Marketing Portfolio (CH9, CH12, CH13, CH14, CH15, CH16, CH17, CH18, CH19) ***PowerPoint Content CAN be Provided***
TutorialHelp2020
CH19_PricingConceptsCONENTforWORDDOCUMENT.pptxChapter 19
Pricing Concepts
Learning Goals
Review the importance of pricing decisions to the economy and to the organization
Describe a variety of pricing objectives
Understand the role of supply and demand in price determination
Introduce the concept of yield management systems
Apply cost-oriented pricing strategies
Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price
Importance of Pricing decisions
GOAL #1: Review the importance of pricing decisions to the economy and to the organization
Pricing plays an integral role in the U.S. economy by allocating goods and services among consumers, governments, and businesses.
Pricing is essential in business because it creates revenue, which is the basis of all business activity.
The Importance of Price
Price allocates resources in a free-market economy
To the consumer... Price is the cost of something
To the seller... Price is revenue
4
Price means one thing to the consumer and another to the seller. Marketing mangers find the task of setting prices a challenge.
Chapter 19 Pricing Concepts
4
Setting prices
In setting prices, marketing managers attempt to find a level high enough to produce a satisfactory profit.
Price × Sales Unit = Revenue
Revenue − Costs = Profit
Profit drives growth, salary increases, and corporate investment
The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by
the number of units sold.
Profit
Revenue minus expenses.
6
1
Chapter 19 Pricing Concepts
6
Notes:
Trends Influencing Price
Flood of new products
Increased availability of bargain-priced
private and generic brands
Price cutting as a strategy to maintain or regain market share
Internet used for comparison shopping
U.S. recession from late 2007 to 2009.
7
Chapter 19 Pricing Concepts
7
Describe a variety of pricing objectives
Goal #2
Pricing Objectives
Establishing realistic and measurable pricing objectives is a critical part of any firm’s marketing strategy.
Pricing objectives are commonly classified into three categories:
Profit oriented,
Sales oriented, and
Status quo.
Pricing Objectives
Profit Oriented
Sales Oriented
Status Quo
10
Chapter 19 Pricing Concepts
10
Notes:
Profit-oriented pricing is based on profit maximization, a satisfactory level of profit, or return on investment (ROI).
The goal of profit maximization is to generate as much revenue as possible in relation to cost.
Often, a more practical approach than profit maximization is setting prices to produce profits that will satisfy management and stockholders.
The most common profit-oriented strategy is pricing for a specific return on investment relative to a business’ assets.
Pricing objectives
Return on Investment (ROI)
ROI = Net profit after taxes
Total assets
Net profit after taxes divided by total assets.
12
The higher the organization’s ROI, the better off the organization is. ROI puts an organization’s profits into perspective by showing profits relative to investment.
ROI needs to be evaluated in terms of the competitive environment, risks in the industry, and economic conditions. In general, businesses seek ROIs in the 10- to 30-percent range, depending on the industry.
Chapter 19 Pricing Concepts
12
© Cengage Learning 2015. All Rights Reserved.
13
Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory Profits
Target Return on
Investment
2
Chapter 19 Pricing Concepts
13
Pricing objectives
The second type of pricing objective is sales oriented, which focuses on either maintaining a percentage share of the market or maximizing dollar or unit sales.
The third type of pricing objective aims to maintain the status quo by matching competitors’ prices.
15
Sales-Oriented Pricing Objectives
Market
Share
Sales
Maximization
Sales-Oriented Pricing Objectives
Chapter 19 Pricing Concepts
15
Online
Market Share
A company’s product sales as a percentage of total sales for that industry.
16
Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix.
Larger market shares often mean higher profits, thanks to economies of scale, market power, and ability to compensate top-quality management.
However, this conventional wisdom is not always reliable.
Many companies with low market share survive if they are in a slow growth industry and experience few product changes.
Chapter 19 Pricing Concepts
16
17
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
prices
Status Quo Pricing Objectives
Chapter 19 Pricing Concepts
17
Identify the roles of Supply and demand in price determination
Goal #3
The Demand Determinant of Price
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.
19
3
Chapter 19 Pricing Concepts
19
Role of Demand
Demand is a key determinant of price.
When establishing prices, a business must first determine demand for its product.
A typical demand schedule shows an inverse relationship between quantity demanded and price: When price is lowered, sales increase; and when price is increased, the quantity demanded falls.
For prestige products, however, there may be a direct relationship between demand and price: the quantity demanded will increase as price increases.
Exhibit 19.2
© Cengage Learning 2015. All Rights Reserved.
21
| Price per package of gourmet cookies ($) | Packages of gourmet cookies demanded per week | Price per package of gourmet cookies ($) | Packages of gourmet cookies demanded per week |
| 3.00 | 35 | 1.50 | 85 |
| 2.50 | 50 | 1.00 | 120 |
| 2.00 | 65 |
Chapter 19 Pricing Concepts
21
Notes: The higher the price, the fewer goods or services consumers will demand, and vice versa.
Exhibit 19.3
© Cengage Learning 2015. All Rights Reserved.
22
| Price per package of gourmet cookies ($) | Packages of gourmet cookies supplied per week | Price per package of gourmet cookies ($) | Packages of gourmet cookies supplied per week |
| 3.00 | 140 | 1.50 | 85 |
| 2.50 | 130 | 1.00 | 25 |
| 2.00 | 110 |
Chapter 19 Pricing Concepts
22
Notes: The higher the price, the fewer goods or services consumers will demand, and vice versa.
How Demand and Supply Establish Price
Price
Equilibrium
The price at which demand
and supply are equal.
Elasticity of Demand
Consumers’ responsiveness
or sensitivity to changes
in price.
The concepts of supply and demand are combined to see how competitive market prices are determined.
23
Chapter 19 Pricing Concepts
23
Notes:
Exhibit 19.4
24
Equilibrium price is reached when supply and demand are equal.
Chapter 19 Pricing Concepts
24
A price below equilibrium results in a shortage because the demand is greater than the available supply. A shortage puts upward pressure on price.
At a price above equilibrium, the demand is less than the available supply, and a surplus is created. A surplus lowers the price.
Establishing an equilibrium price may not be possible all at once.
Prices may fluctuate as the market for a good moves toward equilibrium; however, demand and supply will eventually settle into the proper balance.
Equilibrium Price
25
Marketing managers must also consider demand elasticity when setting prices.
Elasticity of demand is the degree to which the quantity demanded fluctuates with changes in price.
If consumers are sensitive to changes in price, demand is elastic; if they are insensitive to price changes, demand is inelastic.
Thus, an increase in price will result in lower sales for an elastic product and little or no loss in sales for an inelastic product.
To appreciate demand analysis, the concept of elasticity should be understood
Role of Demand
Elasticity of Demand
Elastic Demand
Consumers buy more or less of a product when the price changes.
Inelastic Demand
An increase or a decrease in price will not significantly affect demand.
Unitary Elasticity
An increase in sales exactly offsets a decrease in prices, so total revenue remains the same.
27
Chapter 19 Pricing Concepts
27
Notes:
Elasticity of Demand
Elasticity (E) =
Percentage change in
quantity demanded of good A
Percentage change
in price of good A
If E > 1, demand is elastic.
If E < 1, demand is inelastic.
If E = 1, demand is unitary.
28
Chapter 19 Pricing Concepts
28
Elasticity of Demand
29
| Price Goes… | Revenue Goes… | Demand is… |
| Down | Up | Elastic |
| Down | Down | Inelastic |
| Up | Up | Inelastic |
| Up | Down | Elastic |
| Up or Down | Stays the Same | Unitary Elasticity |
Elasticity can be measured by observing the changes in total revenue
Chapter 19 Pricing Concepts
29
Factors that Affect Elasticity of Demand
Availability of substitutes
Price relative to
purchasing power
Product durability
A product’s other uses
Rate of inflation
30
Chapter 19 Pricing Concepts
30
Notes:
Introduce the concept of yield management systems
Goal #4
Yield management system
In yield management systems (YMS), prices are adjusted using complex mathematical software to profitably fill unused capacity
The software uses techniques such as:
discounting early purchases,
limiting early sales at these discounted prices, and
overbooking capacity.
These systems are used in both service and retail businesses and are substantially raising revenues.
Yield Management Systems
Discounting early purchases
Limiting early sales at discounted prices
Overbooking capacity
33
Chapter 19 Pricing Concepts
33
Notes:
Yield Management systems
When competitive pressures are high, a company must know when it can raise prices to maximize its revenues.
Yield management systems have spread beyond the service industries and are used by companies to set prices based on a number of variables.
The software employs techniques such as discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity.
Yield Management Systems
Yield Management Systems (YMS) make it possible for a company to:
Stimulate demand when demand is low
Maximize profits when demand is high
.
35
An example of the effect of YMS on the customer is that when people on tight budgets buy air fare, they usually accept the inconvenience of planning ahead and staying over on a Saturday night to get cheaper fares. The last-minute planner pays more for their fare and (essentially) subsidizes the cost-sensitive customer.
Chapter 19 Pricing Concepts
35
Notes:
Apply cost-oriented pricing strategies
Goal #5
The Cost Determinant of Price
Varies with changes
in level of output
Types of Costs
Variable
Cost
Fixed Cost
Does not change
as level of output changes
37
Chapter 19 Pricing Concepts
37
Cost oriented pricing
The other major determinant of price is cost.
Marketers use several cost-oriented pricing strategies.
To cover their own expenses and earn a profit, wholesalers and retailers commonly use markup pricing: they tack an extra amount onto the manufacturer’s original price.
Another pricing technique is to maximize profits by setting price where marginal revenue equals marginal cost.
Still another pricing strategy determines how much a business must sell to break even and uses this amount as a reference point for adjusting price.
38
The Cost Determinant
of Price
Average Variable Cost (AVC): Total variable cost divided by quantity of output.
Average Total Cost (ATC): Total costs divided by quantity of output.
Marginal Cost (MC): The change in total costs associated with a one-unit change in output.
39
To compare the cost of production to the selling price of a product, it is helpful to calculate costs per unit, or average costs.
Notes:
Chapter 19 Pricing Concepts
39
The Cost Determinant
of Price
Break-Even
Pricing
Profit Maximization Pricing
Keystoning
Markup pricing
Methods
Used to
Set Prices
40
Chapter 19 Pricing Concepts
40
Notes:
.
Markup Pricing
Markup
Pricing
The cost of buying the product
from the producer plus amounts
for profit and for expenses not otherwise accounted for.
Keystoning
The practice of marking up prices by 100 percent, or doubling the cost.
41
Chapter 19 Pricing Concepts
41
Profit Maximization
Profit
Maximization
A method of setting prices that
occurs when marginal revenue
equals marginal cost.
Marginal
Revenue
(MR)
The extra revenue associated with selling an extra unit of output,
or the change in total revenue with
a one-unit change in output.
42
Chapter 19 Pricing Concepts
42
Notes:
Exhibit 19.7 Costs, Revenues, and Universal Sportswear
43
Chapter 19 Pricing Concepts
43
Notes:
Break-Even Pricing
Break-Even
Quantity
=
Total fixed costs
Fixed cost contribution
Fixed cost
Contribution
=
Price - Avg. Variable Cost
44
Break-even analysis determines what sales volume must be reached before the company breaks even and no profits are earned. Its total costs equal total revenue.
Chapter 19 Pricing Concepts
44
Notes:
Break-even analysis determines what sales volume must be reached before the company breaks even and no profits are earned.
The advantage of break-even analysis is that it provides a quick estimate of how much the business must sell to break even and how much profit can be earned if a higher sales volume is obtained.
Sometimes, however, it is hard to know whether a cost is fixed or variable.
Additionally, simple break-even analysis ignores demand.
Break-even pricing
Goal #6
DEMONSTRATE HOW PRODUCT LIFE CYCLE, COMPETITION, DISTRIBUTION AND PROMOTION STRATEGIES, CUSTOMER DEMANDS, THE INTERNET AND EXTRANETS AND PERCEPTION OF QUALITY
Other Determinants of price
The price of a product normally changes as it moves through the life cycle and as demand for the product and competitive conditions change.
Management often sets a high price at the introductory stage, and the high price tends to attract competition.
The competition usually drives prices down because individual competitors lower prices to gain market share.
Adequate distribution for a new product can sometimes be obtained by offering a larger-than-usual profit margin to wholesalers and retailers.
What else affects price?
The Internet enables consumers to compare products and prices quickly and efficiently.
Price is also used as a promotional tool to attract customers. Special low prices often attract new customers and entice existing customers to buy more.
Large buyers can extract price concessions from vendors. Such demands can squeeze the profit margins of suppliers.
Perceptions of quality can also influence pricing strategies.
A business trying to project a prestigious image often charges a premium price for a product.
Consumers tend to equate high prices with high quality.
Review
Price is best described as:
that which is given up in exchange to acquire a good or service
money exchanged for a good or service
the psychological results of purchasing
the cost in dollars for a good or service as set by the producer
good in an exchange
Revenue:
equals quantity sold times profit margin
equals price minus costs
equals return on investment
is synonymous with profit
equals price of goods times quantity sold
Review
Money that is left over after paying for company activities is called:
return on investment.
a contribution margin.
profit.
net worth.
revenue.
For convenience, pricing objectives can be divided into three categories. They are:
refundable, competitive, and attainable
perceived, actual, and unique-situational
differentiated, niche, and undifferentiated
profit oriented, sales oriented, and status quo
monopolistic, fixed, and variable
Review
_____ is equal to net profit after taxes divided by total assets.
Revenue
Net worth
Retained earnings
Return on investment
Efficiency maximization
An organization is using _____ when it sets its prices so that total revenue is as large as possible relative to total costs.
profit maximization
market share pricing
demand-oriented pricing
sales maximization
status quo pricing
Review
Britney is fifteen years old and wants to open her own business selling cupcakes to local coffee shops and restaurants. She is having a tough time deciding whether to base her pricing objectives on market share, dollar sales, or unit sales. Regardless of which she chooses, her pricing objective can be categorized as:
status quo.
profit oriented.
need oriented.
cost oriented.
sales oriented.
_____ is a company’s product sales as a percentage of total sales for that industry.
Return on investment
Profit share
Revenue share
Market share
Contribution
Review
If a company’s pricing objective is to meet the competition or to maintain existing prices, it is using _____ pricing.
head-on
target return on investment
status quo
market share
demand-oriented
As a short-term pricing objective, _____ can be effectively used on a temporary basis to sell off excessive inventory.
profit maximization
profit-oriented pricing
status quo pricing
sales maximization
market share pricing
Review
Although many factors can influence price, the primary determinants are:
costs of manufacturing and distribution
the demand for the good and the cost to the seller
demand by the consumer and perceived quality
distribution and promotion strategies
stage of the product life cycle and costs to the consumer
_____ is the quantity of a product that will be offered to the market at various prices for a specified period.
Distribution
Supply
Price
Equilibrium
Elasticity
Review
The quantity of a product that will be sold in the market at various prices for a specified period is called:
market share.
demand.
supply.
value.
revenue.
Peggy’s Twist Shack sells soft-serve ice cream. Peggy graphed the demand per week for vanilla ice cream cones. The graph indicates a demand schedule that slopes downward and to the right. This graph indicates that the quantity of vanilla ice cream cones demanded increases as:
cost increases.
supply decreases.
price increases.
price decreases.
increases.
Review
When the price of a product is set at a level where demand and supply are the same, price _____ has been achieved.
equilibrium
stability
leverage
symmetry
status quo
Consumers’ responsiveness or sensitivity to changes in price is known as:
break-even.
Equilibrium.
unitary revenue.
asymmetrical demand.
elasticity of demand.
Review
When price decreases and total revenue falls, demand is:
elastic.
inelastic.
absolute.
unitary.
stable.
The greater the number of different uses for a product, the more _____ demand tends to be.
elastic
inelastic
unitary
volatile
stable
Review
Yield management systems are used to:
determine the availability of product substitutes in complex industries that are experiencing rapid change
profitably fill unused capacity
predict necessary service levels to achieve revenue goals
determine whether it is financially more feasible to buy a new product or repair a broken one
create elastic demand for low-involvement products
The two types of costs a marketer needs to consider when setting prices are:
primary and secondary.
variable and fixed.
marginal and absolute.
short term and long term.
elastic and inelastic.
Review
_____ costs do not change as output is increased or decreased.
Asset
Variable
Fixed
Symmetrical
Status quo
A cost that changes with the level of output is called a(n) _____ cost.
liquidity
variable
fixed
asset
elastic
Review
Central Bark is a dog resort where pets are pampered. Which of the following is the BEST example of one of its fixed costs?
Dog biscuits
Dog collars and leashes
Payment on the building used by Central Bark
Bubble bath
Advertisements in local magazines
When a seller determines the selling price by adding to cost an amount for profit and expenses not previously accounted for, the seller is using _____ pricing.
profit maximization
demand-oriented
break-even
target return
markup
Review
The most popular method used by wholesalers and retailers in establishing a sales price is _____ pricing.
markup
status quo
formula
marginal revenue
break-even
Keystoning is:
the practice of marking up prices by 100 percent.
a method used for determining the point of elasticity.
a plan for reducing marginal costs.
the practice of maintaining variable costs at one-half of total fixed costs.
a method of changing consumers’ perceptions about price.
Review
Profit maximization occurs when:
total costs equals average fixed revenue.
average variable costs are larger than average total costs.
total costs equal total variable costs.
marginal variable costs equal average revenues.
marginal revenue equals marginal cost.
The point at which marginal cost and marginal revenue are equal always results in:
maximization of elasticity.
maximization of revenue.
maximization of costs.
maximization of profits.
break-even equilibrium.
Chart1
| 3 |
| 2.5 |
| 2 |
| 1.5 |
| 1 |
Sheet1
| X-Values | Y-Values |
| 35 | 3 |
| 40 | 2.75 |
| 50 | 2.5 |
| 60 | 2.2 |
| 65 | 2 |
| 80 | 1.6 |
| 85 | 1.5 |
| 100 | 1.3 |
| 120 | 1 |
| To resize chart data range, drag lower right corner of range. |
Chart1
| 3 | 140 | 140 |
| 2.5 | 130 | 130 |
| 2 | 110 | 110 |
| 1.5 | 85 | 85 |
| 1 | 25 | 25 |
Sheet1
| X-Values | Y-Values | X-Values2 | Y-Values2 |
| 140 | 3 | ||
| 130 | 2.5 | ||
| 110 | 2 | ||
| 85 | 1.5 | ||
| 25 | 1 | ||
| To resize chart data range, drag lower right corner of range. |
Chart1
| 3 |
| 2.5 |
| 2 |
| 1.5 |
| 1 |
Sheet1
| X-Values | Y-Values |
| 35 | 3 |
| 40 | 2.75 |
| 50 | 2.5 |
| 60 | 2.2 |
| 65 | 2 |
| 80 | 1.6 |
| 85 | 1.5 |
| 100 | 1.3 |
| 120 | 1 |
| To resize chart data range, drag lower right corner of range. |
Chart1
| 3 |
| 2.5 |
| 2 |
| 1.5 |
| 1 |
Sheet1
| X-Values | Y-Values | Column1 | Column2 |
| 140 | 3 | ||
| 130 | 2.5 | ||
| 110 | 2 | ||
| 85 | 1.5 | ||
| 25 | 1 | ||
| To resize chart data range, drag lower right corner of range. |
