1. The document discusses various factors that affect pricing decisions for businesses, including costs, competition, the product life cycle, demand, and perceptions of quality. 2. It describes different pricing objectives like profit maximization, market share goals, and status quo pricing. It also covers cost-based strategies like markup pricing and break-even analysis. 3. New technologies like the internet and yield management systems can impact pricing by increasing price transparency, stimulating variable demand, and optimizing profits from limited capacity.

1. Lamb, Hair, McDaniel CHAPTER 19 Pricing Concepts 2010-2011

2. 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 Learning Outcomes

3. 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 Learning Outcomes

4. The Importance of Price Discuss the importance of pricing decisions to the economy and to the individual firm LO 1

5. The Importance of Price Price allocates resources in a free-market economy LO 1 To the consumer... Price is the cost of something To the seller... Price is revenue

6. What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price LO 1

9. The Importance of Price to Marketing Managers LO 1 Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

10. Trends Influencing Price LO 1 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

11. The Importance of Pricing Decisions LO 1 Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment

12. Pricing Objectives List and explain a variety of pricing objectives LO 2

13. Pricing Objectives LO 2 Profit-Oriented Sales-Oriented Status Quo

14. Profit-Oriented Pricing Objectives LO 2 Profit-Oriented Pricing Objectives Profit Maximization Satisfactory Profits Target Return on Investment

15. Profit Maximization Profit Maximization LO 2 Setting prices so that total revenue is as large as possible relative to total costs.

16. Return on Investment Return on Investment LO 2 ROI = Net Profit after taxes Total assets Net profit after taxes divided by total assets.

17. Sales-Oriented Pricing Objectives LO 2 Market Share Sales Maximization Sales-Oriented Pricing Objectives

18. Market Share Market Share A company’s product sales as a percentage of total sales for that industry. LO 2

20. Status Quo Pricing Objectives LO 2 Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives

22. The Demand Determinant of Price Explain the role of demand in price determination LO 3

23. The Demand Determinant of Price LO 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.

24. The Demand Curve LO 3

25. The Supply Curve LO 3

26. How Demand and Supply Establish Price LO 3 Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price.

27. Price Equilibrium LO 3

29. Elasticity of Demand LO 3 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.

30. Elasticity of Demand LO 3 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

31. Elasticity of Demand LO 3

32. Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation LO 3

33. The Power of Yield Management Systems Understand the concept of yield management systems LO 4

34. Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. LO 4 Yield Management Systems

35. Yield Management Systems LO 4 Discounting early purchases Limiting early sales at discounted prices Overbooking capacity

37. SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007. Yield Management Systems Supply Side of Product or Service LO 4 Capital Intensity Perishability High Office block House Airline seat Utilities Sport event Rental car Low Shirt Pencils Food Tropical fish Low High

38. SOURCE: “Dynamic Pricing Schemes—Established Supplier Led Pricing—Yield Management,” online at http://www.managingchange.com/hynamic/yieldmgt.htm, accessed November 7, 2007. Yield Management Systems Variability of Demand Demand Side of Product or Service LO 4 Variability of Value High Utilities Highway use Telephone Airline seat Sport event Rental car Mobile phone Low Food Music CD Shirt Office block Laptop House Low High

39. Yield Management Systems LO 4

40. The Cost Determinant of Price Describe cost-oriented pricing strategies LO 5

41. The Cost Determinant of Price LO 5 Varies with changes in level of output Types of Costs Variable Cost Fixed Cost Does not change as level of output changes

42. The Cost Determinant of Price LO 5 Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices

43. Markup Pricing LO 5 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%, or doubling the cost.

44. Profit Maximization LO 5 Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

45. Break-Even Pricing LO 5

46. Break-Even Pricing LO 5 Break-Even Quantity = Total fixed costs Fixed cost contribution Fixed cost Contribution = Price - Avg. Variable Cost

47. REVIEW LEARNING OUTCOME Cost-Oriented Pricing Strategies LO 5

48. 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 LO 6

49. Other Determinants of Price LO 6 Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle

50. Stages in the Product Life Cycle LO 6 Introductory Stage Growth Stage Decline Stage $ High $ Stable $ Decrease Maturity Stage $ Decrease Stable High

53. Distribution Strategy Selling against the brand LO 6 Stocking well-known branded items at high prices in order to sell store brands at discounted prices.

54. The Impact of the Internet LO 6 Internet auctions Shopping bots Second opinions from expert sites Product selection

55. SOURCE: Jeffrey A. Trachtenberg, “Borders Business Plan Gets a Rewrite,” Wall Street Journal , March 22, 2007 B1 Impact of the Internet on Book Distribution LO 6 Net Publisher Revenue 1998 2006 $22.5 Billion $28.5 Billion Online 13% Schools and Libraries 24% Book Clubs 5% Non-bookstore Retail 18% Traditional Retail 38% [+ 2% direct-to-consumer sales] Online 2% Schools and Libraries 27% Book Clubs 16% Non-bookstore Retail 13% Traditional Retail 42%

56. The Relationship of Price to Quality Charging a high price to help promote a high-quality image. Prestige Pricing LO 6

58. REVIEW LEARNING OUTCOME Factors Affecting Price Price – Other firms enter market – Price wars Competition LO 6 – Convenience – Selling against the brand – Exclusive distribution Distribution Intranet and extranets – Consumers use shopping for bargains – Increased competition – Internet auctions Price used as a promotional tool Promotion strategy Large customers pressure suppliers for price reductions and guaranteed margins Demands of large customers Uncertain consumers tend to rely on price to indicate quality (“You get what you pay for.”) Price/quality relationship Introduction Growth Maturity Decline PLC