1

Learning Objective

Discuss the importance of

pricing decisions to the economy
and to the individual firm.

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The Importance of Price

To the seller... To the consumer...

Price is revenue What is Price? Price is the cost
and profit source of something

In the broadest sense, price allocates

resources in a free-market economy
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What is 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 1
to Marketing Managers

The price charged to customers

Revenue multiplied by the
number of units sold.

Profit Revenue minus expenses

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The Importance of Price

Revenue = Unit Price  Number of units sold

 Revenue pays for every activity.

 What’s left over is Profit.

Marketers must select a price

that is not too high
or not too low,
a price that equals
the perceived value to target consumers
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Trends Influencing Price Setting
High rate of
new product introduction

Increased availability of
bargain-priced dealer and
Trends generic brands
in the
Market Price cutting as a strategy to
maintain or regain
market share

More efficient and better

informed buyers
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Learning Objective

List and explain a variety

of pricing objectives.

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Pricing Objectives

Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives

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Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

Target
Profit Satisfactory
Return on
Maximization Profits
Investment

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Profit Maximization

Setting prices so that

total revenue is as large
as possible relative
to total costs.

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Return on Investment

Net profit after taxes

divided by total assets.

ROI = Net Profit after taxes

Total assets

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Sales-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Market Sales
Share Maximization

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Market Share

A company’s 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

Status Quo Pricing Objectives

Maintain Meet
existing competition’s
prices prices

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Learning Objective

Explain the role of demand

in price determination.

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Demand and Supply

The quantity of a product that

Demand will be sold in the market at various
prices for a specified period.

The quantity of a product

that will be offered to the market
Supply by a supplier at various prices
for a specific period.

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Elasticity of Demand

Consumers’ responsiveness
or sensitivity to changes
in price.

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Elasticity of Demand
Elastic  Consumers buy more or less
of a product when the
Demand price changes

Inelastic  An increase or decrease in

price will not significantly
Demand affect demand

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Elasticity of Demand
Price Goes... Revenue Goes... Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

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Factors that Affect Elasticity

Availability of Substitutes

Price relative to
Purchasing Power

Factors Product Durability

That Affect
Elasticity
of Product’s Other Uses
Demand
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Learning Objective

Understand the concept of

yield management systems.

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Yield Management Systems

A technique for adjusting

prices that uses complex
mathematical software
to profitably fill
unused capacity.

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Yield Management Systems
Discounting
early purchases

YMS
Price Limiting early sales at
Adjustments discounted prices

Overbooking capacity

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Learning Objective

Describe cost-oriented pricing strategies.

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The Cost Determinant of Price

Types of Costs

Variable
Fixed Costs
Costs

Deviate with changes Do not deviate

in level of output as level of output changes

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The Cost Determinant of Price

Methods used to set price

Markup pricing Break-even pricing

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Markup Pricing
The cost of buying the product from
Markup the producer plus amounts for
Pricing profit and for expenses not
otherwise accounted for.

Example:
If a pen costs $1.80 and sells for is
$2.20, the markup is $.40, or 22% of
cost

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Break-Even Pricing
Total Revenue
4,000 Total Costs
Break-even point
Price

2,000
Fixed costs

0 1,000 2,000 3,000 4,000 5,000 6,000

Quantity
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Learning Objective

Demonstrate how the product life

cycle, competition, distribution
and promotion strategies,
customer demands, the Internet
and extranets, and perceptions of
quality can affect price.

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Other Determinants of Price
Stages of the
Product Life Cycle

Competition
Other Factors
That
Influence Distribution Strategy
Price

Promotion Strategy

Perceived Quality
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Stages in the Product Life Cycle
Introductory Growth Maturity Decline
Stage Stage Stage Stage

$ $ $ $
High Stable Decrease Decrease

Stable

High

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Distribution Strategy

Convincing Distributors
to Carry Product

Offer a larger Give dealers a large

profit margin trade allowance

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The Impact of the Internet

 Allows price and product comparisons

 Prices are coming down

 Data collection allows sellers to tailor

products and prices

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Extranet

A private electronic network

that links a company
with its suppliers
and customers.

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Prestige Pricing

Charging a high price to

help promote a high-quality
image.

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Indicators of Quality
Retailer
Reputation

Appearance

Price

Brand Name

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Learning Objective

Describe the procedure for

setting the right price.

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Steps in Setting the Right Price
Establish pricing goals

Estimate demand, costs, and profits

Choose a price strategy

Fine tune with pricing tactics

Results lead to the right price

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Pricing Objectives

Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives

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Price Strategy
A basic, long-term pricing
framework, which
establishes the initial price
for a product and the
intended direction for
price movements over the
product life cycle.

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