Pricing Concepts

1
Pricing Concepts
16
Prepared by Deborah Baker Texas Christian
UniversityRevised byDr. BaurAgricultural
Technical Institute
chapter
2
Chapter 13 Review

• 1. Discuss the effect of advertising on market
  share and consumers.
• 2. Identify the major types of advertising.
• Discuss the creative decisions in developing an
  advertising campaign.
• Describe media evaluation and selection
  techniques.
• Discuss the role of public relations in the
  promotional mix.

13
chapter
3
Chapter 16 Learning Objectives

• 1. Discuss the importance of pricing decisions to
  the economy and to the individual firm.
• 2. List explain a variety of pricing
  objectives.
• Explain role of demand in price determination.
• Understand the concept of yield management
  systems.
• Describe cost-oriented pricing strategies.

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chapter
4
Chap 16 Learning Objectives (cont)
6. Demonstrate how the product life cycle,
competition, distribution promotion strategies,
customer demands, the Internet extranets, and
perceptions of quality can affect
price. 7. Describe the procedure for setting
price. 8. Identify the legal and ethical
constraints on pricing decisions. 9. Explain
how discounts, geographic pricing, and other
special pricing tactics can be used to fine-tune
the base price.
16
chapter
5
Discuss importance of pricing decisions to the
economy to individual firm.
492
Learning Objective
1
Price is that which is given up in an exchange to
acquire a good or service.
To the seller...Price is revenue and profit
source
To the consumer...Price is the cost of something
In the broadest sense, price allocates resources
in a free-market economy
6
The Importance of Price
492
Discuss importance of pricing decisions to the
economy to individual firm.
Learning Objective
1
Price
The exchange value of one unit
Revenue
The price of one unit multiplied by the number
of units sold.
Profit
Revenue minus expenses
Marketers must select a price that is not too
high or not too low, a price that equals the
perceived value to target consumers
7
493
Discuss importance of pricing decisions to the
economy to individual firm.
Learning Objective
1
1. High rate of new product introduction
TRENDS INFLUENCING PRICE SETTING
2. Increased availability of bargain-priced
dealer and generic brands
3. Price cutting as a strategy tomaintain or
regain market share
4. More efficient and better informed buyers
8
A. Profit-Oriented Pricing Objectives
453
Learning Objective
List and explain a variety of pricing objectives.
2
1. Profit Maximization
2. SatisfactoryProfits
3. Target Return On Investment
Setting prices so that total revenue is as large
as possible relative to total costs.
Net profit after taxes divided by total assets.
ROI Net Profit aft tax Total
assets
9
B. Sales-Oriented Pricing Objectives
554
Learning Objective
List and explain a variety of pricing objectives.
2

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

A companys product sales as a percentage of
total sales for that industry.
10
C. Status Quo Pricing Objectives
495
Learning Objective
List and explain a variety of pricing objectives.
2
11
Learning Objective
495
Explain the role of demand in price
determination.
3
Demand
The quantity of a product that will be sold in
the market at various prices for a specified
period.
Supply
The quantity of a product that will be offered
to the market by a supplier at various prices
for a specific period.
12
496
Learning Objective
Explain the role of demand in price
determination.
3
Elasticity of Demand
Consumers responsiveness or sensitivity to
changes in price
Consumers ARE sensitive to price changes in the
product
Elastic Demand
Consumers ARE NOT sensitive to price changes in
the product
InelasticDemand
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Elasticity of Demand
Learning Objective
xxx
Explain the role of demand in price
determination.
3
Price Goes...
Revenue Goes...
Demand is...
Price Up
Elastic
Rev Down
Price Down
Rev Up
Unitary
Price Upor Down
Rev Same
Rev Up
Price Up
Inelastic
Rev Down
Price Down
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496
Learning Objective
Explain the role of demand in price
determination.
3
Availability of Substitutes
FactorsThat Affect Elasticity of Demand
Price relative to Purchasing Power
Product Durability
Products Other Uses
15
Yield Management Systems
496
Learning Objective
Understand the concept of yield management
systems
4
YMS
A technique for adjusting prices that uses
complex mathematical software to profitably fill
unused capacity.
16
496
Learning Objective
Understand the concept of yield management
systems
4
Discounting early purchases
YIELD MANAGEMENT SYSTEMS Price Adjustments
Limiting early sales at discounted prices
Overbooking capacity
17
The Cost Determinant of Price
497
Learning Objective
Describe cost-oriented pricing strategies.
5
Variable Costs
Fixed Costs
TYPES OF COSTS
Deviate with changes in level of output
Do not deviate as level of output changes
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Markup Method to Set Price
497
Learning Objective
Describe cost-oriented pricing strategies.
5
Markup Pricing
The cost of buying the product from the
producer plus amounts for profit for expenses
not otherwise accounted for.
Example If a pen costs 1.20 and the markup is
20, What is selling price?
Example If a pen costs 1.80 and sells for is
2.20, the markup is .40, or 22 of cost
1.20 1.20 1.44
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Break-Even Method to Set Price
498
Learning Objective
Describe cost-oriented pricing strategies.
5
20
499
How prod life cycle, competition, distribution,
promotion, demand, Internet quality can affect
price.
Learning Objective
6
1. Stages of the Product Life Cycle
Other Factors That Influence Price
2. Distribution Strategy
3. Competition
4. Promotion Strategy
5. Perceived Quality
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1. Stages in the Product Life Cycle
499
How prod life cycle, competition, distribution,
promotion, demand, Internet quality can affect
price.
Learning Objective
6
Other Factors That Influence Price
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3. Distribution Strategy
500
How prod life cycle, competition, distribution,
promotion, demand, Internet quality can affect
price.
Learning Objective
6
2. Competition
Convincing Distributors to Carry Product
Give dealers a large trade allowance
Other Factors That Influence Price
Offer a larger profit margin
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The Impact of the Internet
500
How prod life cycle, competition, distribution,
promotion, demand, Internet quality can affect
price.
Learning Objective
6

• Allows price and product comparisons
• Prices are coming down
• Data collection allows sellers to tailor products

Extranet
A private electronic network that links a company
with its suppliers and customers.
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5. PromotionStrategy
503
How prod life cycle, competition, distribution,
promotion, demand, Internet quality can affect
price.
Learning Objective
6
8. Prestige Pricing
6. Demands of LargeCustomers
Charging a high price to help promote a
high-quality image.
7. Relationship of Price to Quality
25
A. Steps in Setting the Right Price
Learning Objective
Describe the procedure for setting the right
price.
504
7
a. Profit-Oriented Pricing Objectives
b. Sales-Oriented Pricing Objectives
1. Establish pricing objectives
c. Status Quo Pricing Objectives
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A. Steps in Setting the Right Price
504
Learning Objective
Describe the procedure for setting the right
price.
7
1. Establish pricing objectives
2. Estimate demand, costs, and profits
3. Choose a price strategy
A basic, long-term pricing framework, which
establishes initial price intended direction
for price movements over the product life cycle.
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Price Skimming Price Strategy
505
Learning Objective
Describe the procedure for setting the right
price.
7
A pricing policy whereby firm charges a
relatively high price for a product compared to
competition
Inelastic Demand
Situations when Price Skimming is Successful
Superior Product
Legal Protection of Product
Technological Breakthrough
Limited Production
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b. Penetration Pricing Price Strategy
506
Learning Objective
Describe the procedure for setting the right
price.
7
A pricing policy whereby firm charges a
relatively low price for a product initially as a
way to reach the mass market.
Advantages
Disadvantages

• Requires gear up for mass production
• Selling large volumes at low prices
• Strategy to gain market share may fail

• Discourages or blocks competition from market
  entry

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c. Status Quo Pricing Strategy
507
Learning Objective
Describe the procedure for setting the right
price.
7
A pricing policy whereby firm charges a price
that meets the competition
Advantages

• Simplicity
• Safest route to long-term survival for small firms

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Unfair Trade Practice Acts
508
Learning Objective
8
Identify legal ethical constraints on pricing
strategy
Price Fixing
Laws that prohibit wholesalers and retailers from
selling below cost.
An agreement between two or more firms on the
price they will charge for a product.
Sherman Anti Trust Act
Fed Trade Com Act
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Price Discrimination
508
Learning Objective
8
Identify legal ethical constraints on pricing
strategy
Predatory Pricing

• A firm selling to two or more different buyers at
  different prices if the result would lessen
  competition

The practice of charging a very low price for a
product with the intent of driving competitors
out of business or out of a market.
The Robinson-PatmanAct of 1936
Sherman Anti Trust Act
Fed Trade Com Act
32
A. Steps in Setting the Right Price
509
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
Learning Objective
9
1. Establish pricing objectives
2. Estimate demand, costs, and profits
3. Choose a price strategy
4. Fine tune with pricing tactics
a. Discounts
b. Geographic Pricing
c. Special Pricing Tactics
33
Learning Objective
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
509
9
CommonTactics for Fine-Tuning the Base Price
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Promotional Discount
Rebate Discounts
Value-Based Pricing
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Value-Based Pricing
510
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
Learning Objective
9
Trade Loading
The price is set at a level that seems to the
customer to be a good price compared to the
prices of other options.
The practice of temporarily lowering the price to
induce wholesalers and retailers to buy more
goods than can be sold in a reasonable time.
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b. Geographic Pricing
510
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
Learning Objective
9
1. FOB Origin Pricing
The buyer absorbs the freight costs from the
shipping point (free on board).
2. Uniform Delivered Pricing
The seller pays the freight charges and bills
the purchaser an identical flat freight charge.
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511
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
Learning Objective
9
3. Zone Pricing
The U.S. is divided into zones and a flat
freight rate is charged to customers in a given
zone.
4. Freight Absorption Pricing
The seller pays for all or part of the freight
charges and does not pass them on to the buyer.
5. Basing-Point Pricing
The seller designates a location as a
basing point and charges all buyers the freight
costs from that point.
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c. Special Pricing Tactics
511
9
Single-Price Tactic
All goods offered at the same price
Flexible Pricing
Different customers pay different price
Professional Services Pricing
Used by professionals with experience, training
or certification
Leader Pricing
Sell product at near or below cost
Bait Pricing
Lure customers through false or misleading price
advertising
Odd-Even Pricing
Odd-number prices imply bargain Even-number
prices imply quality
Price Bundling
Combining two or more products in a single
package
Two-Part Pricing
Two separate charges to consume a single good
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Consumer Penalties
513
Explain how discounts, geographic pricing,
other pricing tactics can fine-tune base price.
Learning Objective
Businesses Impose Consumer Penalties if...
9
An irrevocable loss of revenue is suffered
Additional transaction costs are incurred
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Chapter 16 Summary

• The importance of pricing decisions
• List explain a variety of pricing objectives.
• The role of demand in price determination.
• The concept of yield management systems.
• Cost-oriented pricing strategies.
• How various factors quality can affect price.
• Procedures for setting price.
• Legal ethical constraints on pricing.
• 9. How special pricing tactics fine-tune the base
  price.

16
chapter