PRICING

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PRICING

• Key Concepts

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The Importance of Price

• Price allocates resources in a free-market
  economy

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What Is Price?
Price

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

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The Importance of Price to Marketing Managers
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Trends Influencing Price
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The Importance of Pricing Decisions
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Pricing Objectives
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Pricing Objectives
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Profit-Oriented Pricing Objectives
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Profit Maximization
Profit Maximization
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Return on Investment
Return on Investment
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Sales-Oriented Pricing Objectives
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Market Share
Market Share
A companys product sales as a percentage of
total sales for that industry.
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Sales Maximization

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

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Status Quo Pricing Objectives
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The Demand Determinant of Price
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The Demand Curve
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The Supply Curve
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Tysons Meat Glut

• Tyson Foods, the worlds largest processor, has
  an oversupply of meat
• Lower chicken consumption due to avian flu fears
• Export restrictions to Japan and South Koreadue
  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.
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How Demand and Supply Establish Price
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Price Equilibrium
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Elasticity of Demand

• Elastic Demand

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

InelasticDemand

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

UnitaryElasticity

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

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Elasticity of Demand
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Elasticity of Demand
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Factors that Affect Elasticity of Demand
Availability of substitutes
Price relative to purchasing power
Product durability
A products other uses
Rate of inflation
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Yield Management Systems
A technique for adjusting prices that uses
complex mathematical software to profitably fill
unused capacity. E.g. Airfare changes closer to
the flight date
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How Yield Management Systems Work
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Yield Management Systems
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The Cost Determinant of Price
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The Cost Determinant of Price
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Profit Maximization
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Break-Even Pricing
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Break-Even Pricing
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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.
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Cost-Oriented Pricing Strategies
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Other Determinants of Price
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Factors Affecting Price
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Stages in the Product Life Cycle
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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

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Distribution Strategy
Manufacturers
Wholesalers/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

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Distribution Strategy
Selling againstthe brand
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The Impact of the Internet
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The Relationship of Price to Quality
Prestige Pricing
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Dimensions of Quality

• Ease of use
• Versatility
• Durability
• Serviceability
• Performance
• Prestige