricing Objectives
Profit Oriented

Sales Oriented

Status Quo

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

11

Profit-Oriented
Pricing Objectives
Profit-Oriented Pricing Objectives

Profit
Profit
Maximization
Maximization

Satisfactory
Satisfactory
Profits
Profits

Target
Target
Return
Returnon
on
Investment
Investment

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

12

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

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

13

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
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

14

Sales-Oriented
Pricing Objectives
Sales-Oriented Pricing Objectives

Market
Market
Share
Share

Sales
Sales
Maximization
Maximization

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

15

Market Share

Market
Market Share
Share

A companys product
sales as a percentage
of total sales for that
industry.

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

16

Sales Maximization
Short-term objective to
maximize sales
Ignores profits, competition, and
the marketing environment
May be used to sell off excess
inventory

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

17

Status Quo Pricing

Objectives
Status Quo Pricing Objectives

Maintain
Maintain
existing
existing
prices
prices

Meet
Meet
competitions
competitions
prices
prices

LO2
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

18

The Demand
Determinant of Price

Explain the role of

demand in price
determination

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

19

The Demand
Determinant of Price
Demand
Demand

Supply
Supply

The
Thequantity
quantityof
ofaaproduct
productthat
that
will
willbe
besold
soldin
inthe
themarket
marketat
atvarious
various
prices
pricesfor
foraaspecified
specifiedperiod.
period.

The
Thequantity
quantityof
ofaaproduct
productthat
thatwill
will
be
beoffered
offeredto
tothe
themarket
marketby
byaasupplier
supplier
at
atvarious
variousprices
pricesfor
foraaspecific
specificperiod.
period.

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

20

Exhibit 19.2

Demand Curve and Demand

Schedule for Gourmet Cookies

LO3
Chapter 19

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21

Exhibit 19.3

Supply Curve and Supply

Schedule for Gourmet Cookies

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

22

How Demand and Supply

Establish Price
Price
Price
Equilibrium
Equilibrium

The
Theprice
priceat
atwhich
whichdemand
demandand
and
supply
supplyare
areequal.
equal.

Elasticity
Elasticity
of
ofDemand
Demand

Consumers
Consumersresponsiveness
responsivenessor
or
sensitivity
sensitivityto
tochanges
changesin
inprice.
price.

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

23

Exhibit 19.4

Equilibrium Price for

Gourmet Cookies

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

24

LO3

Chapter 19

Elasticity of Demand
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,
so total revenue remains the
same.

Copyright 2012 by Cengage Learning Inc. All rights reserved

25

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.

LO3
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

26

Elasticity of Demand
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
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

27

Factors that Affect

Elasticity of Demand
Availability
Availability of
of substitutes
substitutes
Price
Price relative
relative to
to purchasing
purchasing power
power
Product
Product durability
durability
AAproducts
productsother
other uses
uses

LO3
Chapter 19

Rate
Rate of
of inflation
inflation
Copyright 2012 by Cengage Learning Inc. All rights reserved

28

The Power of Yield

Management Systems

Understand the
concept of yield
management
systems

LO4
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

29

Yield Management Systems

Yield
Yield
Management
Management
Systems
Systems

A technique for adjusting

prices that uses complex
mathematical software
to profitably fill unused
capacity.

LO4
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

30

Yield Management Systems

Discounting
Discountingearly
earlypurchases
purchases

Limiting
Limitingearly
earlysales
sales at
at discounted
discounted prices
prices

Overbooking
Overbookingcapacity
capacity

LO4
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

31

Yield Management Systems

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

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32

Yield Management Systems

LO4
Chapter 19

Capital Intensity

Beyond
Book

the

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 SchemesEstablished Supplier Led PricingYield Management, online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Copyright 2012 by Cengage Learning Inc. All rights reserved

33

Yield Management Systems

LO4
Chapter 19

Variability of
Demand

Beyond
Book

the

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 SchemesEstablished Supplier Led PricingYield Management, online at
http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007.
Copyright 2012 by Cengage Learning Inc. All rights reserved

34

The Cost Determinant of Price

Describe cost-oriented
pricing strategies

LO5
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

35

The Cost Determinant 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

LO5
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

36

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
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

Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

37

The Cost Determinant of Price

Markup
Markup pricing
pricing

Methods
Used to
Set Prices

LO5
Chapter 19

Keystoning
Keystoning
Profit
Profit Maximization
Maximization
Pricing
Pricing
Break-Even
Break-Even
Pricing
Pricing

Copyright 2012 by Cengage Learning Inc. All rights reserved

38

Markup Pricing
Markup
Markup
Pricing
Pricing

Keystoning
Keystoning

The
Thecost
costof
ofbuying
buyingthe
theproduct
product
from
fromthe
theproducer
producerplus
plusamounts
amounts
for
forprofit
profitand
andfor
forexpenses
expensesnot
not
otherwise
otherwiseaccounted
accountedfor.
for.
The
Thepractice
practiceof
ofmarking
markingup
upprices
prices
by
by100
100percent,
percent,or
ordoubling
doublingthe
the
cost.
cost.

LO5
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

39

Profit Maximization
Profit
Profit
Maximization
Maximization

AAmethod
methodof
ofsetting
settingprices
pricesthat
that
occurs
occurswhen
whenmarginal
marginalrevenue
revenue
equals
equalsmarginal
marginalcost.
cost.

Marginal
Marginal
Revenue
Revenue(MR)
(MR)

The
Theextra
extrarevenue
revenueassociated
associated
with
withselling
sellingan
anextra
extraunit
unitof
ofoutput,
output,
or
orthe
thechange
changein
intotal
totalrevenue
revenuewith
with
aaone-unit
one-unitchange
changein
inoutput.
output.

LO5
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

40

Exhibit 19.7

Costs, Revenues, and

Universal Sportswear

LO5
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

41

Break-Even Pricing
Break-Even
Quantity

Fixed cost
Contribution

Total fixed costs

Fixed cost contribution

Price - Avg. Variable Cost

LO5
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Copyright 2012 by Cengage Learning Inc. All rights reserved

42

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
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

43

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

LO6
Chapter 19

Perceived
Perceived Quality
Quality
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44

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
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

45

The Competition
High prices may induce firms to
enter the market
Competition can lead to price
wars

LO6
Chapter 19

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46

Distribution Strategy
Manufacturers
Manufacturers
Offer a larger profit margin or
trade allowance
Use exclusive distribution

Wholesalers/Retailers
Wholesalers/Retailers

Sell against the brand

Buy gray-market goods

Franchising
Avoid business with pricecutting discounters
Develop brand loyalty

LO6
Chapter 19

Copyright 2012 by Cengage Learning Inc. All rights reserved

47

Distribution Strategy

Selling
Sellingagainst
against
the
thebrand
brand

Stocking well-known branded items at

high prices in order to sell store brands
at discounted prices.

LO6
Chapter 19

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48

The Impact of the Internet

Shopping
Shopping Bots
Bots

Internet
InternetAuctions
Auctions

AAprogram
programthat
thatsearches
searchesthe
theWeb
Web
for
forthe
thebest
bestprice
pricefor
foraaparticular
particular
item.
item.

Business-to-business
Business-to-businessauctions
auctionsare
are
likely
likelyto
tobe
bethe
thedominant
dominantform
formof
of
online
onlineauctions
auctionsin
inthe
thefuture.
future.

LO6
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49

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

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50

Demands of Large
Customers
Require
Requiresuppliers
suppliersto
topay
paycash
cash
rebates
rebatesififstores
storesprofit
profitmargins
margins
arent
arentmet.
met.
Fines
Finesfor
forviolations
violationsof
ofticketing,
ticketing,
packing,
packing,and
andshipping
shippingrules.
rules.

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51

The Relationship of
Price to Quality
Prestige
PrestigePricing
Pricing
Charging a high price to
help promote a highquality image.

LO6
Chapter 19

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52

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

LO6

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53

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+Alls
suggested retail price?

http://www.cengage.com/marketing/boo
k_content/1439039429_lamb/company_cl
ips/ch19.html

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54