Chapter 17 Pricing Concepts

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Chapter 17Pricing Concepts
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Introduction

• Price the exchange value of a good or service

some unit of value given up for something of
value
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Other Terms

• Terms Used
• Tuition
• Fare
• Fine
• Tip
• Bribe

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Price Competition
Price Competition
Customer Needs
Slippery slope.
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Nonprice Competition
Product Competition
Customer Needs
Distribution Competition
Promotion Competition
Emphasize value and therefore increase quality
AUCTION
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Lessons from the Auction (hopefully!)
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The Importance of Price to Marketers

• Manage demand
• Adapt to competitive environment
• Psychology of the consumer
• BOTTOMLINE issues

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The Nature of Price

• Profits Total Revenues - Total Costs or
• Profits (Price x Quantity Sold) - Total Costs

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Steps in Setting the Right Price
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Pricing Objectives

• Profit Maximization
• Target-Return Objectives
• achieving a specified return on either sales or
  investment

Profit-oriented
ROI Net Profit after taxes
Total assets
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Pricing Objectives
Profitability

• Sales maximization
• Market-share objectivesfor controlling a portion
  of the market

Sales-oriented
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Price and Market Share
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Pricing Objectives
Profitability

• Value Pricing

Volume
Meeting Competition
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Pricing Objectives
Profitability

• Prestige Objectives set at a relatively high
  level

Volume
Meeting Competition
Prestige
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Four Market Structures
Pure Competition

• Market structure characterized by homogeneous
  products in which there are so many buyers and
  sellers that none has a significant influence on
  price

Agricultural products STRESS Availability
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Four Market Structures

• Market structure involving a heterogeneous
  product and product differentiation among
  competing suppliers, allowing the marketer some
  degree of control over prices

Pure Competition
Monopolistic Competition
Retailing Price
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Four Market Structures
Pure Competition

• Market structure involving relatively few sellers
  and barriers to new competitors due to high
  start-up costs

Monopolistic Competition
Oligopoly
sensitive to others prices PROMOTION is KEY
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Four Market Structures
Pure Competition

• Market structure involving only one seller of a
  good or service for which no close substitutes
  exist
• Anti-trust legislation has eliminated nearly all
  monopolies
• Government regulated monopolies do exist in
  certain areas, such as public utilities

Monopolistic Competition
Oligopoly
Monopoly
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Competitive Environment
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PRICE DETERMINATION IN ECONOMIC THEORY

• Demand schedule of the amounts of a firms good
  or service that consumers purchase at different
  prices during a specified period
• Supply schedule of the amounts of a good or
  service that firms will offer for sale at
  different prices during a specified time period.

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Determination of DemandThe Demand Curve
Price/Quantity Relationship
Price
2.50 P1
D1
Q1 200K
Quantity
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Determination of Demand
Price
2.50 P1
2.00 P2
D1
200K 300K
Quantity
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Determination of Demand
Price
2.50 P1
2.00 P2
1.50 P3
D1
200K 300K 400K
Quantity
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Determination of Demand Price/Quantity
Relationship and Demand Increasing
Shifting Demand Curves
Price
P1 2.50
D2
D1
200K 400K
Quantity
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The Concept Of Elasticity In Pricing Strategy

• Elasticity measure of consumers responsiveness
  to changes in price

• If Abs(elasticity) gt 1 then DEMAND is ELASTIC
• If Abs(elasticity) lt 1 then DEMAND is INELASTIC

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Determinants Of Elasticity
Availability of Substitutes
Luxury or Necessity
Portion of Budget
Time
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Determination of Demand - INELASTIC
Demand is not very sensitive to price increases
Price
P2
P1
Q2 Q1
Quantity
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Determination of Demand - ELASTIC
Demand is very sensitive to price increases
Price
P2
P1
Q1
Q2
Quantity
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Some Elasticity Calculations

• Change in Price 10 (increase)
• Change in Quantity -20 (decrease)
• Elasticity
• Elasticity
• Abs(Elasticity)
• Elastic?

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Some Elasticity Calculations

• Change in Price 10 (increase)
• Change in Quantity -5 (decrease)
• Elasticity
• Elasticity
• Abs(Elasticity)
• Elastic?

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Elasticity and Revenues

• Baseline Case
• 100 units sold _at_ 10 each
• Total Revenues 10 100 units 1000.
• Case I
• Let us drop price to 8.
• Demand increases to 110 units.
• Elasticity
• Revenue

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Elasticity and Revenues

• Case II
• Let us drop price to 8.
• Demand increases to 150 units.
• Demand
• Revenue

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Elasticity and Revenues

• When Price DECREASES, Total Revenues INCREASE for
  __________ products
• When Price DECREASES, Total Revenues DECREASE for
  _________ products

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Elasticity and Revenues
Careful Revenues DO not equal profitability!
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Analysis of Demand, Cost, and Profit
Relationships

• Fixed Costs do not vary with units produced
• Variable Costs varies with units produced
• Total Costs Fixed Costs Variable costs

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Analysis of Demand, Cost, and Profit
Relationships
Breakeven Analysis
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Evaluation of Breakeven Analysis

• Effective tool in assessing the sales required
  for covering costs and achieving specified levels
  of profit. Sensitivity analysis.
• Easily understood

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Analysis of Demand, Cost, and Profit
Relationships Determining the Breakeven Point
Total Revenue
BreakevenPoint
Total Costs
Dollars
Fixed Costs
Quantity (Units of Production)
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Analysis of Demand, Cost, and Profit
Relationships Determining the Breakeven Point
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Analysis of Demand, Cost, and Profit
Relationships Determining the Breakeven Point
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Breakeven Analysis

• Selling Price 100 per unit
• Variable costs 50 per unit
• Total Fixed Costs 150, 000
• Contribution

Fixed Costs
Breakeven Point
_______________________________ Per Unit
Contribution to Fixed Costs
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Breakeven (continued)

• Breakeven point (in terms of unit sales) _____
  units
• Breakeven point (in terms of sales volume)
  ____________ 300,000

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Other factorsPricing and the Life Cycle
Introductory Stage
Growth Stage
Decline Stage
Maturity Stage
High
Stable
Decrease
Decrease
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Pricing Strategies

• Skimming pricing strategy
• the use of a high price relative to competitive
  offerings.

Skimming
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Pricing Strategies
Skimming

• Penetration pricing policy
• the use of relatively low price as compared with
  competitive offerings

Penetration
Psychological